Municipal Reinvestment Case

Bank of America Bid Rigging

(Analyzed from a justice standpoint)


Recently Bank of America (BofA) agreed to pay roughly $140 million in restitution to settle allegations that they fraudulently obtained and poorly reinvested municipal bond proceeds.  BofA is just one of many financial firms that have settled in the long-running investigation of the process used by reinvestment companies to award municipal bond proceeds to banks.  After a municipality successfully issues a bond or bonds to finance a local project, they typically hire a reinvestment company to aid them in finding the most attractive (read: profitable) investment opportunity for them to park their money until the proceeds are ready to be deployed.  According to federal rules, these reinvestment companies are supposed to utilize a systematically established bidding process in order to determine which bank should be awarded the issuance proceeds.  This bidding process was implemented as a way to allow banks of all sizes to fairly compete for the proceeds.  The institution with the best proposal for how to invest the proceeds is supposed to be awarded the funds.  However, instead of awarding funds to the banks with the best investment proposals, some reinvestment companies have been awarding the funds only to those banks which are willing to pay them a kickback.[1]

Facts about the case

Applicable facts (assumptions are noted as such) surrounding the case include the following:

  • Municipalities utilize reinvestment companies to find the most attractive investment vehicle for the proceeds of the municipalities bond sales until such proceeds are ready to be deployed.
  • Banks (including investment banks) are to submit a “bid” to the reinvestment company if they are interested in investing the bond proceeds on behalf of the municipality.
  • The “bidding” process was implemented to systematically award municipality proceeds to the bank that submits the most attractive investment opportunity.
  • Reinvestment companies are impartial and always follow established, fair procedures when awarding proceeds to banks (assumption).
  • Winning “bidders” invest the municipalities’ proceeds in the most profitable investment vehicles in order to maximize the municipalities’ returns (assumption).

Ethical issue

Is it ethical to award a contract to an institution for any reason other than the ones that have been previously established (agreed upon) and are written into law?


Primary and secondary stakeholders (and why they are considered such) of this case include the following:

Primary Stakeholders:

  • Municipalities – direct party to the transaction; provide the funds for banks to invest; rely on reinvestment companies to act in the municipalities’ best interest.
  • Reinvestment companies – direct party to the transaction; are tasked with finding the most attractive investment vehicle for the municipalities.
  • Banks (includes investment banks) – direct party to the transaction; bid on municipal proceeds and invest them in other areas of the market.

Secondary Stakeholders:

  • Residents of the municipalities – the less money that is made from the bank’s investment strategy, the more they will have to compensate via taxes.
  • Legal system (courts) – when federal rules are broken, the offending parties are charged with a crime.
  • Internal Revenue Service (IRS) – investment income is taxable; the less income the banks make from municipal investments, the less revenue the IRS receives.

Identifying the relevant justice issues

When ethically evaluating this case from a justice point of view, one can clearly discern that multiple fairness issues are present.  Most notably, we note that procedural justice is not being applied by the reinvestment companies that determine the winning banks and that distributive justice is lacking (as evidenced by the banks having to make restitution with the municipalities).

In this case, the reinvestment companies are primarily the ones responsible for neglecting procedural justice.  When the reinvestment companies allowed certain banks to bypass the previously established bidding process in exchange for a kickback, the mechanism effectively became arbitrary and bias.  Additionally, the reinvestment companies’ selection tactics did not provide openness or access to participation in decision making to all of the banks.

The banks that paid the kickbacks in order to obtain the municipal proceeds typically did not have the most attractive bids, which raises the issue of inequity.  The municipalities that were fortunate enough not to have hired one of the unethical reinvestment companies were being paired with financial institutions that could actually maximize their returns (i.e., facilitated the most attractive investment opportunities).  What this means is that comparable municipality inputs were not resulting in comparable investment outcomes.

Cognitive barriers/biases

Multiple categories of disengagement mechanisms allowed the reinvestment companies to engage in unethical behavior without feeling bad about it.  The impropriety discussed in the case is estimated to have lasted for more than a decade.[2] Employees of the reinvestment companies likely compared their actions to more reprehensible ones of their coworkers (or competitors) in order to make their unethical actions acceptable.  Additionally, given that the unethical practice was so widespread, employees of the reinvestment companies could easily diffuse responsibility in order to reduce their personal accountability.  Finally, as the victims in this case were institutional municipalities (e.g., not identifiable individual human beings), it was likely easy for employees of the reinvestment companies to reduce their identification with them (dehumanize).

Proposed solution

Particular to this case, distributive justice is a function of procedural justice – meaning, if procedural justice is maintained then distributive justice will exist as well.  Based upon the fact that neither procedural nor distributive justice was maintained, the actions of the reinvestment companies would be considered unethical.  There needs to be more accountability.  The reinvestment companies should be required to provide the municipalities with a “bid” sheet, detailing all bank bids.  The municipalities can then review the bids and choose a winner based on their needs.

Contributed by: Philip Whalen

[1] Zachary A. Goldfarb, “Bank of America to pay $137 million in state fraud cases,” The Washington Post, 07 December 2010,

[2] Ibid.