Birmingham Weekly Looks at the Muni-Bond Scandal

A good take down of the whole scandal with a focus on Jefferson County, it even manages to include the fact that the muni-bond scandal has managed to spread to Europe:. It would be nice to have seen the role of AIG in there, but they do a good take down of Chase, who settled with the SEC the other day for the obvious reasons that this scandal could severely damage that bank, as the article points out the Italian government has seized all of Chase's assets in Italy until the matter is cleared up in court.

First, the public corruption trial of Larry Langford proved that at least one firm, Blount Parrish & Co., acted as a sort of Wall Street bagman, locking banks into work with the county in exchange for millions in fees for no real work. Portions of those fees then went to Langford, who served as county commission president and chairman of the finance committee.

Second, the county’s swap advisor, CDR Finance Products, was indicted on federal charges that it rigged similar deals. Federal prosecutors have accused CDR of colluding with banks to inflate fees in exchange for more lucrative business. The indictment does not accuse CDR of acting improperly in Jefferson County, but the association has been conspicuous.

Third, after years of investigation, the Securities and Exchange Commission finally filed suit against JPMorgan Securities and two of its bankers, Douglas MacFaddin and Charles LeCroy. According to the lawsuit, which the county cribs from heavily, LeCroy and MacFaddin conspired with Jefferson County commissioners to direct millions in fees for bogus work to the commissioners’ pet bankers. These bankers never really did any work, and on at least one occasion, LeCroy and MacFaddin struggled to concoct a bogus title for these bankers in the public disclosures.

Little did LeCroy and MacFaddin know at the time, but they were suspects in a federal corruption investigation. Federal investigators probing public corruption in Philadelphia had wiretaps on the bankers’ phones. Recorded conversations among the two bankers and some of their coworkers suggest blatant acceptance of and participation in public corruption here in Jefferson County and possibly elsewhere.

In 2005, LeCroy pleaded guilty to two counts of wire fraud in connection to public corruption in Philadelphia. He has since spent time in prison and been released.Some believe that the bankers were part of a much wider and prolific scheme to hopscotch the country, selling municipalities on these complex derivatives and risky debt instruments. Indeed, the same bankers involved in Jefferson County performed similar services in Pennsylvania, Georgia, New Mexico and even elsewhere in Alabama.

Retired investigators have told the media about a massive multi-agency investigation into JPMorgan and CDR, but that investigation has yet to result in any indictments other than CDR. Were an investment bank, such as JPMorgan, to be an indicted, it could lose its securities licenses in most, if not all, states. Were JPMorgan to be indicted, it could pose an unthinkable threat to the bank itself and, in turn, the economy.

Elsewhere in the world, prosecutors are not letting the bank’s precarious circumstances keep them from pursuing legal action. In Milan, Italy, prosecutors are accusing JPMorgan, among other banks, of engaging in practices conspicuously similar to what transpired in Jefferson County. Public officials there are accused of conspiring with investment bankers to sell the city derivatives it didn’t need, swaps that created a tumultuous debt structure. The Italian government has seized JPMorgan’s assets in that country until the matter has been settled in court.

The European , as detailed here was of of interest because many of the same financial institutions as seen here in the US were involved in very similar black box deals that ended up going south. As for impact, its nice to see media organizations detailing the national implications of the muni-bond scandal.