At long last, and in what will be the largest municipal bankruptcy in history, Jefferson County Alabama is poised to file bankruptcy, but only after county officials attempted to stick it to taxpayers one last time.
Jefferson County, Alabama, which may vote in two days to file a record U.S. municipal bankruptcy, hired attorneys who represented Orange County, California, when it sought protection from creditors in 1994.
County commissioners voted 5-0 today to retain Kenneth Klee and his Los Angeles firm Klee, Tuchin, Bogdanoff & Stern LLP. The commissioners have scheduled a July 28 meeting in which they may decide to seek bankruptcy protection, extend negotiations with creditors on restructuring more than $3 billion of sewer bonds or approve a settlement.
Creditors including JPMorgan Chase & Co. (JPM) and bond insurer Syncora Guarantee Inc. haven’t responded to a county proposal to reduce its debt obligation to about $2 billion, while raising sewer rates by 8 percent for the next three years, commissioners said. The county will likely enter bankruptcy if creditors don’t respond this week, they said.
“My constituents are saying pull the trigger,” Commissioner Sandra Little Brown said at a meeting.
The county, home to Birmingham and more than 658,000 residents, has been under fiscal stress for more than three years after a sewer-bond refinancing collapsed during the credit crisis. Its woes intensified when the Legislature refused to act after a court struck down a local occupational tax in March. The tax generated about a quarter of Jefferson’s general-fund revenue, and losing it forced officials to put more than 500 employees on unpaid leave.
Previously, debt holders and companies that insure the bonds proposed refinancing as much as $2.4 billion and raising sewer fees more than 25 percent for at least three years.
Commissioners have said they will reject any proposal that requires them to raise sewer revenue by 10 percent or more.
Death Spiral Swaps
This sad saga should have ended three years ago. It has been so long ago now that most have probably forgotten about the fraud involving JPMorgan that is at the center of the saga.
Flashback April 12, 2008: Jefferson County Death Spiral Swaps
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.
Fraud Involving JP Morgan
Flashback May 23, 2008: Fraud, Antitrust Investigation Involving JPMorgan, Jefferson County
Jefferson County Alabama is back in the news with a Fraud probe involving JPMorgan.
On May 22 Bloomberg reported JPMorgan Swap Deals Spur Probe as Default Stalks Alabama County.
Like homeowners who took out mortgages they couldn’t afford and didn’t understand, Jefferson County officials rejected fixed- rate debt and borrowed instead at rates that varied with the market.
The county paid banks $120 million in fees — six times the prevailing rate — for $5.8 billion in interest-rate swaps. That was supposed to protect the county from rising rates for their bonds. Lending rates went the wrong way, putting the county $277 million deeper into debt.
Bankers who worked for New York-based Bear Stearns Cos. and JPMorgan when Jefferson County bought its swaps have been told they might face criminal charges under an antitrust investigation of the municipal derivatives industry, according to records filed with the Financial Industry Regulatory Authority Inc.
On April 30, the SEC sued Larry Langford, the former county commission president and now Birmingham’s mayor, for fraud in allegedly accepting $156,000 from a local banker while refinancing the sewer debt.
JPMorgan, Bank of America, Bear Stearns, and Lehman Brothers Holdings Inc. charged Jefferson County about $50 million above prevailing prices for 11 of the interest-rate swaps the county bought between 2001 and 2004. None of the fees were disclosed to the commissioners, records show.
Porter, White & Co., the Birmingham-based financial advisory firm later hired by the county to analyze its swaps, said the banks raked in as much as $100 million in excessive fees on all 17 of its swaps.
At least four JPMorgan bankers who worked for the bank at the time Jefferson County deals were done, including Douglas MacFaddin, the former head of municipal derivative sales, have been told by the U.S. Attorney’s office that they could face criminal charges, records show. MacFaddin, who was fired in March, couldn’t be reached for comment.
Clear Case Of Fraud
I am not an attorney but the facts presented suggest there is a clear case of fraud. Jefferson County should walk away from those deals and/or sue JPMorgan for fraud and antitrust violations.
