Crimson tide swamps Birmingham
The fiscal tsunami triggered by the collapse of Wall Street’s investment banking giants is poised to drown an entire county in Alabama.
According to a report in Fortune magazine, Jefferson County, AL, which includes the city of Birmingham, is on the verge of filing for Chapter 9 protection in what would be the largest municipal bankruptcy in U.S. history.
Fortune says that Jefferson County has fallen ”hopelessly behind” on payments to service $3.2 billion it borrowed on ridiculous terms from the financial geniuses on Wall Street during the past decade to build a new sewer system. Despite desperate pleas from Alabama Gov. Bob Riley to the federal government, the Jefferson County Commission is said to be just days away from an official bankruptcy filing.
Riley reportedly has placed several urgent phone calls to Treasury Secretary Hank Paulson’s newly named bailout czar, Neel Kashkari, and told him that the impending fiscal disaster in Jefferson County is ”the single biggest threat to the municipal bond market today and a poster child for how the subprime mortgage crisis is hurting Main Street America.”
According to a legal study cited by Fortune, bankruptcy filings by municipalities have been extremely rare in the United States. Since the bankruptcy laws were written in 1934, fewer than 600 localities have filed under Chapter 9. By comparison, roughly the same number of private sector entities file for Chapter 11 bankruptcy protection every two weeks in this country.
The Chapter 9 protection provides for the reorganization of the municipality. The folks in Jefferson County may want to start with the officials who thought it was a great idea to finance their new sewer system with exotic financial instruments hawked by the snake-oil peddlers at the big Wall Street investment banks.
Two of the county’s biggest counterparties in derivatives trades used to finance the sewer project were the now-defunct Lehman Brothers and Bear Stearns, according to Fortune. To make matters worse, an ongoing federal corruption probe in Jefferson has thus far yielded 21 convictions. The mayor of Birmingham, who previously served as president of the Jefferson County Commission, is said to be a prime target of the probe.
The people of Jefferson County thought they were going to get an end to constant overflows of raw sewage when a $250 million project to improve the local sewage system was approved in 1996.
What they got was a $3.2 billion piece of the Great Fiscal Flood of 2008, which smells even worse.