A Crappy Wall Street Deal Produces Nation's Largest Ever Municipal Bankruptcy, Finally

[vminfla]

Source: Time Magazine

Jefferson County has long been the canary in the municipal bond market coal mine - a sign that there were big problems brewing in the market for local government debt that could spread like the bank problems in 2008, and we fear Italy and the rest of Europe's debt problems now, to the rest of the economy. Indeed, last year, Meredith Whitney, the bank analyst who famously and correctly alerted the world to the problems growing at the nation's largest banks before the financial crisis, loudly predicted that we could soon see a destabilizing wave of muni-bond defaults.

The problem with that logic is that Jefferson County's bankruptcy will be no surprise to anyone in the muni-bond market, or even a regular reader of national news. Indeed, it turns out municipal bankruptcies are like asteroids, apparently we can see them coming years in advance. Even before the government set up the TARP bank rescue fund, county officials in Birmingham, which is Alabama's largest city and located in Jefferson County, were calling the Treasury Department and telling officials there that it was their county and not the banks that needed a bailout. A very good Fortune story called Birmingham on the Brink which the magazine published in October of 2008 said Jefferson County's bankruptcy filing was almost certain, and it implied imminent. Three years and nearly a month later, here we are.


Jefferson County's problems stem in part from a, quite literally, crappy Wall Street deal. In the early 2000s local official realized that they had spent too much updating their sewer system, which had regularly overflowed in heavy rains. The sewer system's alone accounts for $3 billion of Jefferson County's overall debt. There was no way the fees generated by the sewer system could pay the interest on the debt building it had run up.

Wall Street, thankfully, had a solution. Jefferson County's financial advisers, lead by JPMorgan Chase, told the county to refinance its sewer debt into something called auction-rate securities - a trick that would allow the county to pay lower short-term interest rates on what was long-term debt. The trick would dramatically lower the county's financing costs. Some local officials called it magic.

Read more: http://curiouscapitalist.blogs.time.com/2011/11/10/a-crappy-wall-street-deal-produces-nations-largest-ever-municipal-bankruptcy-finally/

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I am with the finance company, we are here to help.

[xchrom]

1. Recommend

[PoliticAverse]

2. "a number of Jefferson County officials have gone to jail, though, perhaps unsurprisingly, no one...

from the Wall Street side of the deal."

Too big to jail...

[one-eyed fat man]

3. You don't know how right you are

Most folks think that being convicted of a felony automatically forfeits your right to own a gun.

The only felonies that are not covered by the federal gun ban are:

1) those "pertaining to antitrust violations, unfair trade practices, restraints of trade, or other similar offenses relating to the regulation of business practices," per 18 U.S.C. § 921(a)(20)(A)

2) felony convictions from foreign countries, per Small v. United States, --- U.S. ---, 2005 WL 946620 (April 26, 2005).

[ewagner]

4. Not too surprised

Municipal funds backed by the ability to tax (even Governor Walker's tax freeze exempted raising taxes for debt service) are a tempting pool of money for Wall Street financiers...

Willie Sutton, the infamous bank robber told police he robbed only banks because "that where the money is". Wall Street financiers will be found WHERE THE MONEY IS..and right now that's municipals.

[HillWilliam]

5. Soooo, Birmingham

Howzat privitizing workin' out for ya?

[denverbill]

6. God forbid they just raise their sewer rates.

Guess what? Sewers are expensive. People have to pay for services.

[No Elephants]

7. Yes, things are expensive and people overcharge, too, esp. when contracting with government.

Meanwhile, government fails to control overcharges, cronyism, waste, etc. and, in fact, is sometimes complicit in same.

And, yes, the citizenry expects government to provide goods and services without charging or taxing.

Toxic combo on the part of government, contractors and the citizenry. Sometimes, all three should be smacked upside the head.