The Scam Wall Street Learned From the Mafia
How America's biggest banks took part in a nationwide bid-rigging
conspiracy -
until they were caught on tape
by: Matt Taibbi
Someday, it will go down in history as the first trial of the modern
American
mafia. Of course, you won't hear the recent financial corruption case,
United
States of America v. Carollo, Goldberg and Grimm, called anything like
that. If
you heard about it at all, you're probably either in the municipal
bond business
or married to an antitrust lawyer. Even then, all you probably heard
was that a
threesome of bit players on Wall Street got convicted of obscure
antitrust
violations in one of the most inscrutable, jargon-packed legal
snoozefests since
the government's massive case against Microsoft in the Nineties - not
exactly
the thrilling courtroom drama offered by the famed trials of old-
school mobsters
like Al Capone or Anthony "Tony Ducks" Corallo.
But this just-completed trial in downtown New York against three
faceless
financial executives really was historic. Over 10 years in the making,
the case
allowed federal prosecutors to make public for the first time the
astonishing
inner workings of the reigning American crime syndicate, which now
operates not
out of Little Italy and Las Vegas, but out of Wall Street.
The defendants in the case - Dominick Carollo, Steven Goldberg and
Peter Grimm -
worked for GE Capital, the finance arm of General Electric. Along with
virtually
every major bank and finance company on Wall Street - not just GE, but
J.P.
Morgan Chase, Bank of America, UBS, Lehman Brothers, Bear Stearns,
Wachovia and
more - these three Wall Street wiseguys spent the past decade taking
part in a
breathtakingly broad scheme to skim billions of dollars from the
coffers of
cities and small towns across America. The banks achieved this
gigantic rip-off
by secretly colluding to rig the public bids on municipal bonds, a
business
worth $3.7 trillion. By conspiring to lower the interest rates that
towns earn
on these investments, the banks systematically stole from schools,
hospitals,
libraries and nursing homes - from "virtually every state, district
and
territory in the United States," according to one settlement. And they
did it so
cleverly that the victims never even knew they were being cheated. No
thumbs
were broken, and nobody ended up in a landfill in New Jersey, but
money
disappeared, lots and lots of it, and its manner of disappearance had
a familiar
name: organized crime.
In fact, stripped of all the camouflaging financial verbiage, the
crimes the
defendants and their co-conspirators committed were virtually
indistinguishable
from the kind of thuggery practiced for decades by the Mafia, which
has long
made manipulation of public bids for things like garbage collection
and
construction contracts a cornerstone of its business. What's more, in
the manner
of old mob trials, Wall Street's secret machinations were revealed
during the
Carollo trial through crackling wiretap recordings and the lurid
testimony of
cooperating witnesses, who came into court with bowed heads, pointing
fingers at
their accomplices. The new-age gangsters even invented an elaborate
code to hide
their crimes. Like Elizabethan highway robbers who spoke in thieves'
cant, or
Italian mobsters who talked about "getting a button man to clip the
capo," on
tape after tape these Wall Street crooks coughed up phrases like "pull
a nickel
out" or "get to the right level" or "you're hanging out there" - all
code words
used to manipulate the interest rates on municipal bonds. The only
thing that
made this trial different from a typical mob trial was the scale of
the crime.
USA v. Carollo involved classic cartel activity: not just one corrupt
bank, but
many, all acting in careful concert against the public interest. In
the years
since the economic crash of 2008, we've seen numerous hints that such
orchestrated corruption exists. The collapses of Bear Stearns and
Lehman
Brothers, for instance, both pointed to coordinated attacks by
powerful banks
and hedge funds determined to speed the demise of those firms. In the
bankruptcy
of Jefferson County, Alabama, we learned that Goldman Sachs accepted a
$3
million bribe from J.P. Morgan Chase to permit Chase to serve as the
sole
provider of toxic swap deals to the rubes running metropolitan
Birmingham - "an
open-and-shut case of anti-competitive behavior," as one former
regulator
described it.
More recently, a major international investigation has been launched
into the
manipulation of Libor, the interbank lending index that is used to
calculate
global interest rates for products worth more than $3 trillion a year.
If and
when that case is presented to the public at trial - there are several
major
civil suits in the works here in the States - we may yet find out that
the
world's most powerful banks have, for years, been fixing the prices of
almost
every adjustable-rate vehicle on earth, from mortgages and credit
cards to
interest-rate swaps and even currencies.
But USA v. Carollo marks the first time we actually got
incontrovertible
evidence that Wall Street has moved into this cartel-type brand of
criminality.
