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The Scam Wall Street Learned from the Mafia
- kurrent 14y agothe source http://www.justice.gov/atr/cases/f261600/261602.htm http://www.justice.gov/atr/cases/f261600/261602.htm
- deleted 14y ago[deleted]
- doomslice 14y ago> 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?
- leot 14y agoPerhaps 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 14y agoThere 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?
- brazzy 14y agoDo you have a link that explains what exactly a "three bid system" is? The top hit on Google for the term describes a card game...
- grabeh 14y agoMy understanding is that it is simply a closed bid system where three separate banks submit bids (interest rate that will pay on sums invested with them) with the highest one winning.
- tedunangst 14y agoIn general, you want to buy something. You have to get a quote from at least three vendors, then you pick the lowest. For contracts, like to build something, paint city hall, whatever, you solicit bids by publishing a notice in the local paper. Usually the bids are sealed, which "guarantees" people make a fair bid without undercutting their competitor by a dollar.
- SideburnsOfDoom 14y agoWhat are you trying to say? The argument that "everyone knows it's crooked" does not make it legal. It does not make a prosecution impossible.
- tedunangst 14y agoOf all the ways that municipalities and hospitals and whatnot get cheated, banks skimming a little interest is among the least interesting. What would have been interesting is a nice shiny pie chart showing where all the graft goes, but that would relegate this particular scandal to a sideshow.
- SideburnsOfDoom 14y ago"least interesting" or "smallest amount of money" ? They're not necessarily the same. In the article, Matt Taibbi says it's "a business worth $3.7 trillion". A few percentage points of that is still interesting amounts.
- jbooth 14y agoYou'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.
- tedunangst 14y agoThe lowest (or highest, in this case) bid was also enforced in this case. I totally agree with your point about small purchases, I've also dealt with it in the situation where you could walk down to Staples and buy something for $200, but we'd spend $300 because that was the best offer from an approved vendor.
- newman314 14y agoAny 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 14y agoIf 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.
- kahawe 14y ago> Perhaps most amazing is many people's apparent assumption that banks would never engage in this kind of behavior. I was sort-of witness to a shouting match between a well educated son and his hard-working working-class rest of the family over the fact that banks give out let's say ~ten times as much as they actually have. They called him stupid, outrageous and how could any company possibly do this and they can certainly not run their small wood-shops and small companies like that so how should a bank be able to do that? Mind you, these are average good natured law abiding folks, the kind that certainly is the majority of the population. This goes to show that there certainly is a vast amount of blind trust in banks in the average population; looks like acting all serious-business and putting on a suit AND being able to control or at least have an important stake in a lot of major aspects of working-class citizens' lives (tight budgets, making ends meet) makes for a powerful combination.
- mjwalshe 14y agoBut presumably these "working class" peopel had a morgage that is highly leveraged - did they not see the diference?
- 16s 14y ago33% (or slightly more) of homeowners have no mortgage at all. Edit - Some sources: http://www.ritholtz.com/blog/2012/04/debunking-the-housing-recovery-story-part-1-of-5/ http://www.ritholtz.com/blog/2012/04/debunking-the-housing-r... http://www.irishexaminer.com/ireland/kfsneyqlidgb/rss2/ http://www.irishexaminer.com/ireland/kfsneyqlidgb/rss2/
- lolcraft 14y agoWell, the defendants also admitted doing all this, but still didn't though there was anything wrong about it because they were expert investment bankers. That's quite amazing too.
- dkarl 14y agoIt's because we don't feel comfortable telling people who wear suits and ties and working in high-rises that they're going to jail because they followed the prevailing ethics in their neigborhood. We have no problem sending black people or sweaty guys with ethnic names to jail just because they were joiners who went blindly along with the prevailing social mores in their social group, but we only send investment bankers to jail if we can prove they knowingly sunk lower than other investment bankers. We allow the Wall Street subculture to set the standard for its own behavior, and we consider that the desired normal state of things. Instead of reluctantly intervening to "send a message" once in a while when the corruption becomes too egregious to ignore, we should recognize that the complexity and lucrativeness of the finance industry makes Wall Street a natural locus of crime that requires constant attention. Just like a bad neighborhood or a bus station bathroom. That means we need a proactive and well-funded SEC, of course.
