Breaking The Banks Again

Looks like the math geniuses in the world of finance have found yet another part of our system rigged by the megabanks to make huge profits, but this time it's the federal government being defrauded here as US treasuries markets are the target.

The same analytical technique that uncovered cheating in currency markets and the Libor rates benchmark -- resulting in about $20 billion of fines -- suggests the dealers who control the U.S. Treasury market rigged bond auctions for years, according to a lawsuit.

The analysis was part of a 115-page lawsuit filed in Manhattan federal court on Aug. 26 by Quinn Emmanuel Urquhart & Sullivan LLP and other law firms. The plaintiffs built their case against the 22 primary dealers who serve as the backbone of Treasury trading -- including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley -- using data from Rosa Abrantes-Metz, an adjunct associate professor at New York University who has provided expert testimony in rigging cases.

Her conclusion: More than two-thirds of a certain type of Treasury auction appear to have been rigged. She found issues with other auctions, too.

Investment firms buy US treasuries from these authorized "primary dealers".  With 22 of them, they are supposed to compete against each other and keep the economy healthy during these regular treasury auctions of US debt.  Guess what?  They didn't compete.

The U.S. Treasury initially sells securities to the primary dealers who in turn sell them to clients, creating a secondary market for trading. Sometimes, after auctioning off debt, the government later issues an identical batch of securities -- known as reissued Treasuries.

When the second set of Treasuries is issued, their prices and yields can be compared with the identical securities already trading in the secondary market. If there are pricing differences, that could be evidence of a problem. According to the plaintiffs, 69 percent of the auctions of reissued Treasuries from 2009 to 2015 appear to have been rigged, artificially boosting yields by 0.91 basis points.

The plaintiffs said there’s evidence of cheating from at least 2007 through earlier this year, when press reports revealed the Justice Department investigation into the auction process.

“These analyses reveal a consistent pattern: Treasury auction yields were artificially high (and prices correspondingly low),” according to the complaint. “Defendants then turned around and sold the Treasuries at higher prices (and correspondingly lower yields) in the secondary markets, reaping substantial profits.”

And yes, there's a corresponding Justice Department investigation into this as well, since the real victim here is the US taxpayer.

Perhaps we should be putting bankers in jail.  A lot of them.  Finally.