It also offered a disgusting glimpse into the enabling and grossly
cynical role
played by politicians, who took Super Bowl tickets and bribe-stuffed
envelopes
to look the other way while gangsters raided the public kitty. And
though the
punishments that were ultimately handed down in the trial - minor
convictions of
three bit players - felt deeply unsatisfying, it was still a watershed
moment in
the ongoing story of America's gradual awakening to the realities of
financial
corruption. In a post-crash era where Wall Street trials almost never
make it
into court, and even the harshest settlements end with the evidence
buried by
the government and the offending banks permitted to escape with no
admission of
wrongdoing, this case finally dragged the whole ugly truth of American
finance
out into the open - and it was a hell of a show.
1. THE SCAM
This was no trial scene from popular lore, no Inherit the Wind or
State of
California v. Orenthal James Simpson. No gallery packed with rapt
spectators, no
ceiling fans set whirring to beat back the tension and the heat, no
defense
counsel's resting a sympathetic hand on the defendant's shoulder as
opening
statements commence. No, the setting for USA v. Carollo reflected the
bizarre
alternate universe that exists on Wall Street. Like so many court
cases
involving big banks, the proceeding looked more like a roomful of
expensive
lawyers negotiating a major corporate merger than a public search for
justice.
The trial began on April 16th in a federal court in Lower Manhattan.
The
courtroom, an aerielike setting 23 stories up, offered a panoramic
view of the
city and the East River. Though the gallery was usually full
throughout the
three-plus weeks of testimony, the spectators were not average
citizens come to
witness how they had been robbed blind by America's biggest banks.
Instead,
there were row after row of suits - other lawyers eager to observe a
long-awaited case, one that could influence the outcome in a handful
of civil
suits pending across the country. In fact, the defendants themselves,
whom the
trial would reveal as easily replaceable cogs in a much larger machine
of
corruption, were barely visible from the gallery, obscured by the
great
chattering congress of prosecution and defense attorneys.
Only the presence of the mostly nonwhite and elderly jury, which
resembled the
front pew of a Harlem church, served as a reminder that the case had
any
connection to the real world. Even reporters from most of the major
news outlets
didn't bother to attend. The judge in the trial, the right honorable
and
amusingly cantankerous Harold Baer, acknowledged that the case was not
likely to
set the public's pulse racing. "It is unlikely, I think, that this
will generate
a lot of media publicity," Baer sighed to the jury in his preliminary
instructions.
Once opening statements began, it was easy to see why the press might
stay away.
One of the main lines of defense for corrupt Wall Street institutions
in recent
years has been the extreme complexity of the infrastructure within
which these
crimes are committed. In order for prosecutors to win convictions,
they have to
drag ordinary Americans, people who watch and enjoy reality TV, up the
steepest
of learning curves, coaching them into game shape with regard to
obscure
financial vehicles like swaps and CDOs and, in this case, Guaranteed
Investment
Contracts.
So it was no surprise that both the prosecution and the defense began
their
opening remarks to the jury by apologizing for the hellishly dull maze
of
"convoluted" and "boring" and "tedious" financial transactions they
were about
to spend weeks hearing about. Only Wendy Waszmer, the feisty federal
prosecutor
with straight brown hair and an elfin build who presented the
government's case,
succeeded in cutting through the mountainous dung heap of acronyms and
obfuscations and explaining what the case was about. "Even though some
aspects
of municipal bond finance are complex, the fraud here was simple," she
told the
jurors. "It was about lying and cheating cities and towns in a bidding
process
that was in place to protect them."
The "simple fraud" Waszmer described centered around public borrowing.
Say your
town wants to build a new elementary school. So it goes to Wall
Street, which
issues a bond in your town's name to raise $100 million, attracting
cash from
investors all over the globe. Once Wall Street raises all that money,
it dumps
it in a tax-exempt account, which your town then uses to pay builders,
plumbers,
the chalkboard company and whoever else winds up working on the
project.
But here's the catch: Most towns, when they raise all that money,
don't spend it
all at once. Often it takes years to complete a construction project,
and the
last contractor isn't paid until long after the original bond is
issued. While
that unspent money is sitting in the town's account, local officials
go looking
for a financial company on Wall Street to invest it for them.
To do that, officials hire a middleman firm known as a broker to set
up a public
auction and invite banks to compete for the town's business. For the
$100
million you borrowed on your elementary school bond, Bank A might
offer you 5
percent interest. Bank B goes further and offers 5.25 percent. But
Bank C, the
winner of the auction, offers 5.5 percent.
In most cases, towns and cities, called issuers, are legally required
to submit
their bonds to a competitive auction of at least three banks, called
providers.
The scam Wall Street cooked up to beat this fair-market system was to
devise
phony auctions. Instead of submitting competitive bids and letting the
highest
rate win, providers like Chase, Bank of America and GE secretly
divvied up the
business of all the different cities and towns that came to Wall
Street to
borrow money. One company would be allowed to "win" the bid on an
elementary
school, the second would be handed a hospital, the third a hockey
rink, and so
on.
