Some of these sections are a little confusing. Can someone help me out? Hopefully Planet Money on NPR will do an episode on it soon :)
"So it goes to Wall Street, which issues a bond in your town's name to raise $100 million, attracting cash from investors all over the globe"
Why would investors put money into a school? Are they hoping for returns on their investmant later on like shares in a company? I can't image the profit margins on a school would be very lucrative. Why would people invest in these projects?
"While that unspent money is sitting in the town's account, local officials go looking for a financial company on Wall Street to invest it for them."
So the town raised money for a school which they then invest back into wallstreet, to make money? That seems like an odd process. Would it not be possible for towns to say "We are going to build a $300 million dollar theme park", get the money, and say "construction isn't due to start until, oh I don't know, 2023?", meanwhile just earning huge amounts of interest?
"the broker would tell the prearranged "winner" what the other two bids were"
If the three banks are colluding, why does the broker need to be the one to pass on the information of what the other bids where? Can't the banks just talk to each other directly and plan in advance what they are going to bid?
The investors don't care about the school, they care about the interest payments they will receive. Bonds are often considered lower risk because the income is fixed.
Earning "huge" amounts of interest is exactly what they are doing. They get cash, they put it back in the bank. The lawsuit is about the "huge" interest rate being rigged.
Oh, you ask why they don't do that and never build the project? Because they're paying interest on it in excess of whatever they're earning. The earned interest is only to minimize the cost of sitting on the borrowed money.
Using a broker to decide the winner leaves less paper trail. It'd be weird for three competing banks to have a three way call every time this happened.
"So it goes to Wall Street, which issues a bond in your town's name to raise $100 million, attracting cash from investors all over the globe"
Why would investors put money into a school? Are they hoping for returns on their investmant later on like shares in a company? I can't image the profit margins on a school would be very lucrative. Why would people invest in these projects?
"While that unspent money is sitting in the town's account, local officials go looking for a financial company on Wall Street to invest it for them."
So the town raised money for a school which they then invest back into wallstreet, to make money? That seems like an odd process. Would it not be possible for towns to say "We are going to build a $300 million dollar theme park", get the money, and say "construction isn't due to start until, oh I don't know, 2023?", meanwhile just earning huge amounts of interest?
"the broker would tell the prearranged "winner" what the other two bids were" If the three banks are colluding, why does the broker need to be the one to pass on the information of what the other bids where? Can't the banks just talk to each other directly and plan in advance what they are going to bid?