Financial Armageddon Could be Coming to a County Near You

Jefferson County in Alabama is now on track to potentially become the largest municipal bankruptcy filing since Orange County, California, lost $1.6 billion on derivatives in 1994. All it’s taken is a swashbuckling local politician, some synthetic bond derivatives served up piping hot from JP Morgan Chase, and a few aggressive and short-sighted bets.

Fittingly, the blunder took place in the sewage game. It began when the current mayor of Birmingham, Larry P. Langford, was Jefferson County commission president in 2003 and 2004. He made an agreement with JPMorgan Chase that he believed could reduce their interest rate costs. The county was told by the federal government to fix sewers that had been polluting the local watershed and the expensive $3.2 billion project was to be partly financed in tax-exempt bonds that, at the time, were at a 30-year low.

Instead of moving forward with the fixed rate, JP Morgan Chase bankers won support, largely through $12,000 in clothing and luxury good bribes for Langford, for a “synthetic fixed rate.” It’s unclear how well the scheme could have worked if all had gone according to plan but, in reality, it failed disastrously when the credit crisis hit and crippled the county’s bond insurer ratings.

As a result of the failed bond scheme, Jefferson County is left saddled with debt, had an occupational tax that generated 25 percent of the county’s revenue struck down, had roughly 1,000 county employees furloughed, and has a local politician in court-issued leg irons.

The consequences are immediate and severe. The sewer system already charges customers about 300 percent more for various services than it did a decade ago, and its annual bills are roughly twice the national average.

The Jefferson County taxpayer had no hand in arranging the debacle, but now bears the brunt of it. The financial shenanigans at the top of the local political pyramid are have made sewage services more expense and the shortfall there will likely snowball into other country cutbacks. It’s just one local story, but it’s bound to have numerous different but similar faces in municipalities across the nation.

In-depth coverage from Bloomberg offers many more sordid details about financial Armageddon in Alabama.

The Daily Reckoning