Yield Burning

Yield Burning was a method by which major Wall Street US municipal bond dealers cheated the federal government out of millions of dollars of revenue. [http://query.nytimes.com/gst/fullpage.html?res=9D05E6DC123CF937A25757C0A9649C8B63&scp=2&sq=michael+lissack&st=nyt UPDATE/MICHAEL R. LISSACK; Wall Street Expatriate] , New York Times, April 14th, 2002] . It was exposed by whistleblower Michael Lissack in 1994, and eventually the firms involved settled with the government for $205 million. [http://www.bondsonline.com/News_Releases/news09020802.php Whistleblower Says Dealers `Laundered' Bond Prices] , Bloomberg News, September 2nd 2008]

The New York Times describes the scam as follows:

"To refinance their old, expensive debt when interest rates fall, municipalities often sell new bonds and put the proceeds into temporary escrow accounts. By law, those accounts cannot generate a higher rate of interest than the rate on the newly issued bonds; if they do, the excess is considered to be arbitrage profit, and it must be rebated to the Federal Government.

To comply with that law, issuers typically buy a mix of ordinary Treasury securities in the open market or special securities, called slugs, from the Treasury. In yield burning, underwriters sell the issuers Treasury securities at inflated prices, which cuts the yield to levels that appear to meet the escrow requirements but that also generate substantial profits for the underwriters. By some estimates, underwriters may have earned $2 billion to $3 billion of illegal profits from yield burning since the late 1970's. " [http://query.nytimes.com/gst/fullpage.html?res=9F01E5DF1739F936A15754C0A960958260&scp=1&sq=%22yield+burning%22&st=nyt Market Place;Municipal bond investors could wind up in an I.R.S. crackdown] , New York Times, July 25th 1996]

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