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JP Morgan Records Largest Profit Ever, While Community Devastated By Its Predatory Lending Sheds 1,000 Workers

By Zaid Jilani on Jun 13, 2011 at 7:00 pm
One of the many tragic stories of the Great Recession involves Jefferson County, Alabama. As Matt Taibbi explained in an article in Rolling Stone last year, mega bank JP Morgan Chase used a predatory refinancing deal on sewer bonds to reap billions while the local area was financially devastated.
Now, Jefferson County, still reeling from the effects of JP Morgan’s dirty deals, is moving to place nearly 1,000 public workers on administrative leave without pay, as the state Legislature failed last week to come to the municipality’s aid with any fiscal support. In doing so, the county hopes to save “just over $12 million.”

Col Hogan wrote:Consider the source (thinkprogress)...

Why didn't the county lawyers protect them prior to signing this so-called bad paper???

People need to accept responsibility for their actions...

ChetSteadman wrote:

Col Hogan wrote:Consider the source (thinkprogress)...

Why didn't the county lawyers protect them prior to signing this so-called bad paper???

People need to accept responsibility for their actions...

No, responsibility has no place in this. People should expect that their actions hold no ramifications.

How much you wanna bet those "lawyers" never read one sentence of the contracts? It's no different that the useless pieces of shit who are crying about "predatory lending" over their ARM loans. They feel like someone should bail out their mistakes because they didn't read.

And I didn't agree with bank bailouts, either.

AZGrizFan wrote:

ChetSteadman wrote:
No, responsibility has no place in this. People should expect that their actions hold no ramifications.

How much you wanna bet those "lawyers" never read one sentence of the contracts? It's no different that the useless pieces of shit who are crying about "predatory lending" over their ARM loans. They feel like someone should bail out their mistakes because they didn't read.

And I didn't agree with bank bailouts, either.

100% accuracy.

The original cost estimates for the new sewer system were as low as $250 million. But in a wondrous demonstration of the possibilities of small-town graft and contract-padding, the price tag quickly swelled to more than $3 billion. County commissioners were literally pocketing wads of cash from builders and engineers and other contractors eager to get in on the project, while the county was forced to borrow obscene sums to pay for the rapidly spiraling costs. Jefferson County, in effect, became one giant, TV-stealing, unemployed drug addict who borrowed a million dollars to buy the mother of all McMansions — and just as it did during the housing bubble, Wall Street made a business of keeping the crook in his house. As one county commissioner put it, "We're like a guy making $50,000 a year with a million-dollar mortgage."

To reassure lenders that the county would pay its mortgage, commissioners gave the finance director — an unelected official appointed by the president of the commission — the power to automatically raise sewer rates to meet payments on the debt. The move brought in billions in financing, but it also painted commissioners into a corner. If costs continued to rise — and with practically every contractor in Alabama sticking his fingers on the scale, they were rising fast — officials would be faced with automatic rate increases that would piss off their voters. (By 2003, annual interest on the sewer deal had reached $90 million.) So the commission reached out to Wall Street, looking for creative financing tools that would allow it to reduce the county's staggering debt payments.

Wall Street was happy to help. First, it employed the same trick it used to fuel the housing crisis: It switched the county from a fixed rate on the bonds it had issued to finance the sewer deal to an adjustable rate. The refinancing meant lower interest payments for a couple of years — followed by the risk of even larger payments down the road. The move enabled county commissioners to postpone the problem for an election season or two, kicking it to a group of future commissioners who would inevitably have to pay the real freight.

But then Wall Street got really creative. Having switched the county to a variable interest rate, it offered commissioners a crazy deal: For an extra fee, the banks said, we'll allow you to keep paying a fixed rate on your debt to us. In return, we'll give you a variable amount each month that you can use to pay off all that variable-rate interest you owe to bondholders.

In financial terms, this is known as a synthetic rate swap — the spidery creature you might have read about playing a role in bringing down places like Greece and Milan. On paper, it made sense: The county got the stability of a fixed rate, while paying Wall Street to assume the risk of the variable rates on its bonds. That's the synthetic part. The trouble lies in the rate swap. The deal only works if the two variable rates — the one you get from the bank, and the one you owe to bondholders — actually match. It's like gambling on the weather. If your bondholders are expecting you to pay an interest rate based on the average temperature in Alabama, you don't do a rate swap with a bank that gives you back a rate pegged to the temperature in Nome, Alaska.

Not unless you're a fucking moron. Or your banker is JP Morgan.

kalm wrote:
I agree, the county workers and the tax payers are clearly responsible for this - they chose to work for a corrupt employer and vote corrupt politicians into office.

kalm wrote:I agree, the county workers and the tax payers are clearly responsible for this - they chose to work for a corrupt employer and vote corrupt politicians into office.

HI54UNI wrote:I think this sentence in the article sums it all up, "Not unless you're a fucking moron."

