Bankruptcy in Alabama

Jefferson County, Alabama, which includes Birmingham, has filed for bankruptcy, the largest such default in US history. The county owes $4 billion that it cannot make payments on or refinance. This story connects in neat ways to many of America's recent and long-term problems:

1) Infrastructure. The ultimate cause of the bankruptcy was the need to maintain and upgrade the county's aging sewer system. America's aging sewers need hundreds of billions of dollars in repairs and improvements, but cities and states say they don't have the money to pay for them.

2) Pollution. The immediate spur for the recent sewer upgrade push was a court ruling finding the county in violation of the Clean Water Act. Americans all want a cleaner environment but are not enthused about paying the cost.

3) Sprawl. One of the reasons the Jefferson County sewer system was in financial trouble was that zoning rules allowed many new developments to be built with individual septic systems rather than connecting to the county sewers, provided the lots were big enough. I know nothing about these particular developments, but in other parts of America development done in this way has led to time bombs of sewage buildup in the ground. But insisting on sewer hookup increases the cost of new housing and is seen by many builders and their friends in government as "anti-development." Encouraging large house lots through rules like this one also encourages sprawl.

4) Wall Street Shenanigans. To quote Bloomberg:

Jefferson County was a victim of the credit crisis in 2008. The sewer system’s floating-rate securities were coupled with interest-rate swaps, in which two parties make periodic payments based on an underlying measure of borrowing costs. The contracts, arranged by New York-based JPMorgan, were supposed to save money by offsetting the floating rates the county paid and giving it a fixed rate that was lower than on traditional bonds. The strategy backfired in early 2008 as the subprime-mortgage market meltdown sent ripples through Wall Street undermining the credit ratings of companies that insured Jefferson County’s bonds. Investors dumped the bonds and the county’s interest costs soared. When banks demanded early payoffs of the bonds, the county defaulted. The swaps exposed the county to hundreds of millions of dollars in fees to refinance.

So once again the master salesmen of Wall Street persuaded somebody that he could get something for nothing -- lower rates, in this case -- while not mentioning the downside risk. Or maybe the risk was explained and the county's leaders decided to be bold and take that risk on.

5) Corruption. Maybe the county's decision to go with this particular investment strategy wasn't just a stupid mistake. Bloomberg again:

Former Commissioner Larry Langford was convicted of accepting bribes in connection with the sewer financing, and two associates pleaded guilty in the scheme.

Two former bankers at JPMorgan are fighting a U.S. Securities and Exchange Commission lawsuit alleging that they made $8 million in undisclosed payments to friends of commissioners to secure a role in the deals. JPMorgan separately agreed to a $722 million settlement with the SEC.

6) Pettifogging Legalism. You might think that since people have already gone to jail as a result of corruption surrounding this deal, maybe JP Morgan, the beneficiary of this corruption, might be expected to pony up for the losses? Apparently not. Even if Morgan's salesmen go to prison, the county is still on the hook for the loss. How this can be, I do not know, but that seems to be the upshot of the legal wrangling so far. Only through bankruptcy can the county's taxpayers escape from debts that were magnified by corrupt and probably illegal dealing.