Municipal Bonds: A license to steal and taxpayers don't even know they are being financially raped

While a lot of evil in America can be traced back to the 1913 passage of the Federal Reserve Act, the worst of the damage occurred when Nixon de-tethered the dollar from gold in 1971 with an Executive Order. From that point on, the dollar became a 100% pure fiat paper currency and America became Debt Man Walking. Ordinary Americans became addicted to debt and federal, state and city governments also started piling on the debt. The money was plentiful; after all, it was literally manufactured ‘out of thin’ air with a keyboard stroke on the Fed’s computer.

All this money manna rained from the heavens in inexhaustible quantities. Folks spent money they never had and so did government. Like a drunk trying to drink himself sober, debt was destined to make everyone rich until one day the fiat debt bubble just busted according to the laws of financial physics. Not only are American citizens swimming in a shark infested sea of fraud and debt, debt ridden government at all levels has joined them.

Nowhere is the debt bubble more covered up and ignored than at the state, city, county and local level. Financial guru Meredith Whitney has been warning about the undetonated bomb known as municipal bonds for years. The municipal bond business is huge, estimated at $3.7 billion a year, and Wall Street makes a ton of money off of these taxpayer rip-offs that frequently involve bribery, a total lack of transparency and massive fraud.

Matt Taibbi, an investigative financial journalist who writes for Rolling Stone, has done some great work in exposing the fraud behind the 2008 Wall Street blow-up. His latest piece, The Scam Wall Street Learned from the Mafia, How America’s biggest banks took part in a nationwide bid-rigging conspiracy – until they were caught on tape, is not one of his greatest hits, although it does expose fraud and even sensationalizes bankster municipal bond fraud in a most entertaining fashion, as if it’s something new (it’s been going on for decades but more about that later). Tabbi’s credibility is tarnished by the fact that he’s a diehard liberal who perceives that Wall Street is the only enemy of the taxpayers and the people. Taibbi pays scant attention to the fact that Democrats and Republicans are the greatest enablers of Wall Street crimes.

While the municipal bond business has always been fraught with some level of fraud typically involving bribing corrupt public officials (governors, state legislatures, mayors etc.), the fraud was rather low level because until 1975, the municipal bond business was a low profit margin business segment of Wall Street. Before, 1975 the municipal bond business was relatively open, transparent and reasonably corruption free. Wall Street made so little money that it considered its municipal underwriting activities to be more of a public service than a profit center.

What happened? In 1975 a Democratic Congress passed a bill creating the Municipal Securities Rulemaking Board (MSRB). The MSRB isn’t even a government agency, not that it would make it any less corrupt, and its website is ‘dot.org’ and not ‘.gov’ - http://msrb.org/. What Congress did in 1975 was toss out all the prevailing free market rules that provided some transparency as well as low profits and Congress mandated that the entire municipal bond business would be regulated by Wall Street! Yes, it was indeed a bankster coup but one that was actually facilitated by congress. Congress literally mandated that Wall Street would forever be in control of the municipal bond business and make all the rules governing the business.


Christopher Taylor ran the Municipal Securities Rulemaking Board (MSRB) as executive director from 1978 to 2007. Apparently, the MSRB took its orders directly from the Wall Street Banksters. According to a 2009 Bloomberg article titled Municipal Regulator Regrets Enabling Losses, Taylor frankly admitted that the MSRB served the interests of Wall Street and not the public or taxpayers.

The former chief regulator for the $2.69 trillion municipal bond market for the first time acknowledged that the governing board failed to save taxpayers in Detroit, Jefferson County, Alabama, and local California governments from suffering more than $1 billion of losses because of opaque financial instruments that backfired.

Christopher “Kit” Taylor, the executive director of the Municipal Securities Rulemaking Board from 1978 to 2007, said his board wouldn’t allow the group to set rules on swaps and derivatives. Many of these deals went awry last year as credit markets seized up, saddling taxpayers with unexpected bills just as the slowing economy reduced tax revenue. “The big firms didn’t want us touching derivatives,” said Taylor, 62 and now a consultant on financial markets and regulatory policy, in a telephone interview from his home in Alexandria, Virginia. “They said, ‘Don’t talk about it, Kit.’”

