How Banks Cheat Taxpayers

Matt Tabbi

By Matt Taibbi, Rolling Stone

27 December 11

good friend of mine sent me a link to a small story last week, something that deserves a little attention, post-factum.

The Bloomberg piece is about J.P. Morgan Chase winning a bid to be the lead underwriter on a $400 million bond issue by the state of Massachusetts. Chase was up against Merrill for the bid and won the race with an offer of a 2.57% interest rate, beating Merrill's bid of 2.79. The difference in the bid saved the state of Massachusetts $880,000.

Afterward, Massachusetts state treasurer Steven Grossman breezily played up the benefits of a competitive bid. "There's always a certain amount of competition going on out there," Grossman said in a telephone interview yesterday. "That's good. We like competition."

Well … so what, right? Two banks fight over the right to be the government's underwriter, one submits a more competitive bid, the taxpayer saves money, and everyone wins. That's the way it ought to be, correct?

Correct. Except in four out of five cases, it still doesn't happen that way. From the same piece [emphasis mine]:

Nationwide, about 20 percent of debt issued by states and local governments is sold through competitive bids. Issuers post public notices asking banks to make proposals and award the debt to the bidder offering the lowest interest cost. The other 80 percent are done through negotiated underwriting, where municipalities select a bank to price and sell the bonds.

By "negotiated underwriting," what Bloomberg means is, "local governments just hand the bid over to the bank that tosses enough combined hard and soft money at the right politicians."

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