California Probes Muni Bond Derivatives Amid Mounting Deficit

[Joanne98]

Jan. 23 (Bloomberg) -- California joined Connecticut and Florida in investigating whether Wall Street banks and financial advisers conspired to overcharge local governments for derivative contracts tied to municipal bonds, a state official said.

The antitrust probes follow similar inquiries by the U.S. Justice Department and class action lawsuits by cities from Oakland to Baltimore. They claim banks and advisers cost taxpayers money by rigging bids or fixing prices on financial contracts.

The investigations center on the investments that schools, states and cities buy with the proceeds of some of the $400 billion of municipal bonds they sell annually and on the interest-rate swaps designed to guard against swings in borrowing costs, authorities have said. Financial advisers are hired to solicit bids for the investments and to determine if their government clients pay fair rates in swaps, which are unregulated instruments not traded on exchanges.

States “almost have no choice but to join in because it involves their towns and cities and maybe even the states themselves,” said Christopher “Kit” Taylor, the former executive director of the Municipal Securities Rulemaking Board, the municipal bond industry regulator. “They’re sitting there saying this is a situation where we may have been taken.”

http://www.bloomberg.com/apps/news?pid=20601087&sid=aPyIRv_aMKzY&refer=home