Investment banks, munis and derivatives, redux | FT Alphaville

Investment banks, munis and derivatives, redux

Wall Street must be wondering whether the returns on selling derivatives to municipalities (and say, Greece) are really worth the headache.

In the latest development in the saga of investment banks v munis in re derivatives, a judge ruled on Thursday that a dozen financial institutions will have to defend themselves against allegations of bid rigging and price fixing in the market for municipal derivatives.

(The original action, brought in August 2009, included more than 40 corporate defendants, court filings show. Goldman Sachs, for those wondering, was not named in the case.)

The defendants read like a who’s who of the Street: Wells Fargo, JP Morgan Chase and Morgan Stanley are among those that will face a pre-trial conference on April 30. Even Bear Stearns — RIP — made an appearance. Representing Europe: UBS, NatWest, SocGen and Natixis.

The plaintiffs include the City of Baltimore, the University of Mississippi Medical Center and the Bucks County Water & Sewer Authority.

As for the conduct alleged:

This action involves allegations of a conspiracy “to fix, maintain or stabilize the price of, and to rig bids and allocate customers and markets for” municipal derivatives sold in the United States and its territories

Named Defendants combined and conspired  to allocate customers and fix and stabilize the prices of municipal derivatives, including the interest rates paid to issuers on such derivatives. The [complaint] alleges that individuals employed by Named Defendants knowingly acted as conduits for communication of pricing and bidding information among Named Defendants, with the knowledge and consent of Named Defendants. Further, Named Plaintiffs allege that Named Defendants shared profits from winning bids, provided secret compensation to losing bidders and paid kickbacks to co-conspirators.

Not good, and especially so when two of the defendants named — JP Morgan and UBS — are already facing trial in Italy on charges related to a 2005 deal involving Milan and a €1.7bn bond issue.

As at pixel time, Bear Stearns had long ceased to exist and could not, therefore, be reached for comment. Natixis did not immediately return a call seeking comment.

Natwest, Wells, SocGen, Morgan Stanley and UBS declined to comment on Thursday’s ruling, as did JP Morgan Chase.

JPM has had perhaps the roughest time as far as the munis/derivatives combination goes. In November, JP agreed to pay $75m and forfeit claims on nearly $650m in termination fees to settle allegations the bank and two former employees paid the friends of political officials to win municipal financing business in Jefferson County, Alabama.

It’s no surprise then, that in late 2009 the bank decided to exit the muni swaps business entirely. Bloomberg obtained the memo sent out by Matt James, the bank’s head of rates, foreign exchange and municipal bonds announcing the move in September:

The risk/return profile of this business is such that the returns no longer justify the level of resources we have allocated to it’

No kidding.

Related links:
Memo to corporate treasurers: you can’t handle derivatives – FT Alphaville
An exposed position – FT
Italy <3 currency swaps too – FT Alphaville
Interest-Rate Deals Sting Cities, States – WSJ