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., 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."
As for Poirier, he was later convicted on fraud charges in Fulton County, Georgia, for paying a bribe to an intermediary at a regional investment bank in exchange for underwriting business. "This crime involved significant planning from both defendants," an appellate court wrote of Poirier's actions. In 1995, Lazard got out of the municipal-finance business.
So, what lessons did Wall Street learn from Lazard, Ferber and Poirier about bribery, conspiracy and back-room dealing in municipal finance? Unsurprisingly, none. In 2009, the Securities and Exchange Commission charged that two bankers at JPMorgan, Charles LeCroy and Douglas MacFaddin, had in 2002 and 2003 privately agreed with "certain" county commissioners in Jefferson County, Alabama, to pay more than $8.2 million to "close friends of the commissioners who either owned or worked at local broker-dealers" that had been hired to advise the county commissioners on awarding underwriting business.
The purpose of the payments, the SEC alleged, was to make sure the commissioners hired JPMorgan as the underwriter of municipal-bond sales and swaps contracts. The SEC caught LeCroy and MacFaddin on tape saying the payments were "payoffs," "giving away free money" and "the price of doing business." (Attorneys for LeCroy and MacFaddin disputed the SEC charges, which they are still fighting.)
The best part, according to a suit filed by the county, was that JPMorgan even agreed to pay Goldman Sachs Group Inc. $3 million if it wouldn't compete for a $1.1 billion interest-rate swap that JPMorgan entered into with Jefferson County. The payments were all undisclosed -- the Goldman money, the suit claimed, was shuffled through a separate derivatives contract created just to make the payment -- and decreased the proceeds the county received from the offerings.
To settle the charges with the SEC, JPMorgan neither admitted nor denied wrongdoing -- of course -- but paid $722 million, including forgiving $647 million in fees that the county would have had to pay to unwind the swap deals. Last November, Jefferson County filed for bankruptcy protection, largely a result of the deals JPMorgan Chase put together.
But still the lesson has not been learned. Just read the latest shocking investigation by Rolling Stone's Matt Taibbi, which recounts a just-concluded case in a Manhattan federal court, US v. Carollo. In a nutshell, it explains how three bankers at General Electric Co.'s finance arm, GE Capital -- as well as a bunch of ne'er-do-wells at an intermediary brokerage, which supposedly vetted potential underwriting firms -- were doing the exact same things bankers at Lazard, JPMorgan and Merrill did in years past: paying and taking bribes in exchange for business "in a breathtakingly broad scheme to skim billions of dollars from the coffers of cities and small towns across America," according to Taibbi.
The details are nauseating -- Taibbi aptly compares the whole scam to the Mafia. It leads one to believe that Wall Street big shots are like scorpions, which sting because that's what they are on Earth to do, they just can't help themselves.
"One of the biggest lies in capitalism," former New York Governor Eliot Spitzer, who made his name prosecuting Wall Street misdeeds, told Taibbi, "is that companies like competition. They don't. Nobody likes competition." Spitzer could have added that this hatred of competition is ever-keener on Wall Street, which today, with its ranks thinned by the financial collapse, operates more like a cartel than ever.
The three GE bankers -- Dominick Carollo, Steven Goldberg and Peter Grimm -- were convicted on May 11 of conspiracy to commit fraud. Will Wall Street finally learn its lesson? It would certainly help if the federal judge in the case, Harold Baer, throws away the keys to the cells the three men are set to inhabit.
William D. Cohan
William D. Cohan, a former investment banker and the author of "Money and Power: How Goldman Sachs Came to Rule the World," is a Bloomberg View columnist. The opinions expressed are his own.