After losing millions on derivatives, Jefferson County, Alabama, employs the rube defence. This sounds unfair: JP Morgan almost certainly didn’t understand the products, either. Bloomberg:
At least seven former JPMorgan bankers are under scrutiny in a Justice Department criminal investigation of whether banks conspired to overcharge local governments on swaps and other derivatives. JPMorgan also led a group of banks that charged $120 million in fees for such deals in Jefferson County, Alabama. That was as much as $100 million too high, the county’s former adviser said.
Wall Street marketed unregulated derivatives as a way for municipalities to save money. The financing, which local officials across the country have said they didn’t understand, backfired this year as fallout from the global credit crisis caused borrowing costs to soar. Now, Jefferson County can’t afford its monthly payments and JPMorgan may be left holding defaulted debt.
JP Morgan now says that it will exit the municipal derivative market, a $2.6 trillion market, because the “risk/return profile for this business is such that the returns no longer justify the level of resources we have allocated to it,” according to a memo written by muni bonds boss Matt Zames.
Jefferson County isn’t JPM’s only alleged victim. The Erie Pennsylvania School District is also suing JPM for overcharging on its fees. Perhaps JPM has decided that getting accuesed of swindling small towns results in more bad puclicity than it’s worth.
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