How did they rig the auctions? Simple: By bribing the auctioneers,
those
middlemen brokers hired to ensure the town got the best possible
interest rate
the market could offer. Instead of holding honest auctions in which
none of the
parties knew the size of one another's bids, the broker would tell the
prearranged "winner" what the other two bids were, allowing the bank
to lower
its offer and come in with an interest rate just high enough to "beat"
its
supposed competitors. This simple but effective cheat - telling the
winner what
its rivals had bid - was called giving them a "last look." The winning
bank
would then reward the broker by providing it with kickbacks disguised
as "fees"
for swap deals that the brokers weren't even involved in.
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.
Given the complexities of bond investments, it's impossible to know
exactly how
much the total take was. But consider this: Four banks that took part
in the
scam (UBS, Bank of America, Chase and Wells Fargo) paid $673 million
in
restitution after agreeing to cooperate in the government's case.
(Bank of
America even entered the Justice Department's leniency program, which
is
tantamount to admitting that it committed felonies.) Since that
settlement
involves only four of the firms implicated in the scam (a list that
includes
Goldman, Transamerica and AIG, as well as banks in Scotland, France,
Germany and
the Netherlands), and since settlements in Wall Street cases tend to
represent
only a tiny fraction of the actual damages (Chase paid just $75
million for its
role in the bribe-and-payola scandal that saddled Jefferson County,
Alabama,
with more than $3 billion in sewer debt), it's safe to assume that
Wall Street
skimmed untold billions in the bid-rigging scam. The UBS settlement
alone, for
instance, involved 100 different bond deals, worth a total of $16
billion, over
four years.
Contracting corruption has been around since the construction of the
Appian Way.
The difference here is the almost unimaginable scope of the crime -
and the fact
that it's mobsters from Wall Street who are getting in on the action.
Until
recently, such activity has traditionally been the almostexclusive
domain of
the Mafia. "When I think of bid rigging, I think of the convergence of
organized
crime and the government," says Eliot Spitzer, who prosecuted two bid-
rigging
cases in his career as a New York prosecutor, one involving garbage
collection,
the other a Garment District case involving the Gambino family. The
Mafia moved
into bid rigging, he says, because it observed over time that
monopolizing
public contracts offers a far more lucrative business model than leg
breaking.
"Organized crime learned their lessons from John D. Rockefeller,"
Spitzer
explains. "It's much more efficient to control a market and boost the
price 10
percent than it is to run a loan-sharking business on the street,
where you
actually have to use a baseball bat and collect every week."
What Spitzer saw was gangsters moving in the direction of big
business. When I
ask him if he is surprised by the current bid-rigging case, which
looks more
like big business moving in the direction of gangsters, he laughs.
"The urge to
become a monopolist," he says, "is as old as capitalism."
2. THE TAPES
The defendants in the case - Dominick Carollo, Steven Goldberg and
Peter Grimm -
worked together at GE, which was competing for bond business against
banks like
Chase, Wells Fargo and Bank of America. Carollo was the boss of
Goldberg and
Grimm, who handled the grunt work, submitting bids. Between August
1999 and
November 2006, the three executives participated in countless rigged
bids by
telephone, conspiring with middleman brokers like Chambers, Dunhill
and Rubin.
We know this because prior to the start of the Carollo trial, 12 other
individuals, including several brokers from CDR, had already pleaded
guilty in a
wide-ranging federal investigation.
How did the government manage to make a case against so many Wall
Street scam
artists? Hubris. As was the case in Jefferson County, Alabama, where
Chase
executives blabbed criminal conspiracies on the telephone even though
they knew
they were being recorded by their own company, the trio of defendants
in Carollo
wantonly fixed bond auctions despite the fact that their own firm was
taping the
conversations. Defense counsel even made an issue of this at trial,
implying to
the jury that nobody would be dumb enough to commit a crime by phone
when "there
was a big sticker on the phones that said all calls are being
recorded," as
Grimm's counsel, Mark Racanelli, put it. In fact, Racanelli argued,
the
conversations on the tapes hardly suggested a secret conspiracy,
because "no one
was whispering."
But the reason no one was whispering isn't that their actions weren't
illegal -
it's because the bid rigging was so incredibly common the defendants
simply
forgot to be ashamed of it. "The tapes illustrate the cavalier
attitude which
the financial community brought toward this behavior," says Michael
Hausfeld, a
renowned class-action attorney whose firm is leading a major civil
suit against
Bank of America, Wells Fargo, Chase and others for this same bid-
rigging scam.
"It became the predominant mode of transacting business."
How and when the government got hold of those tapes is still unclear;
the
prosecution is not commenting on the case, which remains an open
investigation.
But we do know that in November 2006, federal agents raided the
offices of CDR,
the broker firm that was working with Carollo, Goldberg and Grimm.
Caught
redhanded, many of the firm's top executives agreed to turn state's
witness.
