Business Insider.com has posted an article that discusses how Jefferson County, Alabama has ended up owing JP Morgan billions of dollars for “for crappy interest rate swap deals it entered into to ease the debt burden of a flawed sewer project.” The county ended up owing millions in fees alone; JP Morgan settled for $50 million.
The whole thing seems to have started after the sewer system spilled waste into the Cahaba River, which triggered environmentalists to lobby and made the EPA pressure Jefferson County into repairing the sewer system. The county decided to go ahead and repair the whole system. The project was originally slated to cost $250 million, but thanks to politics and corruption the final price tag ended up being about $3 billion. The county went too far into debt and entered into several swap agreements with JP Morgan, hoping to alleviate some of the debt, but that ended up costing more than what was originally owed.
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 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.
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