U.S. Opens Criminal Probe into Municipal Bond Market

The U.S. Justice Department has subpoenaed a host of banks and insurers, including JPMorgan Chase, American International Group and Financial Security Assurance Holdings, in the first-ever antitrust investigation of the $2 trillion municipal bond market. Documents have been seized from three brokers in an attempt to locate evidence of bid rigging. The investigation was sparked by an IRS review that uncovered dozens of muni deals that appear to have robbed taxpayers of over $100 million. Prosecutors allege that the banks involved conspired to fix the fees at which they sold guaranteed investment contracts [GICs]. Local governments are obligated to solicit bids for GICs, for which they rely on brokers. Contracts were allegedly sold by some brokers at below-market rates, implying lower returns for municipalities and less tax revenue for the government. The bid rigging is reminiscent of the yield burning scandals of the 1990s, when Wall Street banks raised the price on Treasuries sold to local governments to avoid restrictions on how much they could earn. The SEC's investigation of that practice ultimately cost those banks more than $170 million.
• Source: Bloomberg
• Related commentary: UBS, Credit Suisse Under SEC Investigation for Bonds Trading Irregularities
• Potentially impacted stocks and ETFs: JPMorgan Chase & Co. (JPM), American International Group Inc. (AIG), Financial Security Assurance Holdings Ltd. (FSF), iShares Lehman 1 - 3 Year Treasury Bond Fund (SHY), iShares Lehman 20+ Year Treasury Bond Fund (TLT), iShares Lehman 7 - 10 Year Treasury Bond Fund (IEF), iShares Lehman Aggregate Bond Fund (AGG)

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