One after another, these hangdog, pasty-faced men were led up to the
stand by
prosecutors and forced to recount how they'd been snatched up in the
raid,
separated and blitz-interviewed by FBI agents, and plunged into years
of
nut-crushing negotiations, which resulted in almost all of them
pleading guilty.
Prosecutors would eventually accumulate 570,000 recorded phone
conversations,
and to decipher them they worked these cooperating witnesses like sled
dogs,
driving them in for dozens of meetings and grilling them about the
details of
the scam.
The state's first witness, confusingly, was a CDR broker named Doug
Goldberg (no
relation to the defendant Steven Goldberg). Almost every executive
involved in
the trial was absurdly young; many were just out of college when the
bid-rigging
scam started in the late Nineties. Doug Goldberg graduated from USC in
1993, and
his fellow CDR executive Evan Zarefsky still looks to be about 15
years old,
suggesting a suit-and-tie version of Napoleon Dynamite. The extreme
youth of
some of the conspirators was an obvious subtext of the trial,
underscoring the
fact that far more senior executives from bigger banks like Chase and
Bank of
America had been permitted by the government to evade testifying.
Right off the bat, in fact, Doug Goldberg explained that while at CDR,
he had
routinely helped the cream of Wall Street rig bids on municipal bonds
by letting
them take a peek at other bids:
Q: Who were some of the providers you gave last looks to?
A: There was a whole host of them, but GE Capital, FSA, J.P. Morgan,
Bank of
America, Société Générale, Lehman Brothers, Bear. There were others.
Goldberg went on to testify that he repeatedly rigged auctions with
the three
defendants. Sometimes he gave them "last looks" so they could shave
basis points
off their winning bids; other times he asked them to intentionally
submit losing
offers - called cover bids - to allow other firms to win. He told the
court he
knew he was being recorded by GE. When asked how he knew that, he drew
one of
the trial's rare laughs by answering, "Either they told me or some of
them, like
Société Générale, you can hear the beeping."
Because of the recordings, he went on, he and the defendants used
"guarded
language."
"I might tell him, if I'm looking for an intentionally losing bid, 'I
need a
bid,' or something like that," he said.
Q: With whom specifically did you use this guarded type of language?
A: With Steve Goldberg and others.
Q: In your dealings with Steve Goldberg, what, if any, language or
other signal
did he use that you understood as a request for a last look?
A: He might ask me where I "saw the market," or he might ask me for,
as I
mentioned, an "indication of where the market is," an "idea of the
market."
The broker went on to detail how he had worked with the GE executives
to
manipulate a number of auctions. In several cases, he was pushed to
make deals
with GE by his boss at CDR, Stewart Wolmark, who seemed smitten with
GE's Steve
Goldberg; jurors listening to the tapes couldn't miss the pair's
nauseatingly
tight, cash-fueled bromance. In December 2000, for instance, Wolmark
helped
Goldberg win a rigged bid for a bond in Onondaga County, New York.
After the
auction, he calls his buddy Steve:
WOLMARK: Hey, congratulations. You got another one.
GOLDBERG: Yeah. Yeah, thank you. Thank you.
WOLMARK: You're hot!
GOLDBERG: I'm hot? Hot with your help, sir.
Later on, Wolmark basically tells Goldberg he owes a service to his
fellow
gangster. "I deserve the big lunch now," Wolmark chirps.
"Yeah," says Goldberg. "I owe you something, huh?"
A few months later, in March 2001, Wolmark and Goldberg do another
deal, this
time for a $219 million construction bond for the Port Authority of
Allegheny
County, Pennsylvania. Wolmark rings up his payola paramour and scolds
him for
not calling him during a recent trip to Vegas, where Goldberg
doubtless spent a
nice chunk of the money Wolmark had helped him steal from places like
Onondaga
County.
"Good time in Vegas, you can't even call me back?" Wolmark laments.
"I don't have time to sleep in Vegas," Goldberg says suggestively.
"There's sleeping," Stewart Wolmark chides, "and there's Stewart."
From there, the clothes just start flying off as the pair jump into a
steamy
negotiation over the monster Allegheny deal. "I'm all set with $200
million,"
Goldberg says. "Everything's ready to go."
Then Wolmark asks if GE is ready to pay CDR its bribe. "You got some
swaps
coming up?"
Goldberg assures him they do. Wolmark then passes the deal off to his
own
Goldberg, Doug, who handles the actual auction.
When prosecutors tried to explain these telephone auctions at trial,
projecting
the transcripts of the calls on a huge movie screen set up across the
courtroom
from the jury, you could see the sheer bewilderment on the jurors'
faces. The
men on the tapes seemed to be speaking a language from another planet
- an
insanely dry and boring planet, where there's no color and no adverbs,
maybe,
and babies are made by rubbing two calculators together. One of the
jurors, an
older white man, spent the first few days of the trial yawning
repeatedly,
fighting a heroic battle to stay awake in the face of all the mind-
numbing
jargon about Guaranteed Investment Contracts. "Who needs Lunesta,"
joked one
lawyer who attended the proceedings, "when you can hear a lawyer talk
about GICs
right out of the gate?"
