An Interesting Week

What a week it was for the legal system as everybody involved in the potential bid rigging scandal, the auction rate securities fiasco, and the municipal derivatives investigation all ran to their local courts to file lawsuits against every financial institution of any size.

Los Angeles sued the mono-line insurance companies (as if they need any more problems) and also sued a laundry list of financial firms ranging from Merrill, Bank of America, Wachovia, Morgan all the way down to a relatively small firm, Investment Management Advisory Group (IMAGE). Just to make sure they got everyone, LA also included "Does 1-50".

Massachusetts sued Merrill, Connecticut and Florida are investigating, Stockton Ca sued anyone they could find while New York sued UBS. The hits just keep coming.

As far as the lawsuits involving municipal bid rigging, I will again state my position that these law suits brought by the municipalities seem to be more an effort to cast themselves as a party harmed. Especially since the federal government is very close to bringing its own action. The last thing the municipalities want is to be charged with some form of complicity in the bidding procedure.

Despite the bravado of LA City Attorney Rocky Delgadillo, ["Today we're sending the message that if you cheat the city, we will come at you with everything we've got, whether you're a gang banger or a Wall Street titan"], I think most of these suits should be dismissed because the plaintiffs will have a hard time proving they were harmed.

On July 29, in a piece written by Michael B. Marois, Bloomberg stated that US "Tax rules also stipulate that profits made by selling bonds at tax-exempt rates and then investing the proceeds at higher yields must be repaid as taxes."

While the profits on investing is not really a tax, more of a confiscation because the federal government takes everything, the concept is correct. The municipalities cannot keep the profits from investing. They cannot use that money generated through their own investing activities as any other citizen for the building of schools, roads, hospitals or any other worthwhile project. They must send the money to the IRS.

The bottom line is: the plaintiffs in the bid rigging lawsuits probably got all the profits they could get. The actions by the financial community probably did not harm those who filed the complaints. But what is unknown is how much did the municipalities know about the bidding procedure they are now challenging.

Eventually, we may all know the answer to that.