State authorities last week seized more than $300 million worth of assets from four banks, chief among them JPMorgan Chase, Jefferson County’s primary creditor. Prosecutors have accused bank employees of defrauding the government with derivative transactions called interest rate swaps.
Built on billions of dollars in bond debt, the swaps were supposed to save the government interest rate payments, but the only apparent result was as much as $130 million in fees for the bankers and consultants working the deals. Authorities are investigating whether the banks participated in kickback schemes with local officials in exchange for the bond business.
Even if the deals were done in good faith, state law prohibits using swaps to gamble on interest rates. A municipal government may only use swaps to save money, and authorities claim the banks ran afoul of that law. Prosecutors seized the banks assets to protect the government in case the banks are found guilty of fraud.
If any this sounds close to home, it isn’t.
That is unless you live in Milan, Italy.
Last week a Milan prosecutor, Alfredo Robledo, began a legal offensive against the banks. Smaller government and private entities around the world are suing the same banks Jefferson County has dealt with for pulling them into these schemes.
It’s apparent that JP Morgan Chase, among other Wall Street banks, wasn’t giving Jefferson County special treatment. If it makes anyone here feel any better, we weren’t the only ones to get duped. It happened all over. Jefferson County is significant merely because of the scale of its mistake. In Pennsylvania, Oregon, Indonesia and Italy, governments got taken.
But there’s another difference worth noticing. When these other folks got ripped off, they haven’t all surrendered the way we have. In the world of high finance, Jefferson County gives up faster than … well … the Italians.
So what is Jefferson County doing?
That’s hard to tell. Watching the county deal with its debt is like watching a tree sloth break-dance.
Right now the county’s plan of action is to let the Alabama Legislature deal with it. In a three-two vote last week, the county commission asked the Alabama Legislature to extend a one-percent sales tax originally meant for funding school construction. Rather than letting that tax sunset, the new money would go toward paying down the county’s debt. Under Alabama law, the county cannot reconfigure the tax itself.
Unfortunately, watching the Legislature deal with a problem like this is like watching tree sloth fight (except for Sen. Charles Bishop, who can really throw a punch). Despite a lot of lobbying from the court-appointed special masters, the Legislature seems unlikely to pass a tax hike to pay for the county’s mistakes.
Rep. John Rogers said last week that he had told one of the special masters he would round up the House Democrats to support the tax hike if five Republicans would support the tax hike, too. Give Rogers credit. He has a talent for killing bills while pretending to keep them alive.
U.S. District Judge David Proctor, who appointed the special masters, is waiting to see what the Legislature does. If the Legislature does nothing, Proctor will likely appoint a receiver to run the county sewer system. At one time, this was thought to be a game-ending event. The term “receiver” sounds benign enough, but the receiver’s function is akin to that of a court-appointed dictator. Whatever the receiver says, that’s what the county does, unless the county wants to face contempt charges.
However, give the county lawyers a little bit of credit (but only a bit). They discovered an esoteric point of law called the Johnson Rule Act. It says that a federal court cannot have rate-making authority over a public utility. That means, even if Proctor appoints a receiver, that receiver will not be able to hike the county’s sewer rates. With that decision, the urgency and risk for the county in court evaporated. Before Proctor’s decision, putting the county into receivership would have forced it into bankruptcy, but not anymore. If the county wants, it can turn the office keys over to the receiver and invite him or her to do a better job. And no matter how much more efficiently a receiver runs the sewer system, the savings will not scratch the $3.9 billion of debt the county owes its creditors.
Commission President Bettye Fine Collins says that, if the Legislature doesn’t pass the sales tax extension, the county could be forced into bankruptcy. I’m not sure I agree. In fact, absent a push by the bond insurers in state court to appoint a rate-making receiver, I’m not sure the county has to do anything but pay what it can when it can. The county is contractually obligated to pay its creditors the net sewer revenues. It’s doing that now.
(However, if the Legislature fails to renew the occupational tax, the county could be thrown into bankruptcy instantly.)
JPMorgan Chase could come at the county with a legion of lawyers, but I doubt that will happen either. The bank disclosed in its annual report that it is being investigated by the Justice Department and the Securities and Exchange Commission. The county won’t fight the banks unless it’s forced to, but if forced to, the county might win, so it’s foolish for the banks to take that risk.
For the last year, I feel like I’ve been one of those street-corner sandwich-board prophets proclaiming, “The End is Near!” Perhaps I should have said instead, “The End is Near-ish.”
I’ve prognosticated this crisis sending the county into one abyss or another. Instead, it is in Limbo. The good news is we’re probably not going to Hell, but the bad news is that we’re not going to Heaven either. The end isn’t near. In fact, this could keep going on forever.
War on Dumb is a column about political culture. Write to firstname.lastname@example.org