Saturday, January 17, 2009

The play in GripGate

marjorie says...

(Here's a piece I posted at NMI last week about GripGate)


The concept of “pay-to-play” has grabbed the attention of New Mexicans since Gov. Bill Richardson’s quest to be Commerce Secretary in the Obama administration was derailed by a federal investigation.

That investigation is centered on whether or not Richardson or his staff instructed the New Mexico Finance Authority (NMFA) to give a couple of lucrative state contracts to CDR Financial Inc., a financial investments advisory firm, after several large donations were made by the firm to two of Richardson’s political action committees in 2003 and 2004.

CDR contributed a total of $100,000 to the PACs but wasn’t alone. According to The Albuquerque Journal, 20 financial companies, advisers, lawyers and agents made at least $12 million for work they did on Gov. Richardson’s Investment Partnership (GRIP) in 2004. Of that, Bloomberg reports that CDR raked in $1.48 million for advising the NMFA “… on interest-rate swaps and restructuring escrow funds for $1.6 billion of transportation bonds issued by the agency.”

These reports illuminate the heart of the scandal that the New Mexico Independent has dubbed GRIPgate: the complex process of issuing government bonds that is difficult for outsiders to understand and perhaps easier for insiders to manipulate.

What investigators want to know is, did the Richardson administration dole out investment consulting fees (”play”) in return for political contributions (”pay”). What New Mexico taxpayers need to know is, did insiders game the process to benefit themselves with the public’s money? And, if so, what can be done about it?

“People focus on the ‘pay-to-play,’ but that’s chump change compared to the money we’re talking about,” Sherman Golden, a municipal bond expert told NMI. “Any time a bond issue is happening, a big question is whether or not the bidding was fair, unbiased, at market rate, or was it rigged?”

The complex bond market

The federal investigation in New Mexico stems from a larger national probe into possible bid-rigging in the municipal bond market.

The issue is whether financial advisory companies — such as CDR — rigged the bidding process for banks wanting to provide investment services for government bond issues, so that banks bid lower than they would have, had the process been competitive, and knew ahead of time which bank would win. The resulting increased profits to the banks would have allowed for kickbacks to the financial advisory firm that arranged the whole thing.

According to a recent report in The New York Times, the financial advisers being investigated referred to the rigged bids as “sloppy bids”:

…the evidence amassed so far included tape-recorded phone calls, in which the independent specialists who are supposed to help local governments pick their bankers could be heard telling bankers: “We want you to bid on this deal, but you’re not going to get it — you’re going to get the next one. We want you to submit a sloppy bid.” …Unsuspecting governments then accepted the recommended bids, and paid too much …

Since the investigation began, about 20 cities, counties, and school districts — including Los Angeles — have sued CDR along with a number of big multi-state banks, alleging that the firm got kickbacks from the banks for steering public bond business their way.

Along with CDR, one of the banks in the national investigation is also central to the story in New Mexico’s specific investigation: JP Morgan Chase.

Keep reading at NMI.