Lord knows we’ve had more than enough scandals ginned up by Wall Street over the years, and the message that banking executives proclaim after each is: “Don’t worry, we’ve learned that lesson, and it will never happen again.”
Which is how we got to the recent spectacle of Jamie Dimon, the chief executive officer of JPMorgan Chase & Co. (JPM), testifying twice before Congress that although the bank’s chief investment office was taking huge proprietary risks with some $350 billion of its depositors money -- and lost $3 billion (and counting) by making a bunch of risky bets on an obscure, thinly traded derivatives contract -- everything is now fine and dandy because the unjustifiable gambling has been stopped dead in its tracks.
We were, of course, told pretty much the same thing after the collapse of the junk-bond market in the 1980s, the collapse of the Internet initial-public-offering market in the 1990s, the collapse of the telecom debt market in the early 2000s, not to mention the scandals over IPO spinning and laddering and the ones involving the trading of favorable corporate research for investment-banking fees.
We are told repeatedly that when Wall Street’s deeply flawed incentive system leads to one bad outcome after another, year after year, it will never happen again. Yet it does. And you can add this vital business to the list: The way state and local government officials hire Wall Street firms to raise the billions of dollars their municipalities need to build schools, hospitals, airports and sewers, and provide other essential services.
For some reason, Wall Street never seems to get the message that bribing government officials -- and paying each other off -- to get access to lucrative municipal-bond underwriting business is illegal. Wall Street has never learned this lesson because the miniscule price it ends up having to pay for misbehaving has absolutely no deterrent value whatsoever.
Indeed, what the cartel of the major banks does over and over again to win underwriting business from local government officials, and the way the cartel then sorts out among itself who gets what fees, is a microcosm of a much wider problem of the increasing power that the Wall Street survivors of the financial crisis have over the rest of us.
As I described in my book “The Last Tycoons,” about Lazard Freres & Co., the firm in the early 1990s surprisingly became a force in the underwriting of bond sales for state and local governments, even though Lazard was basically a mergers- and-acquisitions shop. Lazard’s prowess came after it hired two senior bankers: Mark Ferber and Richard Poirier.
Over time, the how and why of the firm’s success revealed itself. Poirier seduced state officials where he did business -- New Jersey, Kentucky, Louisiana and Georgia -- while Ferber did the same with government officials in Massachusetts. Ferber also took more than $1 million in payoffs from Merrill Lynch in order that Ferber would recommend Merrill as the underwriter to Massachusetts state officials. Eventually, Lazard and Merrill settled Securities and Exchange Commission charges against the firms for $12 million each -- without admitting or denying responsibility, of course -- and Ferber and Poirier left Lazard.
In August 1996, Ferber was convicted on 58 counts of fraud and then was sentenced to 33 months in federal prison and fined $1 million. The nub of the problem, according to the Boston Globe, was that the arrangement between Lazard and Merrill was “a symptom of an under-regulated municipal finance industry, where political connections can often bring more dividends than the substance of an underwriter’s proposal and where hidden conflicts often abound.”