Friday, November 13, 2009

Was SMUD Ripped Off By Wall Street?

SMUD filed a lawsuite in yesterday in federal court alleging that Goldman Sachs, Morgan Stanley, and Merill Lynch defrauded the utility by riggin bids related to the muncipal derivatives that SMUD invested in over a 9 year period. In the aggreagate, SMUD did more than a billion dollars worth of these deals.

Essentially what happed was that SMUD took money raised through bond offerings and, before spending it on designated projects, invested that money in municipal derivatives. Those derivatives were hedged with another kind of derivative. Competitive bidding among the firms involved would get SMUD the best deal, but now SMUD smells a rat and it is going after the Wall Street firms.

At least 6 other city and county governments around the country are filing similar suits.