

The Scam Wall Street Learned from the Mafia - MaxGabriel
http://www.rollingstone.com/politics/news/the-scam-wall-street-learned-from-the-mafia-20120620?print=true

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leot
Perhaps most amazing is many people's apparent assumption that banks _would
never_ engage in this kind of behavior.

It seems the most cynical predictions and explanations of large bank behavior
are likely to be the ones closest to the truth.

~~~
tedunangst
There are people who think three bid systems actually work? Everyone I've ever
talked to about three bid systems knows they mostly exist to give a faint
dusting of propriety to the fact that somehow the mayor's brother in law is
always the guy winning the contract.

Are there roads in your town? Do you think they were paved by the honest
lowest bidder?

~~~
jbooth
You're pretty far off, here.

I used to be in an elected position and would sign off on stuff like this. The
"lowest bid" thing does actually tend to be enforced, at least where I was,
and it was a huge pain in our butt for totally different reasons.

You're presuming that every deal is a gladhanded corruption thing. Sometimes,
but not most of the time. Often we would know what we wanted, have a good deal
for it, it's not a very significant purchase (like a $500 piece of equipment
or somethign), but we have to spend hours of employees' time getting ahold of
3 options so that we can get the one we were going to get anyways.

The way worse situation is on big ticket items, like your example of roads or
other big capital projects. Where I was they are actually done by the lowest
bidder, by law. But we'd wind up paying way more than that, because in order
to become the "lowest bidder", the contractor would have to unrealistically
underbid and then run way over on the contract. At that point, we'd be screwed
and it's usually a better idea to pay a little more to finish the project than
to sue and have a half-finished project sitting there while you burn 6-7
figures on legal bills. Contractors with the professional integrity to give an
honest estimate were unlikely to get the gig, because of the lowest bid law.

~~~
newman314
Any reason not to do an open bid instead?

Also, I'm more familiar with commercial than federal contracts. Did your
contracts have not-to-exceed clauses or any penalties built in to manage
overrun issues?

~~~
tedunangst
If I bid $100 and you see it, you can bid $99 and win. The theory is that if
you can't see my bid, you'll bid $80 instead because you don't know how low to
go.

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gyardley
'Wall Street does X' and 'the Mafia does X' does not in any way imply that
Wall Street learned X from the Mafia - and there's no evidence in the article,
either. Typical Tabibi bombast.

I suspect bid-rigging, while unethical, is pretty common behavior given this
type of auction mechanic - all the buyers are knowledgeable and known to each
other, while the seller is relatively ignorant and only participates in the
market rarely.

~~~
pmorici
You are missing the point; titling the article "The Scam Wall Street Learned
From the Mafia" is a rhetorical device used by the author to illustrate the
criminal nature of what went on and draw parallels to activity that is
commonly understood by the average person to be unethical. The author isn't
trying to suggest that these banks literally learned this from the mafia.

"the crimes the defendants and their co-conspirators committed were virtually
indistinguishable from the kind of thuggery practiced for decades by the
Mafia, which has long made manipulation of public bids for things like garbage
collection and construction contracts a cornerstone of its business."

~~~
Uhhrrr
Actually, headlines are usually (like, almost always) written by an editor and
not the author. So Tabibi should be off the hook on that count.

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Groxx
I hate to ask, but might there be a tl:dr; summary? That's a lot of text. I'm
interested, but I don't really want to spend _that_ much time on storytelling.

~~~
corford
As the other replies have said, it boils down to bid rigging. What's
interesting about it is the sheer scale. It apparently has been going on for
at least 10 years, affects every state in the US and the banks have likely
scimmed billions of dollars from it. What's particularly galling is that the
entities they have stolen this money from are schools, hospitals, ports etc.
Basically, another example of the already rich brazenly lining their pockets
yet further with misappropriated public money. All the time hiding behind the
supposed "complexity" of what they do and showing apparently no shame or
remorse.

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kurrent
the source

<http://www.justice.gov/atr/cases/f261600/261602.htm>

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laserDinosaur
Some of these sections are a little confusing. Can someone help me out?
Hopefully Planet Money on NPR will do an episode on it soon :)

"So it goes to Wall Street, which issues a bond in your town's name to raise
$100 million, attracting cash from investors all over the globe"

Why would investors put money into a school? Are they hoping for returns on
their investmant later on like shares in a company? I can't image the profit
margins on a school would be very lucrative. Why would people invest in these
projects?

"While that unspent money is sitting in the town's account, local officials go
looking for a financial company on Wall Street to invest it for them."

So the town raised money for a school which they then invest back into
wallstreet, to make money? That seems like an odd process. Would it not be
possible for towns to say "We are going to build a $300 million dollar theme
park", get the money, and say "construction isn't due to start until, oh I
don't know, 2023?", meanwhile just earning huge amounts of interest?

"the broker would tell the pre­arranged "winner" what the other two bids were"
If the three banks are colluding, why does the broker need to be the one to
pass on the information of what the other bids where? Can't the banks just
talk to each other directly and plan in advance what they are going to bid?

