SAN FRANCISCO (Bloomberg) ? Lucy Morris, a retired school custodian in Pensacola, Florida, is waiting for help from $220 million of bonds issued to improve housing for the poor. She lives alone in her one-bedroom apartment, decorated with red and yellow plastic tulips that distract her from the weeds, cinder block walls and barbed wire security fence outside.

JPMorgan Chase & Co., American International Group Inc. and their advisers made $12 million in fees from that 1999 bond sale in Florida. None of the money was ever used for housing. Instead, it sat in a so-called guaranteed investment contract for four years, earning profits for the bank?s partners.

?The promoters should have done the right thing,? said Morris, 85. ?The money never got in the hands of the people who deserved it.?

How guaranteed investment contracts such as the one used in Florida are awarded is now the subject of the US Justice Department?s largest-ever criminal investigation and broadest antitrust probe of the $2.3 trillion municipal bond market.

The Internal Revenue Service has already concluded that 70 bond sales like the one in Florida weren?t intended to serve the public. The bonds were sold so financial firms could reap tens of millions of dollars in fees and investment gains, Charlie Anderson, manager of field operations for the IRS?s tax-exempt bond division, said in September.

During the past decade, local governments have issued a total of $7 billion of such bonds, which lawyers refer to as black box deals, Bloomberg News reported on October 4.

In those transactions, almost none of the money was spent to help the poor, as intended, and financial firms made tens of millions of dollars in fees and investment gains, as the public got nothing.

JPMorgan managed seven debt sales by local governments from Florida to Oklahoma, with AIG as its bond insurer each time. In all of those cases, the money stayed in guaranteed investment contract accounts, with profit from investments going to financial firms, and none or just a fraction being used for housing.

In each case, the issuer bought back the bonds from investors after three or four years to avoid losing tax-exempt status for the securities.

An adviser took bids in all seven JPMorgan transactions from firms seeking to invest the bond proceeds in guaranteed investment contracts before they were spent. The same company won the bidding every time: AIG.

?It sounds very cozy,? said Charles ?Skip? Fish, chief executive officer of Charles Fish Investments in Irvine, California and a former chairman of the Washington-based Municipal Securities Rulemaking Board, a self-regulatory group for public finance issuers. ?I can?t imagine how they actually failed to get more competition,? Fish said.

Black box deals arouse suspicion because the securities are issued without a defined source of revenue to repay the debt, said Bruce Serchuk, who has worked in the office of the IRS chief counsel.

?Anytime you?re dealing with a transaction where no one?s putting any money in and it has got to be self-sufficient, you have to ask the question: Where?s the money coming from?? said Serchuk, 39, at a December 12 conference sponsored by the Bond Buyer newspaper in New York.

The municipal finance industry was rocked by scandals in the 1990s, including a probe of influence peddling concerning pay to play, a practice in which banks gave public officials campaign contributions to win no-bid contracts. There was also the controversy over yield burning, in which banks and brokers overcharged local governments for Treasury bond investments.

The National Association of Bond Lawyers, a group of attorneys who advise US state and local governments on borrowings, said last week it will warn members about anti-competitive practices because of the federal probe.

In the seven deals in which New York-based JPMorgan raised money that wasn?t used for housing, the bank and CDR Financial Products Inc. of Beverly Hills, California, worked with AIG affiliate SunAmerica Life Assurance Co.

The Justice Department has subpoenaed documents from JPMorgan, AIG and CDR. JPMorgan, the third-biggest US bank, has declined to comment on the probe. New York-based AIG, the world?s largest insurer, and CDR say they?re cooperating with investigators.

Antitrust prosecutors from the Justice Department are probing whether banks, brokers and insurance companies conspired to fix the price of guaranteed investment contracts, according to issuers and companies who?ve been subpoenaed.

Investigators have subpoenaed more than a dozen banks and insurers and raided three brokers as part of the probe.

Prosecutors are also seeking information on interest-rate swaps and other derivatives that governments buy to hedge the risk of rising interest rates. A swap is a type of derivative, or financial contract whose value is derived from securities or linked to events such as interest-rate changes.

The investigation stems from an IRS inquiry into whether bid-rigging for the guaranteed investment contracts, known as GICs, is depriving the US Treasury of taxes because local governments are required to rebate to the IRS much of the earnings they reap by reinvesting bond money.

Unlike municipal bonds, guaranteed investment contracts are required to be awarded by competitive bidding. The seven JPMorgan/AIG deals, like 81 percent of all local public financings, were done without competitive bidding at an auction.

AIG and CDR, the adviser to AIG?s bond insurance unit, signed a secret contract in a Gulf Breeze, Florida, deal that allowed CDR to make more money if the bond proceeds weren?t used by the public, Bloomberg News reported.

That agreement also reduced or eliminated the risk AIG faced as the bond insurer. If none of the money was released from the investment account managed by AIG, the insurance company would be assured the money was safe, while receiving a fee to insure the bonds.

AIG reached an undisclosed settlement with the IRS in the Florida deal. AIG neither admitted nor denied wrongdoing.

In the $220 million Florida deal, all the money was invested in a guaranteed investment contract managed by AIG. CDR made $2.2 million from that investment. The local issuer, Capital Trust Agency in Gulf Breeze, Florida, bought back the bonds after four years to avoid having the IRS remove their tax- exempt status.