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Comment by prostoalex | Hacker News Reader

So municipalities tried to game the system by instituting closed auctions instead of the open ones, and then got mad, when it turned out that some parties are willing to pay to peek into the sealed bids? An open auction system would not have created the peeking problem in the first place.

Both parties tried to institute unreasonable complexity to get an upper hand.

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Can you explain further? What do you mean by "closed" and "open" auction?

AFAIK, they outsourced the auction process to a third-party company specializing in conducting auctions. That company and the bidders colluded to defraud municipalities. Corrupt auctioneers also paid bribes to politicians to get hired as as auctioneers.

Do you really not see anything wrong with this picture?

Edit: Removed paragraph with analogy involving ebay. Analogies suck, and it didn't really apply here.

An open auction is one where everyone's bids are public and visible to everyone hence allowing price discovery, contrasted with a closed auction, one where the bids are sealed and not disclosed to any other parties. It seemed from the article that the bids were submitted over the phone and known to the broker ahead of the conclusion of the auction, as opposed to a sealed first-price auction.

Just to be clear, telling the broker their bid instead of just sending it sealed is exactly the corruption that's being discussed in the article.

AFAIK, it wasn't legal for the bidders to tell the auctioneer what their bid was.

They're sealed bid auctions.

You can see what the others bid on eBay. If you choose to bid just a penny over the highest bid (as opposed to bidding up by a larger amount), you're unlikely to be prosecuted.

And the problem was that they became UNsealed auctions due to corruption.

After reading the article, are you saying that the auctioneer conducted a proper sealed auction?

AFAIK, it is the norm worldwide in private as well as public sectors for contracts to be given out via sealed bid auctions, as opposed to ebay-style open auctions.

The ebay-style process works for ebay because there are large number of potential buyers who don't know each other. IMHO, if multi-round open bidding is allowed for auctions like this with a limited number of possible bidders, price collusion is likely to occur even more easily.

Sealed auctions introduce inefficiencies in capital allocation. The parties writing the laws benefit from these inefficiencies, hence market's move to transparency is written up as collusion.

Switch to open auctions would remove incentives for corruption.

There will always be incentives for corruption. For instance, your money is not flowing to me at the moment, which I find to be highly inefficient.

Giving me all your money would remove the incentive to rob you.

Also, are you seriously appealing to anarchist idealism as a justification for bid-rigging? How many of these intellectuals who are using their brainpower to rip off local governments could keep their small fortunes for more than a month in a state of anarchy? They're precisely the kind of people who benefit the most from the existence of a state, so cry me a river at the injustice of them having to play by the state's rules.

mmm.. I don't get your point. Even in an open auction, bidders in an auction could still collude to submit lower bids and divide their winnings.

Problem is that there are only a couple of large banks who control a large portion of money. If there were more banks, one bank will eventually break the collusion and offer a competitive bids, and other banks will follow.

Yeah, you nailed the core of the problem. Banks don't so much "control" the money (most of such bonds flow to mutual funds and ETFs), it's just hard for average citizens to participate in the process. Large issuers have set up direct shops like http://www.buycaliforniabonds.com/

The municipalities didn't try to game any system. Any potential buyer who found closed auctions to be somehow unfair was free to choose not to participate. This is equivalent to what you're saying:

"The supermarket is trying to sell 20-oz sodas for $1.50 a pop, and now they get mad when I steal them instead? A policy of giving sodas away for free would not have created the stealing problem in the first place."

Saying the municipalities weren't trying to game the system, is not proven by saying you don't have to participate.

The statement that if you don't like the rules you don't have to participate plays to the nature of your position. This isn't a private business or private project, these are public municipalities that are spending tax payer dollars. In the name of transparency for voters they should not be able to hide what they're doing.

Wait, so it's the voters who are clamoring for the use of open auctions to determine what bank to invest public funds with? Um, no. As for "[hiding] what they're doing", what do you mean? The article mentions nothing about the municipalities hiding things from the public. If you're referring to the closed auctions, that's just a way of selling something that benefits the seller. It's not "closed" in any other sense.

So what you're saying is that, because a municipality is a public entity, it shouldn't be allowed to invest funds in a manner that would be perfectly acceptable for a private entity not because the entity's constituents disapprove, but because the banks don't like it? That's absurd. If buyers shouldn't be allowed to dictate the negotiation tactics of private sellers, they shouldn't be allowed to dictate the negotiation tactics of public sellers either. You seem to be conflating (or attempting to conflate?) the banks with the municipality's constituents. It's true that a municipality must answer to its constituents, but it doesn't have to answer to any private bank that feels like whining.

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