Bloomberg scoops (and Dow Jones follows without crediting) that the Justice Department says JPMorgan Chase, Bank of America, and General Electric, among many others on Wall Street, conspired to screw municipalities out of money.

And water is wet, you say. Indeed.

The government’s case centers on investments known as guaranteed investment contracts that cities, states and school districts buy with the money they receive through municipal bond sales. Some $400 billion of municipal bonds are issued each year, and localities use the contracts to earn a return on some of the money until they need it for construction or other projects.

The Internal Revenue Service sometimes collects earnings on those investments and requires that they be awarded by competitive bidding to ensure that governments receive a fair return. The government charges that CDR ran sham auctions that allowed the banks to pay below-market interest rates to local governments.

It’s worth noting up high that these banks haven’t been charged—yet, anyway. Top CDR executives have. And it’s interesting that the names of the alleged co-conspirators were “accidentally” leaked by defense lawyers in documents they filed.

The court records mark the first time these companies have been identified as co-conspirators. They provide the broadest look yet at alleged collusion in the $2.8 trillion municipal securities market that the government says delivered profits to Wall Street at taxpayers’ expense.

But, as Bloomberg reports:

“If the government is saying they are co-conspirators, the government believes they have sufficient evidence that they can show they were part of the conspiracy,” said Richard Donovan, a partner at New York-based law firm Kelley Drye & Warren LLP and co-chair of its antitrust practice. Donovan isn’t involved in the case.

And—uh oh—three at CDR have turned states’:

Since last month, three former CDR employees who weren’t charged in the initial indictment have pleaded guilty and agreed to cooperate with the Justice Department.

What’s confusing and not well spelled out in any of the stories (when it’s even addressed) is that in an apparently separate but tangential case a judge ruled yesterday that JPMorgan, Morgan Stanley, Wells Fargo and several others would have to defend themselves against allegations that they colluded in the municipal derivatives market. Here’s Reuters:

About a dozen banks and financial firms must defend allegations of bid rigging, limited competition and price fixing in the municipal derivatives market, a U.S. judge ruled on Thursday.

The Bloomberg story is about U.S. v. Rubin/Chambers, Dunhill Insurance Services Inc., 09-CR-01058, U.S. District Court, Southern District of New York, while the Reuters story is about In Re Municipal Derivatives Antitrust Litigation, U.S. District Court for the Southern District of New York, No. 08-2516.

Apparently the former is a criminal case and the latter is civil.

All this couldn’t come at a worse time for Wall Street, of course. Let’s hope the papers pick up on this in a big way and start sussing this out. It’s striking that the alleged conspiracy is so widespread. How high in the companies did it go? How much money did municipalities lose?

It’s also worth noting other Wall Street-municipal controversies involving derivatives sold to municipalities who didn’t understand them, like Jefferson County, Alabama.

This one has the potential to be big.


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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.