Jefferson County, Alabama, is in the crapper. Literally. In what is likely to be one of the biggest muncipal bankruptcies ever, the county has found itself stuck with a massive pile of debt, including $3 billion from sewer projects.
The fact that the county’s decision to buy interest-rate swaps backfired is well documented. But what’s startling is the failure of regulators.
Naked Capitalism points out that red flags were going up as early as 2005:
Langford said in 2005 that the swaps would save $214 million — an assumption based on the county and its bond insurers maintaining their credit ratings…
The county later hired financial adviser James White of Birmingham-based Porter, White & Co., who estimated that the commission’s cost for the swaps, $120.2 million, was as much as $100 million too high, based on prevailing rates.
It doesn’t end there, though. The SEC was already probing Jefferson County back in 2004 over its swap deals and had plenty of time to correct this mess.
Less than 15 per cent of $391 billion in new debt offerings were sold last year on the basis of public bidding — down from 83 per cent of new sales in 1970. Most issues are now negotiated, meaning borrowing costs are set in private bargaining sessions.
In Jefferson County, the resulting opacity was a gateway to corruption, according to documents filed in Langford’s case. The Securities & Exchange Commission began probing the county’s swaps in 2004; the Federal Bureau of Investigation started inquiring later. In June 2007, SEC investigators deposed Langford in Miami about whether he used the sewer-debt refinancings to pay off political friends.