It's pretty clear from the article that JP Morgan is not the sole cause of these problems:
"But the bill soared to $3.1bn after construction problems and a series of bond and derivatives deals that went sour in the financial meltdown of 2008...[the county] faces a budget shortfall next year of $40m after a local tax was declared illegal."
Clearly, someone involved with the construction is partially at fault, as are politicians for basing their budget on an illegal tax.
So it would certainly be excessive and unfair for JP Morgan to foot the bill for the entire sewer and water system.
I live in Birmingham, so I need to correct a couple things. First, the "illegal" tax has been around a long time. In this particular case, it was overturned on a technicality [1]. However, because the state government is hostile to Birmingham, it has been impossible to replace the lost revenue. However, that's relatively unimportant, because the sewer budget is separate, and funded only by sewer system revenues.
Secondly, the construction problems, common among massive public projects, really weren't the problem. The problem is that County Commissioners were BRIBED by bankers into taking out unwise interest rate swaps in 2003. I believe all five commissioners from that period have been convicted of corruption, particularly Larry Langford, commission president. [2]
The reason for the bankruptcy is less that interest rates rose, but primarily the freezing of the market for municipal bonds during the 2008-2009 recession. Bloomberg explains, "After some bond insurers incurred losses on subprime- related securities, threatening the credit ratings they used to guarantee other Jefferson debts, investors in 2008 dumped the sewer securities on banks that had agreed to act as buyers of last resort. That triggered contractual requirements for the county to pay off $850 million of the debt in four years instead of the 30 or 40 under the original agreements, according to government records." [3]
So it is clear that BOTH bankers and our local politicians are at fault for this problem. Both acted illegally. Our politicians are in jail, but the guilty bankers are not. So, yes, I think JP Morgan should pay a substantial penalty for this.
We don't think the county can pay off the bonds, so we'll demand they pay faster? What's the logic behind that cunning plan? Are they hoping to get paid early enough that the bankruptcy court won't claw back those payments?
"The county paid $120 million in fees -- six times the prevailing rate - to buy interest-rate swaps from J.P. Morgan, Bank of America, Lehman Brothers and Bear Stearns.
Within five years, the bad advice had increased the county's debt by $277 million."
Hmm, let me do some quick arithmetic - is $277M < $3.1B? I believe it is, and I therefore stand by my claim that JP Morgan is not solely responsible for this problem. However, I'm all in favor of sending anyone involved in bribery to jail.
It looks like the real problem is that the county decided to make long bets on housing and lost.
For the record, I'm certainly not saying that JP Morgan is the only responsible party. Clearly our politicians are at fault, and thus the voters as well.
But if you'll read [3] (far more explanatory than [2] about the details), you'll see that the problem isn't the size of the debt that brought the county down -- it's the contractual obligation to pay it off early.
You're right - the county did make long bets on housing. They attempted to expand the sewer system to growing areas to boost revenue. But the bankruptcy was primarily a result of the interest rate swaps.
EDIT: The original reason for the debt was a court order to reduce the pollution from the sewer system. The county also tried to expand the sewer system at the same time to increase the revenue base. The debt was unavoidable (though larger than it could have been without the additional expansion). The interest rate swaps were applied to the debt later. These are what JP Morgan sold, and what caused the bankruptcy.
These are what JP Morgan sold, and what caused the bankruptcy.
Yes, but that doesn't mean JP Morgan is responsible for the bad decisions of the county. Similarly, if the county bet $3.1B at the horse races, they'd have no right to go complain to the racetrack when their horse lost.
That would be true even if the racetrack let some county employees sit in the VIP box.
I disagree. The racetrack is a bad analogy, particularly when bankers are specifically hired for their advice. If I sell you a car I designed and the car blows up from a design flaw several years later, I'm culpable. If you hired me specifically to advise you on which car to buy, I'm even more culpable. And If I bribed you to pay me four times the going rate for this really bad advice, then I'm REALLY culpable.
And this bribery wasn't some minor ethics violation. They didn't give away free meals. The president of the county commission received $236,000 in gifts from an investment banker.
I never disputed that JPM deserves penalties for the acts of bribery performed by their consultants. However, the penalty for bribery should be proportional to the $227M they gained from bribery. About 91% of the county's debt, or $2.8B, has nothing to do with acts of bribery.
And in general, giving advice does not make you culpable for movements of the market. A car can be expected to drive reliably within certain parameters, but investment vehicles are not cars. TD Ameritrade gives me investment ideas all the time, but I don't get to demand they pay me if I buy AAPL and it goes down.
There are exceptions for negligence - e.g., if I say "I want a long position", and they advised me to buy a put.
As as been pointed out repeatedly, the bribes were a small fraction of the total debt. The city got over $2B and that money is gone. The bankers didn't get it.
It appears that the city pissed this money away. Why aren't they responsible for that?
Of course they're responsible and that's why five of them were sent to prison.
What the bankers did was bribing officals into taking bad advice at hiked rates leading to a 30-40 year loan having to be paid off in a tenth of that time. THIS is what's leading to the impending bankrupcy.
I cannot fathom why the investment bankers involved haven't been sent to prison for a very long time. They were the ones who started this whole ordeal. No bribes = no horrible decisions = no bankrupcy = no porta pottys. While I agree that bankers in general are being blamed for most everything that's been going wrong in the world in the last few years this time it really was their fault. Not only theirs but they should be more than fined.
The fact that the county also took on contracts with contingent balloon payments is not caused by bribery. It's caused by the county officials either not reading or not caring what was in the contracts they signed.
This time, about $277 million of the $3.1 billion problem is indeed the fault of the bankers. The only thing being debated here is the other $2.8 billion.
I cannot fathom why the investment bankers involved haven't been sent to prison for a very long time.
The contractors they hired (who were actually the ones that committed bribery) are in jail.
Did you read the Bloomberg article at all? The county (not the city) didn't piss the money away - they built sewer infrastructure with it. The reason they can't pay it back is because a lack of municipal bond buyers during the recession invoked a provision requiring the county to pay back $850 million in 4 years rather than 30-40.
So the bankers ARE partially responsible. They were paid for advice, and their advice was terrible. Now we're bankrupt, and they deserve to take a big loss.
"But the bill soared to $3.1bn after construction problems and a series of bond and derivatives deals that went sour in the financial meltdown of 2008...[the county] faces a budget shortfall next year of $40m after a local tax was declared illegal."
Clearly, someone involved with the construction is partially at fault, as are politicians for basing their budget on an illegal tax.
So it would certainly be excessive and unfair for JP Morgan to foot the bill for the entire sewer and water system.