The language of the auctions was a kind of intellectual camouflage. If
you
didn't listen closely, you'd have thought the two Goldbergs were a
couple of
airmen exchanging weather balloon data, rather than two Wall Street
executives
plotting a crime to rip off the good citizens of Allegheny County. In
that deal,
Steve Goldberg of GE originally bid "503, 4" on the $219 million
bond, only to
be guided downward by Doug Goldberg of CDR. The broker explained in
court:
Q: Can you explain what you understood Mr. Goldberg to say when he was
saying
503, 4? What was he bidding?
A: That was the rate he was willing to bid on this investment
agreement.
Q: How much was it?
A: 5.04 percent.
Q: What did you do as a response to his bid of 5.04 percent?
A: I brought his bid down to 5.00 percent.
In other words, even though GE was willing to pay an interest rate of
5.04
percent, Allegheny County ended up earning just 5.00 percent on its
$219 million
bond. How much money that amounted to is difficult to calculate, given
the way
the bond account diminished each year as the county used it to pay
contractors;
even Doug Goldberg couldn't put a number on the scam. But if the
account was
full at the start of the deal, GE may have cheated the county out of
as much as
$87,600 a year to start.
In any case, GE certainly chiseled the Pennsylvanians out of a sizable
sum,
because soon after, the company paid CDR a kickback of $57,400 in the
form of
"fees" on a swap deal. The whole deal pleased CDR's higher-ups. "I
went to
Stewart Wolmark and told him that not only did Steve Goldberg win but
that I was
able to reduce his rate down four basis points," said Doug Goldberg.
"Stewart
was very happy and excited."
Over and over again, jurors heard cooperating witnesses translate the
damning
audiotapes. In one lurid sequence, the bat-eared, bespectacled CDR
broker Evan
Zarefsky explained how he helped the GE defendant Peter Grimm win a
bid for a
bond put out by the Utah Housing Authority. The pair had apparently
reamed Utah
so many times that it had become a sort of inside joke between the two
of them.
From a call in August 2001:
GRIMM: Utah, let's see, how we look on that?
ZAREFSKY: Good old Utah!
Grimm complains about how much he'll have to pay to win the deal.
"These levels
are really shitty," he says.
Zarefsky comforts him. "Well, I can probably save you a couple of
bucks here,"
he says.
From there, Grimm rattles off numbers, ultimately settling on a bid of
351 -
3.51 percent. Zarefsky, in almost motherly fashion, guides the manic
Grimm
downward, telling him, in code, that his bid is 10 basis points too
high. "You
actually got like a dime in there," Zarefsky says. "You want to come
down a
dime?"
So Grimm comes back with a bid of 3.41 percent, which turned out to be
the
winning bid. Utah lost out on 10 basis points, GE bilked the state out
of untold
sums, and CDR got another nice kickback.
This, basically, is how a lot of the calls went. The provider would
tentatively
offer a number, and the broker would guide him to a new bid. "You have
a little
bit of room there," he might say, or "That's gonna put you about a
nickel
short." Guiding the bidders to the lowest possible bid was called
"figuring out
the level" or being "in the market"; obtaining information about other
bids was
called "giving an indicative" or "seeing the market."
The brokers and providers used a dizzying array of methods for rigging
deals. In
some cases, the broker helped the "winner" by simply excluding other
bidders,
who may or may not have been in on the scam. In one hilarious sequence
that
sounds like something out of a wiretap of a Little Italy social club,
CDR
executive Dani Naeh tells GE's Steve Goldberg that he's not sure he
can
guarantee a win on a bid for a New Jersey hospital bond. There were
too many
triple-A-rated companies interested in the bond, Naeh explains, and he
couldn't
control their bids the way he could those of the lesser, double-A-
rated
companies he usually did business with. "It would be easier for us to
contact
other providers who were rated double-A and ask them to submit an
intentionally
losing bid," Naeh testified. He sounded exactly like a mobster,
talking about
"our guys" and "our friends."
In some of the calls, jurors could hear the entirety of the dirty
deals
negotiated, including the bribe paid back to the broker. In one deal
involving a
bond for the Port of Oakland, California, Steve Goldberg of GE starts
to ask his
pal Stewart Wolmark of CDR what kind of kickback the broker wants for
rigging
the deal. Such conversations about payoffs were so commonplace that
Wolmark
doesn't even have to wait for Goldberg to finish the question:
GOLDBERG: What are we building in here for the...
WOLMARK: Swap.
In his testimony, Wolmark explained that he was asking for a swap deal
in return
for rigging the bid. "He wanted to know what we were going to get paid
on the
back end," Wolmark explained.