What is the political affiliation of Larry Langford, the Mayor? Democrat. Why doesn't the article mention that? It only mentions the political affiliation of one person, a Republican consultant.


Further research finds:

-On the morning of December 1, 2008, Larry Langford was arrested by the FBI on a 101 count indictment alleging conspiracy, bribery, fraud, money laundering, and filing false tax returns in connection with a long-running bribery scheme. He was led into the courtoom in leg-irons. Also indicted were lobbyist and former state Democratic Party executive director Al LaPierre, and Montgomery investment banker and bond underwriter, and former state Democratic Party chairman, William B. Blount of Parrish & Co.

-Chris McNair - convicted commisioner. Democrat

-Mary Miller Buckelew - convicted commissioner - Democrat.

-A characteristic symptom of wrongdoing is unaudited books, the county was three years behind with its auditing.

I feel sorry for the people losing their jobs and the residents having to pay big sewer bills, especially because of EPA mandates because I've been there. But how many of these same people voted for these dumbasses? How many people pay no attention to what is going on? I'm assuming Alabama is like Iowa, a public entity can borrow a dime without public hearings and notices to the public. Where were some of the higher public employees in the sewer department or finance department? Were they raising red flags on this?

Col Hogan wrote:

kalm wrote:
I agree, the county workers and the tax payers are clearly responsible for this - they chose to work for a corrupt employer and vote corrupt politicians into office.

OK, what's your recommendation?

Another bailout???

You toss out the big bad boogyman (the banks)...you mention nothing about the irresponsible, possibly criminally culpable local politicians...then go for the emotional "but think of the county workers"...

Same as a private company that the leadership runs into the ground...the workers get screwed...

What do you recommend we do???

Bloomberg has done an excellent write-up of yet another gnarly development for Jefferson County, Alabama, the locale that was on the business end of a multibillion-dollar fleecing at the hands of J.P. Morgan Chase and other banks...

All of which sucks, of course, but the news keeps getting worse. The House Financial Services Committee has just voted to delay the scheduled implementation of reforms in the Dodd-Frank bill that would limit the ability of banks to pull Jefferson-County style scams in the future. Among other things, the new rules would have required banks to act in the best interests of their clients, and disclose daily pricing information about swaps, making it harder for banks to gouge clients.

In Jefferson County, the Alabamans were massively overcharged by Chase and other banks in large part because interest rate swaps, unlike, say, stocks, are not traded on open exchanges, so nobody knows how much they really cost. The situation is similar to what sports betting would be like if casinos did not publish the point spreads. If you walk into a casino the day before the Super Bowl and you're told the spread is Green Bay -6, you might think you're getting a good deal – but the actual spread might be nine or ten points. Wall Street is making a killing similarly overcharging states and cities and counties (and even countries like Greece) for interest-rate swaps, regularly stealing half a touchdown here and there in these billion-dollar finance transactions.

The Dodd-Frank bill, ball-less as it mostly was, did have a few provisions in it that would have tightened up the rules governing such derivative transactions. But the House Financial Services Committee voted to stall implementation of these new rules until September 2012, at the very least. The cruel irony here is that the Committee is chaired by... Jefferson County's own congressman!

That's right: Alabama Republican Spencer Bachus, who up until recently was sounding like a a real critic of these banking practices. This was Bachus a few years ago, making his own casino comparison:

When you have a county or city that is basically unsophisticated dealing with Wall Street professionals it's very similar to a person walking into a casino where the house always wins. Simply, the county and the Wall Street firms gambled with ratepayers money. While interest rates were low in the beginning, things ultimately blew up when the auction rate securities market collapsed.

That was then. Now, Bachus is the driving force behind this latest move to delay reforms. Wonder why? Just look to see who happens to be the top contributor to Bachus's campaigns for his career: J.P. Morgan Chase. Bloomberg elaborated on Bachus's ties to Wall Street, describing him as the third-biggest recipient of Wall Street cash in the House:

During his two decades in Congress, Bachus – like Frank, his predecessor as chairman – has nurtured ties to Wall Street donors who have poured cash into campaign chests of both Democrats and Republicans. He has received more than $7.1 million from political committees of finance, real estate and insurance companies and their employees, according to the Center for Responsive Politics, a Washington group that tracks campaign donations. That’s more than any House member since 1989 aside from the Republicans’ two top leaders, Speaker John Boehner and Majority Leader Eric Cantor.

If you read the whole Bloomberg piece you'll see other villains here, including Barney Frank and Michelle Bachmann(who is seeking to have all of Dodd-Frank overturned). But Bachus is the big story here. Here you have a congressman who represents a district that just happens to be the most conspicuous group of Main-Street victims of predatory banking practices in all of America -- and even he can't find a way to man up and do the right thing for his voters.

