Former Gov. Bill Richardson could be the Obama administration’s commerce secretary. But he’s not, because of his involvement in a alleged pay-for-play scheme with a Beverly Hills, Calif. brokerage firm called CDR Financial Products, Inc. In December, executives of that firm pleaded guilty to conspiring with the nation’s biggest banks to rig bids on financial products of municipal bonds.
In May, a federal jury convicted three bankers at one of those investment firms, General Electric Co., for defrauding taxpayers and the IRS. A Rolling Stone Magazine report offers some tidbits from inside the trial, with one broker testifying about the Richardson’s illicit dealings with CDR.
As federal prosecutors have successfully pointed out in court, Wall Street’s major banks conspired with brokers to carve up the municipal bond market by rigging supposedly competitive auctions for financial products of municipal bonds. For these products, banks submit bids in closed auctions. The bids represent interest rates they would pay an entity, like a hospital, over the life of the product. The highest bid wins, and auctions were supposed to be competitive. But brokers like CDR would give banks like GE a last look at its competitors’ bids on instruments like guaranteed investment contracts, known as GICs. This allowed GE to offer a lower bid than it might have submitted in a competitive auction.
Over at least a decade, the arrangement cost towns, hospitals, port authorities and other entities hundreds of thousands of dollars in each deal, and, by Rolling Stone’s estimate, accounts for a multibillion-dollar transfer of wealth from those entities to the balance sheets of Wall Street banks. In other words, for years, banks, aided by brokers, have stolen taxpayer money by shaving small percentage points off interest rates they agree to pay those entities.
Rolling Stone writer Matt Taibbi makes the case that these federal crimes, while couched in arcane language of high finance, were “virtually indistinguishable from the kind of thuggery practiced for decades by the Mafia.”
Taibbi also serves up a Michael Corleone-esque quote from Richardson, who allegedly told a broker at CDR (in reference to the broker’s boss):
“Tell the big guy I’m going to hire you guys,” the broker testified Richardson told him. The broker had handed Richardson a $25,000 check at a fundraiser.
“Soon after that, New Mexico hired CDR as its swap and GIC adviser on a $400 million deal, right?” an attorney asked the broker, Doug Goldberg, who had already pleaded guilty and was now testifying for the government.
“Yes,” Goldberg testified.
Goldberg later told the courtroom that CDR had donated $100,000 to Richardson’s political action committee, America Moving Forward. Richardson’s administration, in 2004, had given Goldberg’s CDR a no-bid contract to manage an escrow deposit account. The state eventually ended up paying CDR $1.4 million in one year.
In the wake of the financial crisis, Occupy Wall Street has criticized the federal government for going easy on big banks. But this trial amounts to a rare victory for federal prosecutors, as the three GE executives face up to five years behind bars. Other Wall Street banks have entered into multimillion-dollar settlements with the federal government, and separately, issuers across the nation have pressed large antitrust civil suits against the banks and brokers.
Richardson, one of the highest-ranking political faces in the conspiracy, faced a federal grand jury probe for his alleged connections to it. The federal government killed the probe. But the probe also had devastating political repercussions for Richardson, who withdrew his nomination to President Obama’s cabinet. This testimony offers a glimpse at what a trial against New Mexico’s rising political star might have looked like—and just how hard he really crashed.