In the call, Wolmark and Goldberg start haggling over the price of
CDR's
kickback. Wolmark tells Goldberg he only wants what's fair. "Listen,
I'm not a
chazzer," Wolmark says.
Fans of the movie Scarface will remember Tony Montana's inspired
translation of
this Yiddish term: "Thas a pig that don' fly straight."
Wolmark reassures Goldberg that as pigs go, he's a straight flier.
"You see the
kind of mensch I am," he says.
Negotiations ensue. Goldberg tells Wolmark that he can pay him more on
the
bribe - the swap deal - if Wolmark can help GE save money on the Port
of Oakland
deal. "I'd like to see if we can pull a nickel out of that swap,"
Wolmark says.
Translation: He wants to boost CDR's take on the kickback by five
basis points.
"If I could get to the right level," Goldberg answers, referring to
the Port of
Oakland deal. Translation: Goldberg will help Wolmark get his "nickel"
on the
swap deal if Wolmark can help GE "get to the right level" on the bid.
3. THE POLITICIANS
The Carollo case provides far more than a detailed look at the
mechanics and
pervasiveness of bid rigging; it offers a clear and unvarnished
blueprint of the
architecture of American financial and political corruption. In an
attempt to
discredit the CDR witnesses, defense counsel hounded them about other
revelations that surfaced in the government's investigation,
particularly those
that involved bribery, illegal campaign contributions and pay-for-play
schemes.
The defense's cross-examinations were surreal. It was certainly true
that some
of the government's cooperating witnesses had dubious résumés, so it
may have
made sense to highlight their generally duplicitous history of tax
evasion or
lying to investigators. But in their zeal, defense counsel went far
beyond
simply discrediting the witnesses, spending an inordinate amount of
time
eliciting even more details about the grotesque corruption scheme
their own
clients had taken part in. The result was a rare and somewhat
confusing
spectacle: high-octane lawyers from Wall Street working to rip the lid
off Wall
Street corruption in open court.
Defense counsel showed us, for instance, how CDR employees were
routinely
directed by their boss, David Rubin, to make political contributions
to select
candidates, only to be reimbursed by Rubin for those contributions
later on.
This kind of corporate skirting of campaign finance limits is
something we've
always suspected goes on, but we rarely get to see direct evidence of
it.
More interesting, though, were the stories about political payoffs. In
2001, CDR
hired a consultant named Ron White, a Philadelphia bond attorney who
happened to
be the chief fundraiser for then-mayor John Street. CDR gave White
two tickets
to the 2003 Super Bowl in San Diego plus a limo - a gift worth
$10,000. As his
"guest," White took Corey Kemp, the city treasurer for Philadelphia,
who, 16
days later, awarded CDR a $150,000 contract to advise the city on swap
deals.
But that wasn't the end of the gravy train: CDR doled out those swap
deals to
selected banks, who in return kicked back $515,000 to CDR for steering
city
business their way.
So a mere $10,000 bribe to a politician - a couple of Super Bowl
tickets and a
limo - scored CDR a total of $665,000 of the public's money. If you
want to know
why Wall Street has been enjoying record profits, here's your answer:
Corruption
is a business model that brings in $66 for every dollar you invest.
Even more startling was the way that a notorious incident involving
former New
Mexico governor and presidential candidate Bill Richardson resurfaced
during the
trial. Barack Obama, you may recall, had nominated Richardson to be
commerce
secretary - only to have the move blow up in his face when tales of
Richardson
accepting bribes began to make the rounds. Federal prosecutors never
brought a
case against Richardson: In 2009, an inside source told the AP that
the
investigation had been "killed in Washington." Obama himself, after
Richardson
bowed out, praised the former governor as an "outstanding public
servant."
Now, in the Carollo trial, defense counsel got Doug Goldberg, the CDR
broker, to
admit that his boss, Stewart Wolmark, had handed him an envelope
containing a
check for $25,000. The check was payable to none other than Moving
America
Forward - Bill Richardson's political action committee. Goldberg then
went to a
Richardson fundraiser and handed the politician the envelope.
Richardson,
pleased, told Goldberg, "Tell the big guy I'm going to hire you guys."
Goldberg admitted on the stand that he understood "the big guy" to
mean Wolmark.
After that came this amazing testimony:
Q: Soon after that, New Mexico hired CDR as its swap and GIC adviser
on a $400
million deal, right?
A: Yes.
Q: You learned later that that check in that envelope was a check for
$25,000,
right?
A: Yes. I learned it later.
Q: You also learned later that CDR gave another $75,000 to Gov.
Richardson,
right?
A: Yes.
Q: CDR ended up making about a million dollars on this deal for those
two
checks?
A: Yes.
Q: In fact, New Mexico not only hired CDR, they hired another firm to
do the
actual work that they needed done?
A: For the fixed-income stuff, yes.
