If you thought the SEC’s charges against Goldman Sachs poured fuel on an already-raging populace fire, Wall Street’s involvement in a massive bid rigging scandal in the $2.8 trillion municipal bond market will fan the flames even more.

If you thought the SEC’s charges against Goldman Sachs poured fuel on an already-raging populace fire, Wall Street’s involvement in a massive bid rigging scandal in the $2.8 trillion municipal bond market will fan the flames even more.

Earlier this month, we heard about an SEC investigation of conflicts of interest at big banks that bought credit default swaps on muni bonds they sold to state and local governments. But Bloomberg is out with a big investigative piece today about a massive bid-rigging scandal in the muni market that, if true, bilked 160 state agencies, local governments and non-profits out of hundreds of millions of dollars.

The alleged conspiracy centered around so-called guaranteed investment contracts, or GICs, which acted like certificates of deposit for the cash raised from muni bond offerings. The interest rates on GICs aren’t published so governments were mandated to put the contracts out for competitive bidding. They hired small advisory firms to run the auctions to get the highest interest rates.

But that process appears to have been rigged, according to indictments against one of the advisory firms, CDR Financial Products of Beverly Hills, which is cited in the Bloomberg story. The FBI has also raided several of CDR’s competitors including Investment Management Advisory Group, known as Image, and Sound Capital Management, but haven't yet charged them.

The charges against CDR claim the firm told over a dozen big banks that sell GICs including JPMorgan, UBS, Lehman Brothers, Wachovia, Bank of America and Citigroup, how to lowball their bids to win business from the state and local governments. The banks, in turn, paid kickbacks to CDR.

“The whole investment process was rigged across the board,” said Charlie Anderson, who retired in 2007 as head of field operations for the Internal Revenue Service’s tax-exempt bond division. “It was so commonplace that people talked about it on the phones of their employers and ignored the fact that they were being recorded.”

Three former CDR employees have pleaded guilty to wire fraud and conspiracy to rig bids and more guilty pleas are in the works. A former unnamed BofA banker, who has been cooperating since 2007, is the government’s key man in the investigation. In exchange for its cooperation, BofA has received amnesty from any future prosecution.

To offer amnesty to a bank these days indicates the government is working on a major investigation that could do some major damage to Wall Street's already shaky reputation.