Three major banks were sued today by a California public electric utility, the Sacramento Mununcipal Utility District (SMUD), which alleged that the banks coordinated pricing and accepted kickbacks in a scheme to pre-determine the winners of “municipal derivative” auctions.

Photo by by shadphotos
Photo by by shadphotos

What are Municipal Derivatives?

Municipal derivatives are unregulated financial products, the value of which are based on the value of underlying assets, rates or indexes, in this case of municipal products. Derivatives create short term securities out of these longer term risk assessments; for example, stock options are derivatives, because their value is based upon the underlying value of the stocks the option is based upon.

The lawsuit claims that the banks engaged in price fixing and accepted kickbacks disguised as fees from bidder who were in return promised that they would be winners in the derivative auctions. The case comes as a result of a three year investigation into bid-rigging in the municipal derivatives market. Included in the suit are more than a dozen other banks, as well as CDR Financial Products, Inc., a California based derivative investment advisory firm.

More Money, More Problems

This lawsuit comes at a particularly bad time for Bank of America, just as the investigations into its controversial Merrill Lynch deal seemed to be losing steam. In addition, the added controversy of an antitrust lawsuit is bound to make the search for a new CEO to replace Ken Lewis even more difficult than it already is. Many have suggested that the difficulty in finding a replacement is due to the stigma that Bank of America has been receiving due to a controversy over its lack of disclosure concerning the details of the Merrill Lynch acquisition, and this case will not relieve any of the public scrutiny for the corporation.

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  • mrnan

    Thanks for this information . This is a news for me.