What we get from this is that CDR paid Bill Richardson $100,000 in
contributions
and got $1.5 million in public money in return. And not just $1.5
million, but
$1.5 million for work they didn't even do - the state still had to
hire another
firm to do the actual job. Nice non-work, if you can get it.
To grasp the full insanity of these revelations, one must step back
and consider
all this information together: the bribes, yes, but also the
industrywide,
anti-competitive bid-rigging scheme. It turns into a kind of unbroken
Möbius
strip of corruption - the banks pay middlemen to rig auctions, the
middlemen
bribe politicians to win business, then the politicians choose the
middlemen to
run the auctions, leading right back to the banks bribing the
middlemen to rig
the bids.
When we allow Wall Street to continually raid the public cookie jar,
we're not
just enriching a bunch of petty executives (Wolmark's income in 2008,
two years
after he was busted in the FBI raid, was $2,464,210.18) - we're
effectively
creating an alternate government, one in which money lifted from the
taxpayer's
pocket through mob-style schemes turns into a kind of permanent shadow
tax, used
to maintain the corruption and keep the thieves in place. And that
cuts right to
the heart of what this case is all about. Wall Street is tired of
making money
by competing for business and weathering the vagaries of the market.
What it
wants instead is something more like the deal the government has -
regularly
collecting guaranteed taxes. What's crazy is that in order to justify
that dream
of regular, monopolistic tribute, they've begun to see themselves as a
type of
shadow government, watching out for the rest of us. Amazingly enough,
this even
became a defense at trial.
4. THE DEFENSE
There were times, sitting in the courtroom, when I wondered, How did
this case
even go to trial? What defense attorney would look at the thousands of
recorded
phone calls, the parade of cooperating witnesses, the stacks of
falsified
documents, and conclude that airing all of this in court was a smart
play?
Listening to tape after damning tape played in open court while the
defendants
cringed in a corner seemed increasingly like a gratuitous ass-kicking,
one that
any smart defense lawyer would have made a deal to avoid.
But as the weeks passed, I started to get a feel for the defense
strategy, which
made a kind of demented sense. The lawyers for Carollo, Goldberg and
Grimm
didn't even bother trying to argue the facts of the case. Instead, in
one
cross-examination after another, they kept hitting the same theme.
Despite the
fact that the rigged bids resulted in lower returns, wasn't it true
that the
cities and towns still received, technically speaking, the highest
bid? If a
town received a 5.00 percent return on a $219 million bond instead of
5.04
percent, who's to say that wasn't a good price?
John Siffert, the gray-faced and unlikable attorney for Steve
Goldberg, put it
this way in his cross-examination of CDR executive Stewart Wolmark.
Asking about
the Allegheny deal, he boomed: "Isn't it fair to say that you believed
that by
lowering... Steve's bid to 5 percent, Steve's bid was still a fair
price to
pay?"
Wolmark's answer was both quick and sensible: "I don't determine the
fair
price," he replied. "The market does." GE was supposed to pay the
highest price
the market would pay. It wasn't a competitive auction, as required by
law.
But Siffert had made his point, and his rhetoric got right to the
heart of the
defense, which was going to center around the definition of the word
"fair." The
men and women who run these corrupt banks and brokerages genuinely
believe that
their relentless lying and cheating, and even their anti-competitive
cartelstyle scheming, are all legitimate market processes that lead
to
legitimate price discovery. In this lunatic worldview, the bidrigging
scheme
was a system that created fair returns for everyone. If a bunch of
Pennsylvanians got a 5.00 percent return on their money instead of
5.04 percent,
and GE and CDR just happened to split the extra .04 percent, that was
a fair
outcome, because that's what the parties negotiated. True, the
Pennsylvanians
had no idea about the extra .04 percent, and true, they had hired CDR
precisely
to make sure they got that extra 0.4 percent. But hey, it's not like
they were
complaining: Until someone told them they were being brazenly cheated,
they were
happy with their bond service. And besides, it's not like ordinary
people
understand this stuff anyway. So how is it the place of some busybody
federal
prosecutor to waltz in here and say what's a fair price?
Walter Timpone, who represented Carollo, tried to lay this outrageous
load of
balls on the jury using a faux-folksy analogy. "When your refrigerator
breaks
down, if you're not mechanically inclined, you're at the mercy of that
repair
person," he told the jury. "And if he repairs the refrigerator, makes
it work
well, charges you a fair price, you're likely to call on him again
when the
stove breaks." What he was essentially telling jurors was: This shit
is
complicated, so best just to leave it to the experts. Whether they're
fixing a
fridge or fixing a bond rate, they get to set the price, because we're
all
morons who are dependent on them to make our world work. Timpone, in
his
lawyerly way, was actually telling us an essential economic truth:
You're at the
mercy of that repair person.