- gyardley 14y ago'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.
- Avshalom 14y agoYou don't have to 'suspect' it was just shown. in court. that's what the article was about.
- gyardley 14y agoThe sentence you replied to? It doesn't mean what you think it means.
- pmorici 14y agoYou 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 14y agoActually, headlines are usually (like, almost always) written by an editor and not the author. So Tabibi should be off the hook on that count.
- JumpCrisscross 14y agoActually, as a former trader, bid rigging is a big no-no. There is a fine line, ofcourse, e.g. the IPO process's inherent factoring of IPO investors over the issuer or M&A process'a tendency to work off bankers' relationships. But this is unambiguously wrong. Where this becomes classic Taibbi is in his implication that this is business as usual on Wall Street (it's the only place in America I know of where someone's word is worth billions of dollars, with the paperwork coming after a verbal agreement much of the time).
- prostoalex 14y agoSo 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 14y agoCan 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 14y agoAn 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 14y agoJust 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.
- prostoalex 14y agoThey're sealed bid auctions. You can see what the others bid on eBay. If you choose to bid just a penny over the highest bid (as opposed to bidding up by a larger amount), you're unlikely to be prosecuted.
- jakejake 14y agothis fills me with righteous anger
- tempuser007 14y agoImposibruuu ! This is amerika !
- groovy2shoes 14y agoSome helpful advice: this isn't Reddit. Try to keep your comments on-topic and helpful.
- tempuser007 14y agoI just noticed that too but thanks anyway.
- jewbacca 14y agoI see you're a new user: this type of comment is, by consensus and executive decree, not welcome on Hacker News. If you don't have something genuinely novel to contribute to the conversation, please do your part to keep the noise low. This applies to the grandparent comment as well. If people seem to be jumping on your comment more than hers, it's because yours smells worse on the surface. But honestly, the grandparent is more insidious for being less obviously out of place but being similarly empty.
- Groxx 14y agoI 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.
- grlthgn 14y agoCities/Town/States gets money from bond sales and need a place to store the money because it doesn't get used at once. They held auctions and banks would submit bids to hold the money at a certain interest rate. Banks colluded to lower their bids instead of competing fairly.
- tedunangst 14y agoBanks participated in a three bid system for municipal business. It ended the same way all three bid systems do.
- raldi 14y agoI can reduce it to two words: bid rigging There, I just saved you like an hour.
- corford 14y agoAs 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.
- tumult 14y agoMatt 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.
- anon808 14y agoYour doing us an injustice by not tearing it apart. Help us, inform us. He may be a rabble rouser prone to hyperbole, but that by itself doesn't mean what he's writing is false. Look past the drama and tell us what's incorrect.
- davidw 14y agoYou're all doing us an injustice by not flagging it so that it and other off-topic articles like it are not relentlessly expunged from this site.
- mafro 14y agoI'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 14y agoBut 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.
- davidw 14y ago
- Morg 14y agoMeh . people rig stuff everywhere all the time, only the naive believe there's ever anything like fair business. Worse, IT people should realize that if Intel's doing it, everyone's probably doing that kind of stuff too.
- cdooh 14y agoHere in Kenya our politicians are the thieves cheating the public out of millions, in America it seems your bankers are the crooks
- digitalengineer 14y agoThe 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.
- flyinRyan 14y agoNo, it's politicians as well. They tend to work for each other.
- laserDinosaur 14y agoSome 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 14y agoThe 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 14y agoThat clears a lot of it up. Cheers!
- dennisgorelik 14y agoGoogle 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.