Primary Dealers Rigged Treasury Auctions, Investor Lawsuit Says

In the latest example of Wall Street malfeasance, a 115-page lawsuit was filed in Manhattan federal court last month, claiming that the big banks that serve as the main counterparties to the public finance operations of the US Treasury and Federal Reserve, were abusing their positions as "primary dealers" by colluding to raise prices.

According to Bloomberg:

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. 

Treasury traders at some banks learn of customer demand hours before auctions, and were communicating with their counterparts at other firms via chat rooms as recently as last year, Bloomberg News reported earlier this year.

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.

For us MMTers that fully understand monetary operations, this latest scandal is especially egregious. We know full well that the primary dealers serve as middlemen between our government agencies and end users of Treasury securities, getting their cut by conducting essentially risk free trading. As if the enviable position of being a primary dealer was not enough, now we learn that these guys were concocting schemes to skim even more off top--all at the expense of the American people.

This latest scandal gives more momentum to the cause of cutting out these middlemen entirely. As Marriner Eccles put it, its a bunch of "hocus-pocus" anyway. Its high time we stop with the charade of long term treasury issuance all together, and stick to the short term bills that trade at or below the federal funds rate. There was never any good reason to pay people interest to hold idle fiat in the first place. Now that even the relatively banal primary dealer system has been corrupted by Wall Street crooks, its time to give them the boot (and maybe the finger, too!)