Sordid Jefferson County, Alabama (Birmingham) Bankruptcy May Come to a Sort of Reasonable Conclusion

Government Officials End Up in Jail, Bankers End Up . . . Not in Jail

The debacle that was Jefferson County, Alabama's attempt to build a huge sewage treatment plant resulted in billions of dollars of debt that the County could not pay and a filing of bankruptcy on the part of the county.  Like most financial scandals, this one is complex and complicated, but much of it can be laid at the feet of corrupt municipal officials and J. P. Morgan, who handled much of the transaction.

Butch Dill/Associated PressProtesters demonstrated outside the Jefferson County courthouse in Birmingham, Ala., in 2011 when commissioners were considering bankruptcy. The county on Tuesday reached a deal to refinance most of the sewer debt at the center of its financial collapse.

The short story is that the county, to comply with Federal clean water regulations built a sewage treatment facility using “creative” financing designed by J. P. Morgan, who earned huge fees from the deal.  The whole project was rife with corruption and now pubic officials are in jail.  The county is in municipal bankruptcy and a plan to reorganize is now being considered.

The terms call for these creditors to receive about $1.84 billion for the $2.4 billion of debt they now hold. The concessions were weighted most heavily toward JPMorgan, the term sheet said, “to increase the recovery of other sewer creditors.”

The bank is giving up $842 million, or about 70 percent, of the face value of its debt, according to people briefed on the negotiations. Just before declaring bankruptcy in 2011, the county abruptly rejected a previous package of concessions that called for JPMorgan to give up about $750 million.

Why is J. P. Morgan losing so much?  Well here’s why.

JPMorgan was widely expected to make big concessions as part of any bankruptcy settlement, because some former officials of the bank were found to have been involved in improprieties in connection with a county debt refinancing in 2002 and 2003. That refinancing involved a complex package of variable-rate bonds and derivatives called interest-rate swaps.

A lawsuit by the county against JPMorgan over the improprieties, still active in state court, would be resolved as part of the proposed agreement. In 2009, JPMorgan agreed to forgive all the termination fees the county owed on the swaps, or about $647 million, to settle a complaint from the Securities and Exchange Commission. The bank also paid the county $75 million under the same settlement.

Oh, and how many J. P. Morgan bankers are going to jail?  About as many as you would think.

Despite those concessions, residents of Jefferson County have still often complained that they were treated inequitably because several of their elected officials went to prison as a result of the refinancing, while no one from the bank was convicted of a crime. They have railed in particular against the possibility that their sewer rates would go up to allow the county to pay sewer debt that many now see as illegitimate.

See bankers don’t go to jail for this sort of thing.  On Wall Street the whole thing is considered clever business, and if a bank gets caught out every now and then, well that’s just a cost of doing business.

As for the citizens complaints about having to pay higher sewer rates, well folks, you elected the crooks and clowns that did all of this.  There are consequences.