11.14.2011 0

Jefferson County’s courage to default

Jefferson County SealBy Robert Romano — When Jefferson County, Alabama took out $5.8 billion of interest rate swaps in 2003 through JP Morgan with no competitive bidding to help pay for a $3.2 billion bond to finance a sewer project, it was supposed to save the county money on interest. Instead it wound up with much higher interest payments than had been anticipated when the recession hit and rates jumped.

The whole thing, up to and including the sewer system, stinks to high heaven.

The end result, according to Bloomberg News, was $120 million of fees at six times the prevailing rate and $277 million of additional debt for the county. For years, the county as a result has tottered on the verge of bankruptcy until finally, on Nov. 9, it voted 4-1 to officially file for Chapter 9 protection.

It was either that or a settlement with JP Morgan that would have required three annual sewer-rate increases as high as 8.2 percent, followed by annual hikes after that of no more than 3.25 percent. Not only that, but it would have required the state legislature to enact so-called “moral obligation” backing for new sewer debt and the creation of a government utility service commission to manage it.

And to add insult to injury, the proposed settlement called for a wage tax that had been struck down by a local judge to be reenacted.

In other words, JP Morgan wanted the taxpayers to foot the bill with higher fees and a wage tax, and anticipating that Jefferson County might still default, it wanted a state guarantee on all future sewer debt to be administered by an unelected commission. Pretty good deal — for JP Morgan.

Meanwhile, former county commission president and then-Mayor of Birmingham, Larry Langford, was convicted and sentenced to 15 years of prison for accepting a $156,000 bribe to refinance the sewer debt through JP Morgan.

The Securities and Exchange Commission was also called in to investigate the rate swaps, and charged JP Morgan with directing illegal payments to consultants close to the commissioners. In 2009, JP Morgan was ordered to cease its practices, fined the bank $25 million, and required it pay Jefferson County $50 million.

Of course, that was just the cost of doing business for JP Morgan, since the whole deal resulted in $277 million of additional debt for the county.

“Jefferson County is just the tip of the iceberg,” Americans for Limited Government President Bill Wilson said, adding, “Local bond issues are some of the sleaziest business in the country and are rife with corruption, bribes, price-fixing, and other scams.”

Just recently, JP Morgan, Bank of America, and UBS have had to pay hundreds of millions in settlements after divisions were convicted of rigging auctions of municipal bonds.

With $2.8 trillion of state and local government debt across the country — not to mention the $5.689 trillion of U.S. treasuries held domestically in private hands — government debt is very big business for financial institutions.

Which is why government defaults when they get so far in over their heads are so dangerous to the banks — they only hold $1.5 trillion of capital, according to the American Bankers Association. If just 17.6 percent of the domestic government bonds go bad, the entire banking system would not only collapse, but be completely liquidated.

Of course, none of this would be possible if banks were not granted a government charter to create money out of thin air through loans. But it illustrates the pressure that is placed on governments, and in particular on taxpayers, to make good on all of the politicians’ debts — no matter how foolishly large they have become.

That is why the Jefferson County Commission — and Alabama state Democrats like Representatives Patricia Todd, John Rogers, and Mary Moore who stood in the way of the settlement at the state level — are all to be saluted for having the courage to default.

They refused to saddle their constituents and taxpayers with the bill for what turns out was a corrupt, dishonest deal that resulted in a debt so large it could not be repaid.

Members of the congressional Supercommittee looking for ways to reduce the $14.973 trillion national debt might do well to consider the example of Jefferson County when they mull over proposals to increase taxes. The proceeds of tax hikes will do nothing to benefit the American people, they will simply service what are already unsustainable debt obligations, having little more effect than bestowing hundreds of billions of interest payments on the banks.

If Congress wants to avoid a bloody default, it must balance the budget immediately by cutting spending, slash the tax burden and reduce regulatory roadblocks to jumpstart economic growth, and begin paying down the debt to restore order to the nation’s fiscal house — before it is too late.

If members fail to enact necessary reforms to pay down the debt and grow the economy, a national bankruptcy will be the only remaining option to the American people.

Robert Romano is the Senior Editor of Americans for Limited Government.

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