Baltimore has filed two antitrust lawsuits in eight days, alleging price-fixing by big banks and hoping to turn both procedings into class action suits that seek billions in damages for governments and pension plans.

The suits address two different kinds of municipal market bonds, but both levy the same charges: that banks manipulated interest rates to their advantage, at the expense of taxpayers.

“That’s a big accusation because what that means is these banks were all in cahoots with each other,” says David Brunori, a research professor of public policy at the George Washington University. He adds that the complaint “reads like a crime novel,” conjuring up images of collusion behind closed doors in smoke-filled rooms. “I suspect it doesn’t actually work that way.”

If the allegations are true, Brunori estimates the liabilities for banks could be in the billions. That makes it likely many plaintiffs would opt for a settlement, as has happened with other municipal market lawsuits.


What the Suits Allege

In one suit, filed March 25, the city of Baltimore alleges that Bank of America and nine other banks conspired to fix the interest rates of variable rate demand obligations, from at least August 2007 to June 2016. “While Defendants enjoyed the benefits of their rate-fixing scheme,” the complaint reads, “issuers suffered to the tune of billions of dollars in overcharges.” The suit from Baltimore, which issued more than $260 million in variable rate debt over that time, follows ones by Philadelphia and a whistle-blower lawsuit filed on behalf of California, Illinois, Massachusetts and New York.

The other suit, filed April 2, deals with so-called Fannie and Freddie bonds, which are issued by the federal government and purchased by municipalities and other investors. Baltimore, which bought $1 billion in the bonds between 2009 and 2014, alleges that banks inflated the prices of the bonds when selling them to the city and deflated the price when the city sold those bonds. The suit follows reports that the U.S. Department of Justice is investigating whether banks manipulated the prices of the bonds and a similar suit in Florida by the Deerfield Beach Municipal Firefighters Pension Trust Fund.

The bonds in each of Baltimore’s suits have an important commonality: They are traded through a network of broker-dealers rather than a public exchange. That essentially renders it a “a dark market that enabled a few select, knowledgeable, and privileged dealers with exclusive access to price information to collude and harm investors,” Baltimore City Solicitor Andre M. Davis said in a statement, “without risking that these investors would [discover] their conspiracy.”

Both cases were filed as class action suits. But it could take several years for them to win that classification, depending on the other government plaintiffs who come forward.


Not the First Time

Cities have gone after financial institutions before, but the 2008 financial crisis increased the frequency of the suits. That’s because banks handling deals in the municipal market generally have more expertise and experience than their local government clients, says Court Street Group analyst Joseph Krist. The financial crisis was the tipping point. “This [vulnerability] left many at a distinct disadvantage which left them wide open to manipulation and outright deceit,” Krist says. Litigation, he continues, is being “used as a tool to remedy the results of this.”

Since 2008, antitrust lawsuits have alleged banks manipulated interest rates in credit default swap deals and in setting the benchmark interest rate for the entire market (called the London Interbank Offered Rate, or Libor). And some cities have sued banks over predatory lending practices that led to the housing market collapse and ensuing drop in tax revenue.


The Results

The class action suits, when successful, can yield big windfalls. “Municipalities are becoming more engaged in this because, for many of them, it’s a way to supplement budgets that are very lean,” says George Zelcs, a commercial litigation attorney at Korein Tillery.

In the case of credit default swaps, governments reached a $1.9 billion settlement 2015. And in the Libor case, nearly half the banks named in the suit have reached settlements, so far totaling nearly half a billion dollars.

But governments are also seeking more permanent changes. The credit default swaps agreement also called for reforms increasing transparency in the credit default swap market.

Still, says Brunori, the lawsuits in recent years aren’t likely to lead to vast changes in the municipal market. “There will be improvements at the margins,” he says. “But it won’t change the fact that cities and states borrow money, and the only mechanism for them doing that is through the banking system.”


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