Congress set up the MSRB in 1975 to make rules for firms that underwrite, trade and sell municipal debt. The board is funded by fees paid by member firms, which generated revenue of $22.2 million in fiscal 2008.

As a self-regulatory organization, members of the industry are granted the authority to supervise their own practices. A 15-member board oversees the organization and 10 of the directors are from Wall Street firms. Enforcement is handled by the U.S. Securities and Exchange Commission.

The SEC was supposed to supervise the MSRB. What a joke. The SEC exists to protect folks like Bernie Madoff who made off with the money of investor despite numerous letters and complaints from knowledgeable folks who knew for years that Madoff was indeed operating a Ponzi scheme. But rich folks like Madoff have friends in high places to cover up their crimes.  Protecting the rich and powerful always trumps protecting ordinary Americans.

The municipal bond fraud perpetrated by Wall Street with the blessing of Congress and the SEC is huge and has soaked taxpayers and municipal borrowing entitles for decades. Of course, that was the intent when Congress created the MSRB under the supervision of the SEC. For a laugh, here's the reason the MSRB is suppose to exist according to its own website.

1975 – Creation of the Municipal Securities Rulemaking Board The MSRB was established by Congress as a self-regulatory organization to protect investors and the public interest by promoting a fair and efficient municipal securities market. The MSRB’s role includes developing rules to regulate the securities firms and banks involved in underwriting, trading, and selling municipal securities dealers. The MSRB Board, composed of members from the municipal securities dealer community and the public, sets standards for all municipal securities dealers. All MSRB rules are subject to oversight by the Securities and Exchange Commission.

Even more shocking is that MSRB frequently hired former politicians and lobbyists as consultants (well, that’s not so shocking once one understands how Congress really operates). After all it was Congress who set up the MSRB in 1975. Like everything else that Congress does, protecting the Banksters and Wall Street is not only the top priority of Congress it’s the only priority of Congress after keeping defense contractors happy by waging endless murderous wars. The actions of Congress prove that protecting the interests of the Banksters trumps the right of the public not to be looted. Only our Congress Critters put the foxes of Wall Street in charge of the Hen House.

The first step in restoring an honest municipal bond market is to abolish the MSRB and force the banksters and underwriting back into the competition of free markets.  Moreover, how 'honest' municipal bond markets operate  is entirely dependent upon independent and citizen oversight at the state, city and county level.  Politicians and public officials simply cannot be trusted to negotiate the best deal for taxpayers.

Bankster and politician carnage inflicted upon states, cities and municipal entities in the multi-trillion dollar municipal bond market is widespread and exceedingly costly to taxpayers. Banksters have imposed significant financial misery upon school districts, hospitals, counties, cities, states, public utilities and a whole lot more. They steal with impunity.

True, it takes a substantial amount of public corruption and/or sheer stupidity at all levels to effectively rob the public. In some cases, a public official can be bought for as little as “paid for jewelry, a Rolex watch, an Ermenegildo Zegna suit and clothes from Salvatore Ferragamo” according to a Bloomberg report, here. Many elected officials and public officials have very cozy relationships with the banksters who are viewed as the Magi bearing gifts.  

Birmingham, Alabama’s mayor was charged with bribery and money laundering in connection with municipal bond and derivative deals while he was president of the Jefferson County Commission, according to an indictment unsealed today.

Larry Langford, a Democrat, was accused of soliciting $235,000 from William Blount, chairman of Montgomery, Alabama- based bond underwriter Blount Parrish & Co., and lobbyist Albert LaPierre. William Blount helped Langford get a $50,000 loan, and paid for jewelry, a Rolex watch, an Ermenegildo Zegna suit and clothes from Salvatore Ferragamo, according to the indictment. Blount Parrish received about $7.1 million in fees in connection with the deals, which refinanced debt issued for the county’s sewer system.

Langford is now serving a 15 year prison sentence. In 9/11, Jefferson County Alabama filed the largest bankruptcy in US municipal history because it can't service over $3 million in sewer debt, here.

