In an era of widespread foreclosure and unemployment, due in part to irresponsible banking practices, it’s not surprising that many cities are less than thrilled with the banks that had been their trusted business partners for many years. Frustration over the way banks handle foreclosures has led cities all over the nation to consider and pass responsible-banking legislation, which strips banks of their ability to win city contracts and hold city deposits if they have behaved irresponsibly in the city. A new feature by Matt Taibbi in Rolling Stone might convince more cities to pass similar legislation: it turns out, Wall Street has been systematically ripping off American cities for years.

Sakeeb Sabakka/flickr source

Taibbi’s story follows the case of United States of America v. Carolloa, Goldberg and Grimm, which resulted in the conviction of three bankers who engaged in a conspiracy with banks to fix the auctions for contracts to hold onto municipal bond deposits. When cities raise money, they often do so by issuing debt in the form of bonds, but they don’t pay all this money out immediately, explains Taibbi, so banks compete in a public auction to offer cities safe places to keep their deposits before they pay whomever they need to pay. Cities are obligated to take the best bid — the highest interest rate — and this is where the price-fixing came in.

The defendants, who worked as brokers between the cities and banks competing for their business, would let certain banks know how low they could bid and still win a contract in exchange for kickbacks, and they did so in a coded language. What we would call a “bribe” they would call a “swap”; instead of telling a bank their bid was 10 basis points too high, they would tell them to “come down a dime.”

What does this mean? In Taibbi’s words:

The end result of this (at least) decade-long conspiracy was that towns and cities systematically lost, while banks and brokers won big. By shaving tiny fractions of a percent off their winning bids, the banks pocketed fantastic sums over the life of these multimillion-dollar bond deals. Lowering a bid by just one-100th of a percent, called a basis point, could cheat a town out of tens of thousands of dollars it would otherwise have earned on its bond deposits.

That doesn’t sound like much. But when added to the other fractions of a percent stolen from basically every other town in America on every other bond issued by Wall Street in the past 10 to 15 years, it starts to turn into an enormous sum of money. In short, this was like the scam in Office Space, multiplied by a factor of about 10 gazillion: Banks stole pennies at a time from towns all over America, only they did it a few hundred bazillion times.

While we applaud Rolling Stone’s fact-checking team for having a good enough sense of humor to let Taibbi use the words “gazillion” and “bazillion,” it is disturbing to see how routinely fleeced cities were at the hand of Wall Street bankers, and Taibbi certainly doesn’t hold any punches — in fact, he compares this strategy directly to the mafia’s fixing of public works contracts. It’s a safer source of revenue than loansharking, basically, but it’s still totally illegal. And it’s something that many well-respected financial institutions engaged in.

One hopes that more cities will reconsider which banks they do business with. It might prove difficult to find one that behaves honestly, though.

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