The Largest U.S. Municipal Bankruptcy Looms in Alabama. What caused this mess is an interest rate swap Jefferson County officials entered into when they financed a $3.2 billion sewer cleanup. For weeks county officials claimed they would work things out, but that is increasingly unlikely. Let’s pick up the story from Bloomberg.
Talks on the sewer system’s debt crisis aren’t making progress, increasing the odds that the county will file municipal bankruptcy, Jefferson County Commission President Bettye Fine Collins said Tuesday.
This is how it ends for the little county that was going to teach America how to use interest-rate swaps. The Jefferson County bankruptcy, if it comes, and it’s hard to see how it can be avoided, will eclipse that of the 1994 filing by Orange County, California. Derivatives are at the center of both death-spirals.
Jefferson County played the derivatives game as part of financing a $3.2 billion sewer cleanup. The county engaged in a batch of interest-rate swaps with the banks that helped underwrite the debt, in a strategy designed to save the county and its taxpayers some money. The strategy backfired, demonstrating the speculative, risky nature of swaps.
Jefferson County In Default
Jefferson County failed to post $184 million in collateral in early March and has been in technical default since then. JP Morgan and other investment banks are on the other side of the swaps.
The investment banks want Jefferson county to raise taxes to cover its obligations. Jefferson County wants the Wall Street brokers to renegotiate the swaps and insists it will not raise taxes.
“We are dealing with a virtual immovable force on Wall Street” the Birmingham News quoted Jefferson County Commission President Bettye Fine Collins as saying.
According to Joe Mysak at Bloomberg, the SEC is investigating this deal as part of a larger probe into the reinvestment-of-proceeds business across the municipal market in general. “This has been going on for years, but there are signs it will erupt with a barrage of criminal prosecutions.“
Mysak goes on to say “The stock-market guys say you have to reach a bottom before you can recover, and that a bottom is often signaled by the collapse of some big entity. Many people thought it was Bear Stearns Cos. In reality, it’s Jefferson County.“
On that I say “No Chance”. There are $45 trillion credit default swaps, and over $500 trillion total derivatives, so expecting a default on tiny deal of $3.2 billion to mark any sort of bottom is strikingly Pollyannaish.
Mike “Mish” Shedlock
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