The Banksters collected $120 million in fee income for the financial rape of a poor Alabama County and a local brokerage firm received over $7 million in fees.

In other cases, well meaning folks of means somehow managed to get duped by Wall Street, as probably was the case involving 5 Milwaukee area school districts, including the wealthy school district of Whitefish Bay. Seeking to shore up its retirement obligations, at the urging of Wall Street scoundrels the 5 school districts pooled their resources and borrowed $37 million (bond proceeds) and $165 million from an Irish bank to invest in a complex CDS transaction that was supposed to make them money. According to an Alternet.org article titled The Looting of America: How Wall Street Fleeced Millions from Wisconsin Schools, the investment didn't go well.

Wall Street investment houses went after the $100 billion saved in school-district trust funds like Whitefish Bay's, and made a killing....They were dealing with one of the most complex derivatives ever designed-a synthetic collateralized debt obligation, which is a combination of two other derivatives: a collateralized debt obligation (CDO) and a credit default swap (CDS).

In the Milwaukee school district case, Wall Street got rich and the 5 school districts got massively stiffed and are now holding the bag on a $200 million pile of debt that was incurred as an investment vehicle designed to earn a rate of return greater than the interest costs on the borrowed money. In a little school district in New Castle, PA (New Castle Area School District), the district got $280,000 in upfront cash on a $9.7 million bond deal that went very bad for the school district but not Wall Street. The Philadelphia International Airport got caught in a derivatives deal involving $6.5 million that drove its interest rate from 1.8% to 7.2%. Philadelphia pondered cancelling the complex CDS but that would have cost over $24 million or more than the $20 million over the original bond proceeds. These and other deals are documented in an extraordinary Bloomberg report detailing how these schemes and scams work as well as documenting the plight of its victims.

``A lot of people are getting killed; they're getting crushed,'' says Steve Goldfield, a financial adviser at Public Resources Advisory Group in Media, Pennsylvania, which was hired by a school district now suing JPMorgan. ``Nobody is talking about the impact on the debt side to taxpayers, how much school districts are going to pay in extra interest expense because of this blowup,'' he says....

The seeds of JPMorgan's municipal derivative deals were planted in the late 1980s. In 1987, the Fed relaxed provisions of the Glass-Steagall Act...

For more on Glass-Steagall: Why the Return of Glass-Steagall is a Good Idea 

Hospitals have also been victims of Wall Street. Non-profit South County Hospital in Wakefield, Rhode Island got involved in a derivatives deal that caused its interest rate on $52 million to double to 12%; now its firing workers to pay its massive interest payments. Apparently, hundreds of non-profits entered into similar derivative schemes with the Banksters. Vanderbilt University and the University of Maryland Medical System got caught in similar schemes by entering into exotic CDS peddled by Wall Street that they never understood. For more on the gory details of these transactions and others, read Swaps Backfire on Hospitals Firing Workers to Pay Wall Street.

The above scams are merely a tiny drop in the bucket and most municipalities are extremely reluctant to even acknowledge that they are victims because the folks who made the decisions to jump in bed with Wall Street and its derivative bearing hucksters are either stupid or corrupt or both. Politicians hate scandals, especially big juicy financial scandals involving the financial rape of taxpayers who are mostly clueless that they are being royally gouged and taken to the cleaners by the very folks they elected to be wise and prudent protectors of taxpayer cash. Moreover, public officials aren't exactly fond of going to jail for fraud and malfeasance.

The US municipal bond scams run deep, as are the ties of the politicians to the Banksters. Steve Malanga wrote in a piece titled How Corrupt Is the Muni-Bond Business?

"When I joined Smith Barney, people were not getting rich doing public finance," one of the whistleblowers in the yield-burning investigations said. "Now it's caveat emptor against people who are dumb. It's a whole different ballgame."

The investigations came with warnings from the SEC about the double standard in municipal finance, a result of the fact that this business is more lightly regulated than others in the securities industry. As the head of the SEC's enforcement division said at the time, the industry condoned practices that "would never have passed muster in other markets."

