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Speaker 1: Welcome to the Bloomberg Law Podcast. I'm June Grosso. Every

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Speaker 1: day we bring you insight and analysis into the most

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Speaker 1: important legal news of the day. You can find more

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Speaker 1: episodes of the Bloomberg Law Podcast on Apple Podcasts, SoundCloud

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Speaker 1: and on Bloomberg dot com slash podcasts. Philadelphia is suing

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Speaker 1: seven of the largest Wall Street investment banks, accusing them

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Speaker 1: of costing local governments billions of dollars by colluding to

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Speaker 1: fix the prices on floating rate bonds issued to finance

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Speaker 1: public works. Joining me is Robert Hocket, a professor at

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Speaker 1: Cornell Law School. Bob, this is an antitrust suit at heart,

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Speaker 1: accusing the banks of forming a cartel. Tell us about

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Speaker 1: some of the key allegations in the complaint. Sure, Jude,

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Speaker 1: so great to be with you. Thanks for having me

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Speaker 1: on again. So that the charges that basically over the

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Speaker 1: last or the claim I should say is that over

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Speaker 1: the last decade, um, it seems right, even more than

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Speaker 1: a decades starting in two thousand, The claim is that

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Speaker 1: banks um that are responsible for resetting the rates on

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Speaker 1: these particular floating rate bonds on a weekly basis, we're

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Speaker 1: colluding to set those rates. Um. They weren't um uh

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Speaker 1: sort of abiding by their contractual obligations to try to

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Speaker 1: set them as low as possible given market conditions. Um.

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Speaker 1: Instead they were, Supposedly, the claim is that they were

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Speaker 1: colluding together to set them at particular rates that were

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Speaker 1: in effect indifferent to our unmindful of market conditions. Uh,

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Speaker 1: and that, in consequence, what ended up happening was that

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Speaker 1: the various entities in questions that issue these bonds, we're

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Speaker 1: paying much higher interest rates over time over the last

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Speaker 1: eleven years, uh than they otherwise would have done. Right.

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Speaker 1: So the suit has been brought under a variety of

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Speaker 1: different antitrust statutes, including the usual suspects, the Sherman Act

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Speaker 1: and the Clayton Act UM. And that means, of course

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Speaker 1: that the the claimants are also seeking trouble damages, which

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Speaker 1: are available under those two enactments. A whistleblower from one

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Speaker 1: of the firms led to investigations by the Justice Department

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Speaker 1: and the Securities Exchange Commissions starting in and often it's

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Speaker 1: the government suits that lead to civil lawsuits. Why has

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Speaker 1: there been no action by government regulators here? Well, that's

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Speaker 1: a tough one, June. Um. You know, my first thought

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Speaker 1: would be that well, you know they've they've they're sort

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Speaker 1: of overburdened. They're investigating so much in these in these

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Speaker 1: recent years that, UM, it's taken them longer to get

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Speaker 1: at this. UM they wanted to be sure before they proceeded.

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Speaker 1: But these are just sort of speculations on my part. Um,

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Speaker 1: it would be you know, that would be a great question,

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Speaker 1: for example, you know, to put to the officials, UM,

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Speaker 1: if they would dare come on, you know, come on

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Speaker 1: on the air, that would be that would be great

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Speaker 1: to have them. But we have you now, Bob. So

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Speaker 1: you mentioned they're seeking triple damages for antitrust violations. They're

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Speaker 1: also seeking punitives. Is that a hard sell here? I mean,

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Speaker 1: if the allegations are true, I would not think or

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Speaker 1: I should say, if the allegations are found to be true,

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Speaker 1: I would not think that that would be a very

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Speaker 1: hard sell because the allegations are of something really quite egregious.

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Speaker 1: You know, if you think about it, the the sort

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Speaker 1: of broader significance of this suit is not to be overlooked. Right. So,

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Speaker 1: multiple municipalities and multiple sort of sub municipal units of

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Speaker 1: government UM that basically are in charge of where they

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Speaker 1: are providing various forms of infrastructure. Also many five or

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Speaker 1: one see three organizations that provide educational services and other

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Speaker 1: kinds of publicly publicly used facilities. And that's their operations

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Speaker 1: right with these variable rate demand obligations, these burdos as

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Speaker 1: they're sometimes called. And the idea here is that, you know,

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Speaker 1: the rates are supposed to be very very low, partly

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Speaker 1: because the buyers of the particular securities can always unload

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Speaker 1: them right there, very very liquid, and the banks are

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Speaker 1: acting as go betweens. They're kind of a bit like

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Speaker 1: market makers in with respect to these verdos. These are

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Speaker 1: basically the you know, sort of the the agents who

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Speaker 1: are meant to go and find additional buyers. Uh, they're

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Speaker 1: called remarketing agents that find additional buyers for these things

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Speaker 1: when some people want to unload them. So what this

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Speaker 1: means basically, as lots of the infrastructure services that we

