Atlanta scaled back debt risks — unlike Birmingham
Both faced huge and expensive court-ordered upgrades to their water and sewer systems. And both embraced Wall Street’s financial engineering as a way to help pay for the projects.
But the paths diverged widely last week when Jefferson County filed bankruptcy, providing an ominous reminder that Wall Street’s financial excesses continue to damage the economy and ravage municipal finances.
The same revenue engine that churned out exotic mortgages and pumped up a spectacular and disastrous housing bubble was responsible for the complicated loans that led Alabama’s largest county to financial ruin.
“There was a market demand, there was revenue to be made,” said economist Melissa Woodley, finance professor at Samford University in Birmingham. “Investment banks cooked up products designed to be revenue generators.”
Jefferson County relied heavily on risky swap agreements or variable-interest bonds on “virtually all of their debt,” said Earle Taylor III, partner and Atlanta municipal bond attorney with McKenna Long & Aldridge. They now account for roughly three-quarters of the county’s $4 billion-plus in liabilities.
The exotic products were designed in the same Wall Street environment that produced risky mortgage-backed securities. In Jefferson County, they led to soaring interest rates and unaffordable payments on massive debt.
Some Jefferson County residents blamed their political leaders for the county’s bankruptcy filing as well as some of the highest sewer rates in the country.
“Let them declare bankruptcy and take all the rest of them to jail and let’s start afresh,” said Mark Ham, 58, at Kelley’s bar in Birmingham. “My water usage is $25, and the taxes and sewer charges drive it up to $275. Jefferson County is run by a bunch of crooks.”
Some worry the bankruptcy will hurt residents more.
“I think this bankruptcy is going to mean a lot of pain for the middle-class working people and those with lower incomes,” said Sam Wilson, a 39-year-old concrete refinisher from Tarrant. “It is going to mean higher taxes, most likely, and water and sewer bills going up.
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For example, members are not allowed to serve as paid directors of corporate boards. In his financial disclosure statements Gingrey listed himself as an "unpaid" director of the banks. None of the board members of either bank have been paid any
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As a result, the Wall Street firms essentially called the loans in the deals, forcing local governments to pay back loans immediately or pay huge fees to get out of the swap agreements. That hit Jefferson County especially hard, since it had used the
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