John Eby: Wall Street vs. Main Street not much of a contest

Published 9:39 am Monday, April 5, 2010

ebyHave you heard about the Alabama sewer project that was supposed to cost $250 million, but Jefferson County owes $1.28 billion just in interest and fees, thanks to a combustible convergence of local corruption and Wall Street finance tricks?

As in the housing crisis, bankers switched the county from a fixed rate on the bonds it issued to finance the sewer to an adjustable rate.

Refinancing meant lower interest payments for a few years, then the risk of larger payments landed in the lap of a future board of commissioners.

The New York Times covered this story matter-of-factly on March 12, 2008, and it is presented much more colorfully by Matt Taibbi in the April 15 Rolling Stone.

I looked up the former because the latter seemed unbelievable, even by Taibbi’s Hunter Thompson-like gonzo style.

“How the nation’s biggest banks are ripping off American cities with the same predatory deals that brought down Greece,” the headline promises.

It goes on to describe former public employees eking out Third World existences after their county tumbled $5 billion in debt.

Courthouses, jails and sheriff’s precincts had to close so Wall Street banks could be paid.
Staggered by debt last year and unable to make swap payments to JP Morgan, the bank canceled the deal, triggering a one-time “termination fee” of $647 million.

“Imagine paying $250,000 a year on a car you purchased for $50,000, and that’s roughly where Jefferson County stood at the end of last year,” Taibbi writes.

In November, however, the Securities and Exchange Commission (SEC) charged JP Morgan with fraud and canceled the $647 million in termination fees.

The bank agreed to pay a $25 million fine and fork over $50 million to help displaced Jefferson County workers.

A shiver traveled my spine when I read all the usual suspects – Bear Stearns, Lehman Brothers, Goldman Sachs and JP Morgan – had their tentacles dipped into the feeding frenzy building what one worker called the “Taj Mahal of sewer-treatment plants.”

“We live in a gangster state and our days of laughing at other countries are over,” Taibbi writes. “In Birmingham, lots of people have gone to jail … more than 20 local officials and businessmen have been convicted of corruption in federal court. Last October … Birmingham’s mayor was convicted of fraud and money-laundering for taking bribes funneled to him by Wall Street bankers.”

What I didn’t see was any time for those who offered bribes or profited most from the scam.

There’s a surprise.

Also, ticking time bombs are not confined to Alabama.

The magazine ticks off Detroit, Chicago, Los Angeles and the states of Connecticut and Mississippi.

The county’s financial dealings raised thorny legal questions, for which the SEC deposed the mayor in an effort to learn whether any securities laws had been broken when Jefferson County refinanced its bonds – particularly laws that bar bankers and others from “buying” lucrative municipal bond business by giving gifts to officials who control bond deals.

Instead of letting these bankers compete for the county’s business in open bidding, five county commissioners divvied up the deals among people they knew.

“Jefferson County’s case is an extreme one, but its missteps are not unique,” The Times reported.

“Other communities around the country have also found themselves holding complex financial instruments that did not perform as advertised. As the troubles in the credit markets continue to spread, more such problems are likely to surface. Nor do many local governments hold open, competitive biddings when they issue bonds.”

“I don’t think there’s anyone who has been involved in the swaps and derivatives market to the extent that the Jefferson County sewer system was,” said Paul Maco, director for the SEC’s office of municipal securities during the Clinton administration.

According to the Times, the county ended up with 18 different swaps at one point, “an extraordinary number for a county government.”

Of 11 swaps and similar contracts Jefferson County went into from 2001 to 2003, eight were with JPMorgan Chase.

Taibbi makes the point that today’s big bankers aren’t whizzes making smart investments, but subverters of free-market principles they extol.

“They take no risk, score deals based on political influences rather than competition, keep consumers in the dark and walk away with big money.”

Even if regulators manage to catch up with them billions of dollars later, they pay a comparatively small fine and move on to the next town.

Obits: Rock photographer Jim Marshall, who died March 24 at 74. When the Beatles played their final concert at San Francisco’s Candlestick Park in August 1966, he was the only photographer allowed backstage. Of course, nobody knew it would be their last concert. With blowback from John Lennon’s “we’re more popular than Jesus” remarks, it wasn’t even sold out.

Alex Chilton, 59, who had his first pop hit at 16 with “The Letter” by the Box Tops, died of a heart attack March 17 in New Orleans. The Box Tops had another white R&B hit in “Cry Like a Baby.” Chilton is also known for Big Star, whose “In the Street” was covered by Cheap Trick for the opening theme song to “That ’70s Show.”

John Forsythe, the actor best known for “Bachelor Father” Bentley Gregg, the unseen Charlie of “Charlie’s Angels” and “Dynasty” oil tycoon Blake Carrington, whose TV wives included ex Joan Collins and Linda Evans, died April 1 at his home in Santa Ynez, Calif. He was 92.

Sports Illustrated picks the Detroit Tigers second behind the Minnesota Twins, but ahead of the Chicago White Sox, the Cleveland Indians and Kansas City Royals. Play ball!

John Eby is Daily News managing editor. E-mail him at john.eby @leaderpub.com.