How the Scam Works

The Financial Times reports today on derivative deals gone bad in little Italian villages. Their poster child is Baschi, population 2,800, but it goes way beyond that:

Between 2001 and 2008, 525 Italian local authorities entered into almost 1,000 interest rate swaps with an aggregate value of €35bn, according to Italy’s audit office and the central bank….Scores of these deals are now turning sour, dragging Italian banks such as BNL and global institutions such as Merrill Lynch, UBS, Deutsche Bank and JPMorgan into court.

This is embarrassing for Italy, as the state is widely considered to have failed to control the deals involving cities as large as Milan to a tiny Order of Capuchin Friars near Genoa. It is also extremely embarrassing for investment banks. Investigations by Italy’s finance police have led to raids, the seizure of assets and bankers being named in criminal cases. One prosecutor in south Italy has asked that Merrill Lynch be banned from doing business with municipalities for two years.

Hey, Merrill Lynch! I remember them. That’s the company that entered into a whole bunch of derivative deals with my hometown of Orange County in the early 90s and drove us into bankruptcy. I guess you can take the investment bank out of the hustle, but you can’t take the hustle out of the investment bank. Or something.

This comes via Felix Salmon, who notes that “municipalities around the world have been ripped off by fast-talking derivatives salesmen for years, and the whole business really is very sleazy.” As it happens, there was a bit of sleaze on both sides, probably, as these small towns were all hoping to get something for nothing and figuring that if a piper needed to eventually be paid, some future mayor would have to pay him. But the whole piece is worth reading. It’s a nice look into the incredibly complex deals that these banks put together and sold to plainly unqualified buyers.

One More Thing

And it's a big one. Mother Jones is launching a new Corruption Project to do deep, time-intensive reporting on the corruption that is both the cause and result of the crisis in our democracy.

The more we thought about how Mother Jones can have the most impact right now, the more we realized that so many stories come down to corruption: People with wealth and power putting their interests first—and often getting away with it.

Our goal is to understand how we got here and how we might get out. We're aiming to create a reporting position dedicated to uncovering corruption, build a team, and let them investigate for a year—publishing our stories in a concerted window: a special issue of our magazine, video and podcast series, and a dedicated online portal so they don't get lost in the daily deluge of headlines and breaking news.

We want to go all in, and we've got seed funding to get started—but we're looking to raise $500,000 in donations this spring so we can go even bigger. You can read about why we think this project is what the moment demands and what we hope to accomplish—and if you like how it sounds, please help us go big with a tax-deductible donation today.

We Recommend

Latest

Sign up for our newsletters

Subscribe and we'll send Mother Jones straight to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate