Category Archives: Jefferson County

Three days and counting. That’s the time remaining before Jefferson County Commission must decide whether it will pursue more talks with creditors over a $3.2 billion sewer bond debt or opt for the largest-ever U.S. municipal bankruptcy.

The problems for Jefferson County, Alabama, date back to the 1990s, when the county began a huge upgrade of its outdated sewer system. Acting on the recommendations of consultants from JP Morgan and others, the county entered into a series of disastrous deals that involved complex and risky variable-rate investments, auction-rate debt and interest rate swaps.

The deals later backfired, and the county became stuck with huge loan payments. Meanwhile, then-Birmingham Mayor Larry Langford and a former president of the Jefferson County Commission, ex-Commissioner Chris McNair and others were convicted of rigging the transactions responsible for Jefferson County’s financial downfall.

In 2009, the Securities and Exchange Commission (SEC) charged JP Morgan Securities and two of its former managing directors – Charles LeCroy and Douglas MacFaddin – for their roles in an unlawful payment scheme that allowed them to win business involving municipal bond offerings and swap agreement transactions with Jefferson County.

As part of the settlement, J.P. Morgan agreed to forfeit $647 million of interest-rate swap termination fees, as well as pay a penalty of $25 million to the SEC and $50 million restitution to Jefferson County.

Interest-rate swaps have become synonymous with toxic investments for a growing number of states, cities and towns across America. States and local governments initially turned to the exotic financial instruments as a way to boost their budgets. Instead, many have found themselves pushed to the brink financially and forced to cut basic services like public transportation and sanitation.

An interest-rate swap is a contract between a bond issuer such as a school district or a state or city government and an investment bank. Both parties involved in an interest-rate swap transaction essentially “bet” on the movement of interest rates. Whichever party guesses wrong ends up paying. How much is paid or lost depends on several factors, including the size of the debt and current economic conditions.

When the housing industry started to crumble in 2007, followed by the downturn in the financial markets, interest-rate swap deals quickly began to sour for many state and local governments. Case in point: the Denver school system.

Denver schools turned to interest-rate swaps in 2008 on the advice of JPMorgan Chase and the Royal Bank of Canada. The deal was supposed to eliminate a $400 million pension fund gap for the school system. Instead, it caused a financial drain on Denver’s already-strapped budget. So far, Denver schools have paid $115 million in interest and other fees – an amount that’s at least $25 million more than what was initially envisioned.

Escaping an interest-rate swap is not easy or cheap. As reported Aug. 6 by the New York Times, Denver schools must pay the banks $81 million in termination fees, or about 19% of the system’s $420 million payroll.

Wisconsin is in a similar boat. Several years ago, s group of five school districts invested in derivatives as a way to boost returns to a joint pension fund. They now face losses of nearly $200 million, with the retirement system close to bankruptcy. A lawsuit has since been filed against the financial institutions behind the deal, Stifel Nicolaus & Co. and the Royal Bank of Canada (RBC).

Perhaps the most publicized case involving interest-rate swaps is that of Jefferson County, Alabama. As in the Denver school system, JP Morgan was the bank that arranged the Jefferson County deal, which entailed refinancing the Jefferson County sewer system in 2002 and 2003 with $5 billion in interest-rate swaps. Far from the money-saving investment proposed by the bankers, the deal nearly bankrupted Jefferson County.

If you have a story to tell involving interest-rate swaps, please contact a member of the securities fraud team at Maddox, Hargett & Caruso.

Mired in debt and still facing the nation’s largest municipal bankruptcy, Jefferson County, Alabama, has made little headway to solving its sewer debt crisis. At the center of controversy are members of the Jefferson County Commission, whom many say have let personal issues take a front seat to finding a solution for the ongoing sewer fiasco.

Problems for Jefferson County began seven years ago, when county commissioners entered into an ill-fated arrangement with Wall Street banks to refinance $3.2 billion worth of bonds for a sewer system overhaul. The deal involved highly complex interest-rate swaps that were supposed to protect Jefferson County from rising interest rates on its sewer bonds. Instead, the county faced double-digit interest rates and calls from creditors for the early repayment of the borrowed money. In the process, Jefferson County commissioners turned over $120 million in fees – six times the prevailing rate – to JP Morgan and other financial institutions.

With bankruptcy looming, Alabama Governor Bob Riley struck a deal with the county’s creditors in September 2008 to restructure the county’s $3.2 billion sewer debt at lower, fixed interest rates over a longer term.

Since then, however, a permanent solution to the county’s sewer issue has yet to emerge. Meanwhile, costs continue to climb.

As reported Feb. 12 in the Birmingham News, Jefferson County’s sewer system generates about $138 million a year from customers after paying for system operations. Under terms of the various deals, Jefferson County finance officials estimate they would owe $577 million in debt service this fiscal year alone. By comparison, the county estimated it would need just $125 million annually to cover debt service at the beginning of 2008.

In addition, the county has paid about $5 million for legal and financial advice since last February. Then there’s the cost to get out of those complex interest-rate swaps that the county used to protect itself against rising interest costs on its sewer debt. That has mushroomed to $608 million from about $180 million in March 2008.

As for Jefferson County residents, they’ve also paid the price for the sewer debacle and the fiscal bungling of elected public officials. Sewer rates have skyrocketed over the past decade in Jefferson County, rising more than four-fold. In late December, county commissioners wisely decided to veto yet another sewer-rate increase that would have gone into effect Jan. 1, 2009, and increased sewer charges by nearly 400%.

Meanwhile, the sewer problem continues. Instead of coming up with solutions, the Jefferson County Commission tried to hire a Washington, D.C. lobbying firm to the tune of $1 million to secure federal bailout dollars to pay down the county’s sewer debt. Perhaps in all their misplaced wisdom, commissioners didn’t hear that President Barack Obama takes a hard line on corporate lobbyists.

As it turns out, the lobbying outfit that commissioners wanted to hire, Book Hill Partners, walked away from the controversial contact last week.

Our securities lawyers are actively involved in advising individual and institutional investors in evaluating their legal options when confronted investment losses.