~~~
tedunangst
The investors don't care about the school, they care about the interest
payments they will receive. Bonds are often considered lower risk because the
income is fixed.

Earning "huge" amounts of interest is exactly what they are doing. They get
cash, they put it back in the bank. The lawsuit is about the "huge" interest
rate being rigged.

Oh, you ask why they don't do that and never build the project? Because
they're _paying_ interest on it in excess of whatever they're earning. The
earned interest is only to minimize the cost of sitting on the borrowed money.

Using a broker to decide the winner leaves less paper trail. It'd be weird for
three competing banks to have a three way call every time this happened.

~~~
laserDinosaur
That clears a lot of it up. Cheers!

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doomslice
> How and when the government got hold of those tapes is still unclear; the
> prosecution is not commenting on the case

Didn't Wikileaks say they had some BofA documents/conversations that were
maliciously "deleted" before they went public?

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dennisgorelik
Google AdWords lowers highest CPC ad bid to "the second highest bid + $0.01".

These banks did essentially the same with their bids, just without consent
from their clients.

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cdooh
Here in Kenya our politicians are the thieves cheating the public out of
millions, in America it seems your bankers are the crooks

~~~
digitalengineer
The scam could only continue with the aid of politicians. Big banks told their
employees to donate money to the politicians (and later paid them back the
money they 'donated'). Or they gave away 'gifts' like Superbol Tickets and
limo-treatments. The politicians receive the money/gifts after which they will
"advice the City or County" what bank is to handle the swap-deals. There
turned out to be $66 return for every dollar the banks 'invested' in the
politicians.

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jakejake
this fills me with righteous anger

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tumult
Matt Taibbi is awful. This article, and all of his others, are hyperbolic
demagoguery. This one is particular is so bad that I can't even bring myself
to tear it apart line by line. You're doing yourself an injustice by reading
it. Unless you take pleasure in misinforming yourself and becoming angered
over falsehoods, you're just playing into the hands of a particularly
nefarious and persistent rabble-rouser.

~~~
mafro
I'll give you that 75% of this article is unnecessary hyperbole which adds
nothing to the central message.

The central message is very interesting though.

~~~
pja
But without the hyperbole, people won't get engaged, they won't get angry.

Now, to some extent that engagement is being sought in order to sell Rolling
Stone, but I think that both Matt and the Rolling Stone editors believe that
they're talking about something that matters & that people _should_ be angry
about. Hence the hyperbole.

If they wrote a dry academic paper and published it in some economics journal
somewhere it might contain exactly the same information but it would have
negligible impact.

~~~
tedunangst
If they wanted to get people angry, they should follow the money and show
where _all_ the money used to build a new hospital goes, but Taibbi's axe
doesn't grind that way.

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prostoalex
So municipalities tried to game the system by instituting closed auctions
instead of the open ones, and then got mad, when it turned out that some
parties are willing to pay to peek into the sealed bids? An open auction
system would not have created the peeking problem in the first place.

Both parties tried to institute unreasonable complexity to get an upper hand.

~~~
luser001
Can you explain further? What do you mean by "closed" and "open" auction?

AFAIK, they outsourced the auction process to a third-party company
specializing in conducting auctions. That company and the bidders colluded to
defraud municipalities. Corrupt auctioneers also paid bribes to politicians to
get hired as as auctioneers.

Do you really not see anything wrong with this picture?

Edit: Removed paragraph with analogy involving ebay. Analogies suck, and it
didn't really apply here.

~~~
diziet
An open auction is one where everyone's bids are public and visible to
everyone hence allowing price discovery, contrasted with a closed auction, one
where the bids are sealed and not disclosed to any other parties. It seemed
from the article that the bids were submitted over the phone and known to the
broker ahead of the conclusion of the auction, as opposed to a sealed first-
price auction.

~~~
luser001
Just to be clear, telling the broker their bid instead of just sending it
sealed is exactly the corruption that's being discussed in the article.

AFAIK, it wasn't legal for the bidders to tell the auctioneer what their bid
was.

