The good times just keep coming for Jefferson County, Alabama. Last year I did a story for Rolling Stone about Wall Street's sacking of the Birmingham, Alabama region -- the city was 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.
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.
If you give some teenager a hundred bucks and a Game Boy to buy a fur coat from your department store using his mother's credit card, are you really going to demand payment after you get caught? To me the banks made this bed, they should have to lie in it.