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To Lake County:
Caveat Emptor - County Still Paying
The good times just keep coming for Jefferson County, Alabama. [Last year editor Matt Taibbi did a story for Rolling Stone about Wall Street's sacking of the Birmingham, Alabama region] -- As a result of being roped into a series of deadly swap deals by a number of banks, most notably JP Morgan Chase, that left the county billions of dollars in debt over financing a new sewer system.
It all started with the Cahaba River, the longest free-flowing river in the state of Alabama. The tributary, which winds its way through Birmingham before turning diagonally to empty out near Selma, is home to more types of fish per mile than any other river in America and shelters 64 rare and imperiled species of plants and animals. It's also the source of one of the worst municipal financial disasters in American history.
Back in the early 1990s, the county's sewer system was so antiquated that it was leaking raw sewage directly into the Cahaba, which also supplies the area with its drinking water. Joined by well — intentioned citizens from the Cahaba River Society, the EPA sued the county to force it to comply with the Clean Water Act. In 1996, county commissioners signed a now-infamous consent decree agreeing not just to fix the leaky pipes but to eliminate all sewer overflows — a near-impossible standard that required the county to build the most elaborate, ecofriendly, expensive sewer system in the history of the universe. It was like ordering a small town in Florida that gets a snowstorm once every five years to build a billion-dollar fleet of snowplows.
The genesis of the whole affair was a sewer project that crooked local pols turned into a $3 billion money pit; when they turned to Wall Street to help finance their way out of the cost overruns, the banks leaned on the County to take on a series of swap deals that essentially pushed the debt into the future, but at geometrically increasing cost. Among other things, the banks worked through middlemen who bribed the local commissioners into taking the toxic deals. As a result of all of this, Jefferson County not only ended up saddled with an astronomical debt service on its sewer project, it also saw a downgrade in its overall credit rating, which left it paralyzed in its attempts to borrow money to pay for general expenditures.
Those financial chickens are now coming home to roost. Some of the people I spoke with during that story have been in touch lately to give me the gruesome updates. The most recent news is that the County is closing four courthouses in an attempt to save $21 million a year. Beyond that, there has been a spate of ugly news stories. A local judge recently appointed a New Jersey Water Works executive named John Young to serve as the receiver for the JeffCo sewer system. The appointment of the receiver came at the behest of Bank of New York Mellon, the trustee for most of the county's debt -- Young's job will be to jack up sewer rates in order to pay off the $515 million of sewer debt the city defaulted on.
I got a number of outraged emails from County residents who noted that Young's salary will be $500 an hour. This unelected official will be paid $4000 a day for the job of raising sewer rates on citizens who never once voted for a new sewer project, never voted to accept any of the swap deals, and in general were deprived of any input into any of the financing messes once the few elected officials who were involved started taking bribes from the banks.
It gets better. In yet another ugly twist to the story, the company that provided the insurance for the county's insurance debt, Syncora, is suing both the county and JP Morgan Chase for fraudulently inducing the firm to insure the county's debt. The company certainly has a point and it is clear that there was fraud on all sides of this deal -- but the problem is that if JP Morgan loses the case, it is now saying that it will demand $400 million from the county as reimbursement for any future legal penalties.
My view on all of this is that the citizens of Jefferson County were defrauded by two groups of bad actors: the banks offering these deadly swap deals, and the politicians they bought off to accept them. Because criminal fraud has already been proven in court -- a number of defendants, including several county commissioners from the time period in question, have already been sentenced to many years of jail time for bribery and other charges -- I'm at a loss to understand how any court can justify continuing to enforce these toxic deals post factum.
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Excerpts from: Matt Taibbi, Rolling Stone. April 7, 2011
Jefferson County, Alabama: Screwed By Wall Street, Still Paying
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