The concept of pay-to-play has grabbed the attention of New Mexicans since Gov. Bill Richardson’s quest to be Commerce Secretary in the Obama administration was derailed by a federal investigation.
That investigation is centered on whether or not Richardson or his staff instructed the New Mexico Finance Authority (NMFA) to give a couple of lucrative state contracts to CDR Financial Inc., a financial investments advisory firm, after several large donations were made by the firm to two of Richardson’s political action committees in 2003 and 2004.
CDR contributed a total of $100,000 to the PACs but wasn’t alone. According to The Albuquerque Journal, 20 financial companies, advisers, lawyers and agents made at least $12 million for work they did on Gov. Richardsons Investment Partnership (GRIP) in 2004. Of that, Bloomberg reports that CDR raked in $1.48 million for advising the NMFA on interest-rate swaps and restructuring escrow funds for $1.6 billion of transportation bonds issued by the agency.
These reports illuminate the heart of the scandal that the New Mexico Independent has dubbed GRIPgate: the complex process of issuing government bonds that is difficult for outsiders to understand and perhaps easier for insiders to manipulate.
What investigators want to know is, did the Richardson administration dole out investment consulting fees (play) in return for political contributions (pay). What New Mexico taxpayers need to know is, did insiders game the process to benefit themselves with the publics money? And, if so, what can be done about it?
“People focus on the pay-to-play, but thats chump change compared to the money were talking about,” Sherman Golden, a municipal bond expert told NMI. “Any time a bond issue is happening, a big question is whether or not the bidding was fair, unbiased, at market rate, or was it rigged?”
The complex bond market
The federal investigation in New Mexico stems from a larger national probe into possible bid-rigging in the municipal bond market.
The issue is whether financial advisory companies such as CDR rigged the bidding process for banks wanting to provide investment services for government bond issues, so that banks bid lower than they would have, had the process been competitive, and knew ahead of time which bank would win. The resulting increased profits to the banks would have allowed for kickbacks to the financial advisory firm that arranged the whole thing.
According to a recent report in The New York Times, the financial advisers being investigated referred to the rigged bids as sloppy bids:
the evidence amassed so far included tape-recorded phone calls, in which the independent specialists who are supposed to help local governments pick their bankers could be heard telling bankers: “We want you to bid on this deal, but you’re not going to get it — you’re going to get the next one. We want you to submit a sloppy bid.” Unsuspecting governments then accepted the recommended bids, and paid too much
Since the investigation began, about 20 cities, counties, and school districts including Los Angeles have sued CDR along with a number of big multi-state banks, alleging that the firm got kickbacks from the banks for steering public bond business their way.
Along with CDR, one of the banks in the national investigation is also central to the story in New Mexicos specific investigation: JP Morgan Chase. The bank paid $269,000 to a Denver-based political consultant named Michael Stratton to lobby the NMFA for business. Stratton also lobbied on behalf of CDR. JP Morgan was a primary underwriter of the GRIP bonds. And Stratton is one of Richardsons buddies he arranged tickets to a Bronco playoff game for Richardson in 2006, co-hosted a high-priced fundraiser for the governor in Washington, D.C., just this past December, and he also earned $240,000 in fees from the Democratic Governors Association during the two years Richardson headed that organization up.
In a 2006 expose of the municipal bond market, a team of reporters from Bloomberg suggested that New Mexico overpaid CDR. In 2003 and 2004, CDR gave $75,000 to Richardson’s political action committee Si Se Puede! and the company’s head, David Rubin, gave $25,000 to Moving America Forward, another Richardson PAC. According to Bloomberg:
Between the timing of those contributions, CDR made $951,566 advising the New Mexico Finance Authority on $420 million of interest rate swaps.
The fees New Mexico paid CDR were more than double the $400,000 that New York City paid to its derivatives adviser, Investment Management Advisory Group Inc., in 2004. That year, New York City executed $900 million of the contracts.”
The state has to hire a financial firm on such deals, according to Golden, a bond attorney in Atlanta who is quoted in the Bloomberg piece, because of the complexity and specialization required to understand the bond market. There is also a web of state and federal laws concerning the investment of tax-exempt bond proceeds. The complexity leaves the public at the mercy of financial experts.
“Bid rigging is hard to prove,” Golden said, “because you have to have knowledge of the market and be very experienced to be able to see it. Thats why its taken so long for this investigation to play out. Its very conceivable, likely and probable that whoever hired a company that was bid-rigging wouldnt have had the sophistication to know they were leaving the door to the store open.
The lack of accountability
The problem is exacerbated, says at least one state lawmaker, by the fact that several quasi-state agencies that have bonding authority, including the New Mexico Finance Authority, lack adequate oversight.
Bill Sisneros, NMFAs Executive Director, says that the work CDR did saved the state millions of dollars but State Rep. Janice Arnold-Jones, R-Albuquerque, who serves on the state Legislatures New Mexico Finance Oversight Committee, says such claims are hard to assess given the level of expertise required to understand these complex financial transactions.
She thinks a good move would be to increase oversight of the quasi-governmental agencies that have been given authority to issue public bonds.
“Ultimately, we need someone to look over the shoulder of the New Mexico Finance Authority — or any of the quasi-governmental entities we’ve created — and ask the hard questions,” Arnold-Jones told the Independent.
“There are at least 17 entities with taxing and bonding authority in the state, she continued. These entities are autonomous and are able to invoke confidentiality rules although tax money is involved. Not that all of it is awful, but every time we create a new one, we also create an opportunity for abuse.”
But the fact that much of the investment work regarding bond proceeds is contracted out to private entities makes oversight difficult. Private companies generally won’t open their books for scrutiny.
“The problem is that we contract with these firms to invest our money, but the fact that they are private entities makes it almost impossible for us to know if we are getting a good deal, Arnold-Jones said. But I think if you’re going to do something with the taxpayers money, you should lose the right to confidentiality.”
The entities Arnold-Jones is referring to include various authorities, like the NMFA, plus special assessment and special tax districts, like tax-increment development districts.
Arnold-Jones and other legislators are likely to push the issue of accountability during the 60-day legislative session, which begins Jan. 20.