Bloomberg News Looks at Solutions to the Muni-Bond Scandal

An interesting piece out of Bloomberg news written by Joe Mysak that looks back at possible solutions the muni-bond disaster. The piece goes a long way to discussing the national scale of the problems, from the SEC and Chase revolving around Jefferson County disaster, California suing CDR Financial Products, and the various lawsuits that have cropped up in recent years as these deals went sour. One of the ideas floated is to replace the banks with the Treasury department as a way to end some of the more dubious practices that institutions from Chase to UBS, Socgen and others have practiced in around the world:

Suing Everybody

For those keeping score, the Justice Department is prosecuting CDR, while the SEC settled with J.P. Morgan Securities Inc. and is suing its ex-bankers, Charles LeCroy and Douglas MacFaddin, in connection with the business they did in Jefferson County.

A number of California municipalities are suing just about everybody: Bank of America Corp., Merrill Lynch & Co., UBS AG, JPMorgan Chase & Co., Citibank NA, Morgan Stanley, Wachovia Bank, Goldman Sachs Group Inc., CDR, Investment Management Advisory Group Inc. and 37 others who have worked in the reinvestment-of-proceeds business. Most of them have declined to comment. Bank of America pointed out that it was cooperating with the government.

Documentary Evidence

Last year, a number of jurisdictions filed complaints against the dealers who worked on their swaps and derivatives, piggybacking on the news reports of the Justice Department and SEC investigation. These lawsuits were long on quotations from the press and a vague sense of outrage, short on substance.

No more. The California lawsuits -- and here I refer to one filed by the Sacramento Municipal Utility District, although all the complaints are related -- are based on both original research and oral and documentary evidence provided by Bank of America.

In February 2007, the bank said it had entered into an agreement with the Justice Department. In return for leniency, the bank agreed to tell all. According to the lawsuit, the bank had asked for leniency in 2004, and began cooperating with the feds at that time.

‘Conspiratorial Conduct’

The 181-page complaint is stuffed with quotes, examples and anecdotes, and analyses of those auctions that don’t look much like auctions.“So pervasive was the conspiratorial conduct at the dominant providers of municipal derivatives,” the complaint says, “that it became accepted practice for the conduct to occur and industry participants were surprised not when it occurred, but rather when it did not.”

Reading these documents, you have to wonder whether it is even possible to fix the reinvestment-of-proceeds business. I asked ex-MSRB head Taylor, who first floated the idea of requiring issuers to reinvest all their bond proceeds in Treasury securities back in February, whether he had seen the various lawsuits. He had. He expects more. And he still thinks all issuers should be required to reinvest in Treasuries.

Color me skeptical this shift will ever happen. Considering Obama's payoff to the banks in regards to muni-bonds, it appears the administration is less then concerned with an overhaul of this particular market. By the way it was LeCroy who was in Jefferson County Alabama who later went onto Gulf Breeze Florida, scene of some of the more questionable bond deals.