http://www.rollingstone.com/politics/news/...-mafia-20120620The link is to a report from Rolling Stone, a magazine in the US, from July 2012. It concerns the trial and conviction of 3 people who were involved in financial scams which were shown to be widespread and which undermine the very notion of competition, as it is normally understood. I did not see this trial at the time, but this article is an example of journalism of a kind I seldom see in the UK: a long and comprehensive account of something important. It is normally assumed that we don't have the attention span to read stuff like this, but this article and the one linked in the NHS privatisation thread show how important this kind of journalism is. What a pity it is so rare.
The article deals with the trial of 3 people who worked for GE Capital, which is the finance arm of a big company called General Electric. As I have mentioned before, many companies which made stuff in the past now get most of their profit from financial speculation: so it is no surprise to find that GE have a finance arm.
We are often told that ordinary people cannot understand complex finance and there is pressure to take such cases out of the normal judicial system which involves a jury: but the fact is that all such scams are pretty simple at bottom, and this was no exception. If you strip away the jargon and the obfuscation it is not hard to see what happened: for this is a version of the scam which makes the perpetrator a fortune by taking one penny from every bank account in the country: nobody notices but the sum stolen is vast.
In this case the money stolen came from the public purse. The basic form is this:
When a local authority wishes to build a school it has to raise money to do that. So it issues a bond. It has to do that through the financial services industry, shorthanded as "Wall Street", and investors put money into that bond. The local authority does not spend all that money at once: because things are built in stages and the payments to the contractors are made when their bit is done. So the money is put into an interest bearing account, and is drawn as payments come due. The local authority is required to seek the best rate of interest on that money it can find: and so there are rules in place which are supposed to ensure that there is competition for the money. The local authority doesn't do that directly: they go to a broker who organises a public auction: banks bid for the money by offering a rate of return on it and the auction has to have bids from at least 3 banks so competition is ensured and the local authority will get the best rate of return the market will offer. That is a legal requirement, in fact
So what happened is that the brokers fixed the auctions. They colluded with the banks to lower the bids. Every bank involved got a slice of the action and so they got the work for less interest than they would have paid had the auction be properly conducted. There is no doubt about this: as with the LIBOR scandal there are tapes of telephone conversations which put it beyond dispute.
The difference is not big: it is a matter of a few "basis points" and a basis point is a hundredth of 1%. But it applies to just about every municipal project for building across america: and that mounts up.
In addition to the direct fraud there is also evidence of political corruption: because the brokers need the local authority to ask them to organise the auction: which they do for really surprising low level bribes, such as tickets for the superbowl to folk in a position to steer the business their way. So there is a nice circle of corruption involving politicians, brokers and the biggest banks in the world. This is not confined to american banks: the bonds are traded internationally and so foreign banks are also involved.
They don't see anything wrong with it. The defence took the view that since the "customer" was not complaining there was no problem. But the "customer" is persuaded that competition is in place and it prevents this: so they do not know they are being defrauded of the money. Once again the magic of the market is relied on to produce good results: and once again it fails because competition does not work. Companies do not like competition, they prefer monopoly. And they are in a position to achieve that unless we have strong regulation: which they oppose
As ever the people who have been convicted in this trial are fairly low level and there there are only 3 of them: the main actors are "too big to fail" and so they do not feature.
If you can't be bothered to read the whole thing have a look at the last two pages: I don't find this kind of thing boring nor do I find it difficult to understand: I find it disgusting, but that is quite a different matter