This incredible defense, which the attorneys for all three defendants
led with,
perfectly expresses the awesome arrogance of the modern-day
aristocrats who run
our financial services sector. Corrupt or not, they built this
financial
infrastructure, and it's producing the prices they genuinely think are
fair for
us - and for them. And fair to them is the customer getting the
absolute bare
minimum, while they get instant millions for work they didn't do.
Moreover - and
this is the most important part - they believe they should get
permanent
protection from the ravages of the market, i.e., from one another's
competition.
Imagine Jack Nicholson on the witness stand, dressed in a repairman's
uniform
and tool belt. Who's gonna fix those refrigerators? You? You,
Lieutenant
Weinberg? You can't handle the truth!
That, ultimately, is what this case was about. Capitalism is a system
for
determining objective value. What these Wall Street criminals have
created is an
opposite system of value by fiat. Prices are not objectively
determined by
collisions of price information from all over the market, but instead
are
collectively negotiated in secret, then dictated from above.
"One of the biggest lies in capitalism," says Eliot Spitzer, "is that
companies
like competition. They don't. Nobody likes competition."
To the great credit of the jurors in the Carollo case, they didn't buy
Wall
Street's ludicrous defense. On May 11th, nearly a month after the
trial began,
they handed down convictions to all three defendants. Carollo,
Goldberg and
Grimm, who will be sentenced in October, face as many as five years in
jail.
There are some who think that the government is limited in how many
corruption
cases it can bring against Wall Street, because juries can't
understand the
complexity of the financial schemes involved. But in USA v. Carollo,
that turned
out not to be true. "This verdict is proof of that," says Hausfeld,
the
antitrust attorney. "Juries can and do understand this material."
In the end, though, the conviction of a few bit players seems like far
too puny
a punishment, given that the bid rigging exposed in Carollo involved
an
entrenched system that affected major bond issues in every state in
the nation.
You find yourself thinking, America's biggest banks ripped off the
entire
country, virtually every day, for more than a decade! A truly
commensurate
penalty would be something like televised stonings of the top 10
executives of
every guilty bank, or maybe the forcible resettlement of every banker
and broker
in Lower Manhattan to some uninhabited Andean wasteland...?anything to
address
the systemic nature of the crime.
No such luck. Instead of anything resembling real censure, a few young
executives got spanked, while the offending banks got off with slap-on-
the-wrist
fines and were allowed to retain their pre-eminent positions in the
municipal
bond market. Last year, the two leading recipients of public bond
business,
clocking in with more than $35 billion in bond issues apiece, were
Chase and
Bank of America - who combined had just paid more than $365 million in
fines for
their role in the mass bid rigging. Get busted for welfare fraud even
once in
America, and good luck getting so much as a food stamp ever again. Get
caught
rigging interest rates in 50 states, and the government goes right on
handing
you billions of dollars in public contracts.
Over the years, many in the public have become numb to news of
financial
corruption, partly because too many of these stories involve banker-on-
banker
crime. The notorious Abacus deal involving Goldman Sachs, for
instance, involved
a hedge-fund billionaire ripping off a couple of European banks - who
cares? But
the bid-rigging scandal laid bare in USA v. Carollo is a totally
different
animal. This is the world's biggest banks stealing money that would
otherwise
have gone toward textbooks and medicine and housing for ordinary
Americans, and
turning the cash into sports cars and bonuses for the already rich.
It's the
equivalent of robbing a charity or a church fund to pay for lap
dances.
Who ultimately loses in these deals? Well, to take just one example,
the New
Jersey Health Care Facilities Finance Authority, the agency that
issues bonds
for the state's hospitals, had their interest rates rigged by the
Carollo
defendants on $17 million in bonds. Since then, more than a dozen New
Jersey
hospitals have closed, mostly in poor neighborhoods.
As Carollo showed us, in open court, this is what Wall Street learned
from the
Mafia: how to reach into the penny jars of dying hospitals and schools
and
transform their desperation and civic panic into fat year-end bonuses
and the
occasional "big lunch." Unlike the Mafia, though, they were smart
enough to do
their dirt without anyone noticing for a very long time, which is what
defense
counsel in this case were talking about when they argued that towns
and cities
"were not harmed" by the rigged bids. No harm, to them, means no
visible harm,
i.e., that what taxpayers didn't know couldn't hurt them. This is
logical
thinking, to the sociopath - like saying it's not infidelity if your
wife never
finds out. But we did find out, and the scale of betrayal unveiled in
Carollo
was epic. It was like finding out your husband didn't just cheat, but
had a
frequent-flier account with every brothel in North America for the
past 10
years. At least now we know how bad it was. The trick is to find a way
to make
the cheaters pay.
Editor's Note: Due to a mislabeling in the court transcript, we
misidentified
the attorney who used the refrigerator analogy in his opening
statement. The
online version of the story has been corrected.
This story is from the July 5th, 2012 issue of Rolling Stone.