The crazy thing is that such arrangements — where some local scoundrel gets a massive fee for doing nothing but greasing the wheels with elected officials — have been taking place all over the country. In Illinois, during the Upper Volta-esque era of Rod Blagojevich, a Republican political consultant named Robert Kjellander got 10 percent of the entire fee Bear Stearns earned doing a bond sale for the state pension fund. At the start of Obama's term, Bill Richardson's Cabinet appointment was derailed for a similar scheme when he was governor of New Mexico. Indeed, one reason that officials in Jefferson County didn't know that the swaps they were signing off on were shitty was because their adviser on the deals was a firm called CDR Financial Products, which is now accused of conspiring to overcharge dozens of cities in swap transactions. According to a federal antitrust lawsuit, CDR is basically a big-league version of Bill Blount — banks tossed money at the firm, which in turn advised local politicians that they were getting a good deal. "It was basically, you pay CDR, and CDR helps push the deal through," says Taylor...

The city of Birmingham was founded in 1871, at the dawn of the Southern industrial boom, for the express purpose of attracting Northern capital — it was even named after a famous British steel town to burnish its entrepreneurial cred. There's a gruesome irony in it now lying sacked and looted by financial vandals from the North. The destruction of Jefferson County reveals the basic battle plan of these modern barbarians, the way that banks like JP Morgan and Goldman Sachs have systematically set out to pillage towns and cities from Pittsburgh to Athens. These guys aren't number-crunching whizzes making smart investments; what they do is find suckers in some municipal-finance department, corner them in complex lose-lose deals and flay them alive. In a complete subversion of free-market principles, they take no risk, score deals based on political influence rather than competition, keep consumers in the dark — and walk away with big money. "It's not high finance," says Taylor, the former bond regulator. "It's low finance." And even if the regulators manage to catch up with them billions of dollars later, the banks just pay a small fine and move on to the next scam. This isn't capitalism. It's nomadic thievery.

AZGrizFan wrote:And while Rome burns, Congress feigns concern for the "consumer" by dealing with non-issues like the Visa system interchange rates.

The whole setup is a fucking joke, and we're the bagmen.

HI54UNI wrote:The banks aren't innocent but what the hell are these government officials thinking? Are they all that corrupt or are they all that incredibly stupid?!?!?! It took two groups - JP Morgan and the local government to sign these deals. Why doesn't the article dig into the incompetent government side more. Several of the elected officials were convicted of corruption. I wonder how many paid employees were convicted of something? If they weren't they should probably be fired for being incompetent. Local governments have no business being involved in this kind of stuff, especially when local governments can borrow so cheaply without these scams.

People like to bitch that we should run government like a business and then we elect community activists, teachers, spouses of government employees, lawyers etc. to the board of directors (governing body). Many of these people don't have any business experience and they get enamored by consultants that buy them a steak dinner.

kalm wrote:

AZGrizFan wrote:And while Rome burns, Congress feigns concern for the "consumer" by dealing with non-issues like the Visa system interchange rates.

The whole setup is a fucking joke, and we're the bagmen.

Yes we are. Btw, I think exchange rates might be a big deal especially for the Walmarts of the world and that's probably who's pushing this.

Col Hogan wrote:

kalm wrote:
I agree, the county workers and the tax payers are clearly responsible for this - they chose to work for a corrupt employer and vote corrupt politicians into office.

OK, what's your recommendation?

Another bailout???

You toss out the big bad boogyman (the banks)...you mention nothing about the irresponsible, possibly criminally culpable local politicians...then go for the emotional "but think of the county workers"...

Same as a private company that the leadership runs into the ground...the workers get screwed...

What do you recommend we do???

kalm wrote: ...In a complete subversion of free-market principles, they take no risk, score deals based on political influence rather than competition, keep consumers in the dark — and walk away with big money ... This isn't capitalism. It's nomadic thievery.

kalm wrote:

HI54UNI wrote:The banks aren't innocent but what the hell are these government officials thinking? Are they all that corrupt or are they all that incredibly stupid?!?!?! It took two groups - JP Morgan and the local government to sign these deals. Why doesn't the article dig into the incompetent government side more. Several of the elected officials were convicted of corruption. I wonder how many paid employees were convicted of something? If they weren't they should probably be fired for being incompetent. Local governments have no business being involved in this kind of stuff, especially when local governments can borrow so cheaply without these scams.

People like to bitch that we should run government like a business and then we elect community activists, teachers, spouses of government employees, lawyers etc. to the board of directors (governing body). Many of these people don't have any business experience and they get enamored by consultants that buy them a steak dinner.

Agreed, and if memory serves somewhere around 20 government officials were convicted as a result of this fiasco and JP Morgan has been fined (albeit a small amount relative to the deal) and several bankers are still under investigation. But again, this isn't an isolate case. My solution, hire J.P. Morgan execs to run your governement.

native wrote:

kalm wrote: ...In a complete subversion of free-market principles, they take no risk, score deals based on political influence rather than competition, keep consumers in the dark — and walk away with big money ... This isn't capitalism. It's nomadic thievery.

The bane of our politcs.

kalm wrote:

native wrote:
The bane of our politcs.

Indeed.

Welcome back Nate!