JPMorgan for its part would be smart to absolve Jefferson County of those deals because there is no way for it to win. Even if JPMorgan won a lawsuit vs. Jefferson County, the county could simply declare bankruptcy.
County Officials Stick it to Taxpayers
Jefferson County should have declared bankruptcy three years ago.
Instead they opted to stick it to taxpayers with a 10% fee hike. Moreover, they passed a local occupational tax that thankfully the courts struck down.
It is amazing what lengths politicians are willing to go to blatantly screw taxpayers even in clear cases of fraud.
Striking Similarities to Greece
Parallels to Greece are striking. Greece should have defaulted 3 years ago. Via preposterous can-kicking exercises, all of which screwed taxpayers, EU officials prolonged the taxpayer agony as well as increased the total pain.
Greece defaulted anyway.
Now, unless Jefferson Country officials and JPMorgan come up with an agreement to screw taxpayers once again, this sad saga is finally headed where it should have been three years ago – bankruptcy court.
How many JP Morgan bankers were convicted in criminal court of fraud?
How many tens-of-millions of dollars of taxpayer money did Jefferson County waste in these last three years?
I do not have the answer to that but I can answer this pertinent question: “How many JPmorgan bankers were convicted in criminal court of fraud?”
The answer is none.
Straight from a SEC press release, please consider J.P. Morgan Settles SEC Charges in Jefferson County, Ala. Illegal Payments Scheme
Washington, D.C., Nov. 4, 2009 — The Securities and Exchange Commission today charged J.P. Morgan Securities Inc. and two of its former managing directors for their roles in an unlawful payment scheme that enabled them to win business involving municipal bond offerings and swap agreement transactions with Jefferson County, Ala. This is the SEC’s second enforcement action arising from Jefferson County’s bond offerings and swap transactions.
J.P. Morgan Securities settled the SEC’s charges and will pay a penalty of $25 million, make a payment of $50 million to Jefferson County, and forfeit more than $647 million in claimed termination fees.
The SEC alleges that J.P. Morgan Securities and former managing directors Charles LeCroy and Douglas MacFaddin made more than $8 million in undisclosed payments to close friends of certain Jefferson County commissioners. The friends owned or worked at local broker-dealer firms that performed no known services on the transactions. In connection with the payments, the county commissioners voted to select J.P. Morgan Securities as managing underwriter of the bond offerings and its affiliated bank as swap provider for the transactions.
J.P. Morgan Securities did not disclose any of the payments or conflicts of interest in the swap confirmation agreements or bond offering documents, yet passed on the cost of the unlawful payments by charging the county higher interest rates on the swap transactions.
“The transactions were complex but the scheme was simple. Senior J.P. Morgan bankers made unlawful payments to win business and earn fees,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.
Glenn S. Gordon, Associate Director of the SEC’s Miami Regional Office, added, “This self-serving strategy of paying hefty secret fees to local firms with ties to county commissioners assured J.P. Morgan Securities the largest municipal auction rate securities and swap agreement transactions in its history.”
According to the SEC’s complaint filed against LeCroy and McFaddin in U.S. District Court for the Northern District of Alabama, the two former managing directors demonstrated in taped telephone conversations that they knew the payments to local firms with ties to county commissioners were designed to obtain business for J.P. Morgan’s broker-dealer and affiliated bank. LeCroy and MacFaddin referred to the payments as “payoffs,” “giving away free money,” and “the price of doing business.”
J.P. Morgan Securities agreed to settle the SEC’s charges without admitting or denying the allegations by paying $50 million to the county for the purpose of assisting displaced county employees, residents and sewer rate payers; forfeiting more than $647 million in termination fees it claims the county owes under the swap transactions; and paying a $25 million penalty that will be placed in a Fair Fund to compensate harmed investors and the county in the municipal bond offerings and the swap transactions.
And so here we are, where we should have been three years ago, minus the fraud convictions, minus the fact these entire deals should have never have transpired in the first place, and minus the fact these deals should have been immediately negated in entirety once the fraud was exposed.
Mike “Mish” Shedlock
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