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Last year, we talked at length about the problems associated with Jefferson County, Alabama, a place in the south that ended up owing billions to JP Morgan for crappy interest rate swap deals it entered into to ease the debt burden of a flawed sewer project.Jefferson County ended up owing millions in fees for doing the swap deals and JP Morgan settled with the SEC by paying $50 million.
Now Rolling Stone’s Matt Taibbi has decided to do a piece on the situation and boy is it a long one, but very worth reading.
Taibbi carefully crafts a story of corrupt Wall Street bankers going after small-town Alabama that involves everything from bribery to derivatives chicanery.
The timeline is as follows: Sewer system spews crap into Cahaba River in Alabama. Environmentalists lobby and the EPA clamps down on Jefferson County. Jefferson County in turn decides to overhaul the entire sewer system. Politics and corruption take the price from $250 million to over $3 billion. JPMorgan artfully becomes the lead player in the deal, using its political connections. Debt becomes too much for county. County then goes back to JP Morgan and enters into several swap agreements which end up costing them more than they originally owed. JP Morgan and wheeler-dealer Bill Blount get busted by SEC and pay big fines to settle.
Now that you’ve got the gist of it, here are some choice points from Taibbi’s piece, which is appropriately titled “Looting Main Street“:
- Birmingham, Alabama resident Lisa Pack had to talk other laid-off coworkers out of suicide. “I’d be on the phone sometimes until two in the morning,” she says. “I had to talk more than one person out of suicide. For some of the men supporting families, it was so hard — foreclosure, bankruptcy. I’d go to bed at night, and I’d be in tears.”
- Total cost: more than $3 billion due to pay-to-play contracts and political padding.
- Synthetic interest rate swaps to ease debt repayment ended up costing the county a lot of money. It just ended up postponing the problem rather than actually dealing with it. County officials wanted to make sure they weren’t tarnished in the next election year.
- A wheeler-dealer named Bill Blount took bribes to allow deals to be pushed through. Compensation from this fiasco netted him about $3 million. Says one JP Morgan banker who worked with Blount: “It’s a lot of money, but in the end, it’s worth it on a billion-dollar deal.”
- JP Morgan paid Goldman Sachs $3 million just to “back the fuck off” so they could be the sole firm in the county doing business, an apparent violation of pro-competition laws. Blount took in $300k from that deal.
- Everyone was in on the bribery and illegality of these deals. A bunch of investment banks including Lehman and Bear, contractors, politicians, city planners.
- Advisor on deals was a firm called CDR Financial Products, which came under hot water for signing off on shitty financial products and being a “big-league version of Bill Blount.”
- Jefferson County at one point had more swap deals than New York City and had done at least 23 of them.
- When Jefferson County defaulted on its swap payments, JP Morgan canceled the deal and charged a termination fee of $647 million. The SEC ultimately canceled the fee after charging JPM with fraud. Blount has since been found guilty of bribing officials and is now in jail.
All in all, it’s a really engaging piece about the corrupt system of municipalities around the United States.
And the upshot is that just about every municipality in the country has worked its way into trouble and will pass on their mistakes and bad decisions onto the taxpayer.
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