Among those practices was the blatant hiring of politicians and political operatives by securities firms to lobby their fellow elected officials and associates for municipal work. Smith Barney employed Chicago Mayor Richard Daley's brother as a ‘consultant' to lobby on state and local municipal deals in Illinois, and in Texas the firm hired the Democratic Party's former statewide chairman as its representative. In Ohio Lehman employed one of the GOP's top fundraisers as a ‘consultant' on muni deals, where he pitched politicians whose campaign warchests he helped to fill. Goldman Sachs employed Rahm Emanuel, current White House chief of staff, as a muni consultant while he also worked as a political fundraiser for President Clinton. After he exited prison, disgraced former Washington Mayor Marion Barry even gained a job as a muni consultant.

What helps makes the industry so susceptible to abuses is that the major players in it often are driven by perverse incentives. Wall Street firms, which are supposed to advise politicians on what financing strategies suit their governments best, have a stake in urging them to go ahead with the biggest and most expensive deals because of the fees these transactions generate.

The municipal bond fiasco also has some very interesting side stories. A Franco-Belgium bank that collapsed in 2008, got bailed out, collapsed again in 2011 and got bailed out again, has also been the recipient Federal Reserve bailout bucks. Dexia SA is a big Belgian bank whose $715 billion in assets far exceed the sum total of the entire Belgium economy of $395 billion, according to a Wolf Richter article posted on the website of Naked Capitalism. Among other things, Dexia CEO claimed it wasn't really a bank, despite having 21 million bank accounts, but a hedge fund.

Wolf Richter: CEO of Dexia – ‘Not A Bank But A Hedge Fund’

Dexia, the deposit taking 'hedge fund' is no ordinary 'hedge fund' and it got $300 billion in bailout bucks from governments and central banks.  Dexia is indeed considered special because it's a major insurer of municipal bonds in the US and elsewhere.  The fact that Dexia probably used the bank deposits of ordinary working stiffs to hedge its bets is inconsequential to those who plunder and grow rich by sucking off the public's nipple.

A European bank that got the most Federal Reserve discount window help during the financial crisis received a total of about $300 billion in loans, guarantees and cash infusions from governments and central banks. It also owned subsidiaries implicated in bid-rigging that prosecutors say defrauded U.S. taxpayers. The Fed has kept discount window borrowers secret for 97 years.

Details of Fed lending released last week show that Dexia SA (DEXB), based in Brussels and Paris, borrowed as much as $37 billion, with an average daily loan amount of $12.3 billion in the 18 months after Lehman Brothers Holdings Inc. collapsed in September 2008. ...Dexia guaranteed bonds issued by entities as varied as the Texas State Veterans Land Board in Austin and the Los Angeles County Metropolitan Transportation Authority....

The Fed has kept discount window borrowers secret for 97 years.

97 years of Fed secrecy?  Ron Paul's Audit the Fed would have disclosed every dirty bailout of the Fed but Barney Frank and the Dems killed it when they passed the Obama endorsed Dodd–Frank Wall Street Reform and Consumer Protection Act that vastly increased the raw and absolute powers of the Fed.  Frank attached an extremely watered down version of Ron Paul's Audit the Fed bill to the Dodd-Frank bill which, of course, forced Ron Paul to vote against it.  There was no way on God's green earth that Ron Paul would ever vote to expand the powers of the Fed.  The Dems really rubbed salt into open and oozing public wounds by naming their Fed endorsed horror a consumer protection bill!

The municipal bonds scandals are just another piece of the ongoing financial fraud and crime puzzle.  While the schemes and scams have been substantially unraveled and exposed by financial pundits and journalists, absolutely nothing has been done to stop the fraud.

When one has a government license to steal, theft becomes rampant.  Meanwhile, I'm hoping that folks like Matt Taibbi and others continue to expose the massive financial fraud that infests America and that they do it with  independent clarity  and without allegiance to the Republican and Democratic parties.  Party loyalty taints objectivity and tends engage in the blame game.  Yeah, Wall Street is the biggest crime syndicate in all of human history but the greater question should be "who enabled and empowered the crooks, and gave them a license to steal?".

For more on finacial fraud, see:

The Goldman Sachs Blessing "May the Lloyd be With You, AMEN"