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Speaker 1: all enjoy, um, we all enjoy partly because of this

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Speaker 1: particular market for these particular instruments that are again very

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Speaker 1: low interest for the issuing entities largely municipal and government entities,

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Speaker 1: but also five onnessy threes. If it turns out then

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Speaker 1: that the entities that have been entrusted with the remarketing

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Speaker 1: of these things when and the resetting of the interest

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Speaker 1: rates on a periodic basis with the view to keeping

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Speaker 1: them as low as possible, have been abusing their position

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Speaker 1: in doing that and have been in effect acting as

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Speaker 1: monopolists or as oligobalists um in in a in a

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Speaker 1: kind of a price fixing scheme that's harming the municipalities

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Speaker 1: and the broader public. Then that makes use of these

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Speaker 1: services and pays taxes to make up the difference when

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Speaker 1: the bond issuances don't do the m then this is

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Speaker 1: a real you know, this is effectively a crime against

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Speaker 1: the public. Uh, And it's it's quite egregious again if

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Speaker 1: it's true, So I would not think punitists would be

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Speaker 1: very very hard sell here at all. The whole point

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Speaker 1: behind punitives is to disincent this kind of behavior and

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Speaker 1: this is again quite remarkably anti should we call it

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Speaker 1: a sociopathic behavior if indeed it occurred. Well, global banks

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Speaker 1: have paid something like nine billion dollars in the last

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Speaker 1: seven years for manipulating bond interest rates and benchmarks. Is

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Speaker 1: it still going on or have they learned a lesson

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Speaker 1: at this point? Well, it's hard to tell at this point, June.

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Speaker 1: I mean, one would hope that they would have learned

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Speaker 1: a lesson. But but here's the problem. First of all,

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Speaker 1: as we're seeing right now, a lot of the wrongs

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Speaker 1: that appear to have been committed, or or at least

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Speaker 1: are alleged to have been committed, are only coming to

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Speaker 1: the surface rather late in the game, right And then,

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Speaker 1: of course, the investigations take forever, and then the litigation

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Speaker 1: itself takes for ever, and then finally, to top it off, oftentimes,

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Speaker 1: even when guilt is found or liability is found or

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Speaker 1: a settlement is reached, the fine or the penalty that's

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Speaker 1: paid is pretty small potatoes in comparison to the benefits

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Speaker 1: or the gains that are had through the dastardly deeds. Right. Um,

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Speaker 1: So my own thought is that this probably is continuing,

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Speaker 1: even though I have no specific evidence to back that up.

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Speaker 1: But my guess would be that it still is just

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Speaker 1: because of the disparity between the penalty on the one

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Speaker 1: hand and the profit that can be made by committing

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Speaker 1: the wrongs on the other hand. And for that reason,

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Speaker 1: in turn, it seems to me that we have to

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Speaker 1: get very serious, very soon about truly penalizing in a

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Speaker 1: big way, and that means not just finds or penalties

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Speaker 1: against the banking institutions, but finds penalties and even prison

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Speaker 1: time perhaps against individual human beings who are, of course,

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Speaker 1: the the critters through whom these banking institutions work. Now,

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Speaker 1: this lawsuit, it says the people running the bank's BAWD

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Speaker 1: desks meant gularly in person at the Municipal Bond Club

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Speaker 1: in New York and by phone and electronically. Does it

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Speaker 1: sound like there is a lot of evidence the banks

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Speaker 1: are going to have to explain away about a minute here. Sure,

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Speaker 1: Sure it does sound that way to me, right, I mean,

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Speaker 1: now it's possible they can say, well, you know, we

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Speaker 1: met regularly, uh, in this way and on this basis

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Speaker 1: um for for many many years, but all we talked

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Speaker 1: about was golf um And if they can somehow prove that,

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Speaker 1: then that's great for them, right, I mean, it's it's

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Speaker 1: a little hard to imagine, right what else they would

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Speaker 1: be talking about, and they have we don't know what

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Speaker 1: the electronic communications are. That that might be something another

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Speaker 1: one where we'll see that they said things over emails

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Speaker 1: and texts that they shouldn't have. We have seen that before, Bob.

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Speaker 1: I don't know why people don't learn, but we'll see

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Speaker 1: what happens here. Evidence yet to come. Thank you so much, Bob.

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Speaker 1: That's Robert Hockett, Professor, Cornell Law School, and the banks

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Speaker 1: that were named in the suit by Philadelphia or JP,

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Speaker 1: Morgan Chase, Bank of America, City Group, Goldman Sachs, Wells Fargo,

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Speaker 1: RBC Capital Markets, and Barclay seven Banks. Thanks for listening

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Speaker 1: to the Bloomberg Law Podcast. You can subscribe and listen

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Speaker 1: to the show on Apple Podcasts, SoundCloud, and on bloomberg

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Speaker 1: dot com slash podcast. I'm June Brosso. This is Bloomberg