A stunning new article in Bloomberg Magazine (coming out in the next issue) says that bank employees paid kickbacks to bond advisers who arranged government bond deals–ripping off states in the process.
The alleged scheme is a little confusing so we’ll paraphrase what happened. If you’re interested in the nitty-gritty, you can go on to the Bloomberg piece and read that.
(Remember that the following scenario is just what allegedly happened. We can’t verify it.)
States have money saved up that they plan to use to build schools, parks, whatever. But they don’t need it right away, so they are incentivized to give it to banks, who will invest it. The states will then get back their initial investment plus a set interest rate.
According to Bloomberg, authorities have evidence of banks quoting artificially low interest rates to states (in one instance, the municipality Springfield Township, Pennsylvania).
So let’s say the banks would actually have been willing to return a state’s money plus say, 6% interest. Banks would actually quote the state something more like 4.5% and then pocket extra profit.
Here’s how they did it. The states hired boutique advisory form CDR Financial to help them find the best interest rate. But CDR was in collusion with the banks. While CDR was supposed to be finding the bank with the best interest rate, CDR was actually (allegedly) setting up a plan with that bank to receive a kickback, in addition to a transaction fee from the state.
So maybe CDR told the state, the best interest rate I can get you is with Bank X at 4.5%. And then the states accepted the deal, without knowing that Bank X would have given them a higher interest rate (say 6%) had CDR not told them to take the deal.
The incentive for CDR is that Bank X would pay CDR a kickback (could be something as simple as cash under the table) for giving them the business. The incentive for Bank X was getting paid the fee plus paying the bank an artificially low interest rate.
It must have been tricky to discover where the allegedly illegal activity occurred because the contract Bank X signed with the state stipulates they only have to return the money plus 4.5% interest. They didn’t break the contract. However Bloomberg says that there is proof of illegal activity, namely in the area of the banks quoting artificially low fees to the states.
If this actually happened, this is all illegal. But don’t throw all the hate at the banks. The local governments hired CDR and gave them their business..
AND that’s why the USA’s corruption perceptions index probably just shot up a notch –>