More details are emerging in the Jefferson County derivative/bankruptcy debacle. This Bloomberg article entitled, JP Morgan swap deals spur probe as default stalks Alabama County, is must reading and should be filed in the folder under ‘those that don’t learn from history are doomed to repeat it’. As the article makes abundantly clear, none of the esteemed officials of Jefferson County Alabama read, let alone even heard of the infamous Robert Citron’s exploits.
You remember Mr. Citron, the former treasurer who bankrupted Orange County ,California with derivatives via Merrill Lynch. The names change but the story stays the same. Charles Ponzi would be oh so proud ! For those wondering what the abacus is in reference to. Mr. Citron feigned ignorance when the situation exploded claiming he used an abacus to do math. I have taken some selected passages from the Bloomberg article(in green italics) and then have added some of my own comments as analysis.
"Like homeowners who took out mortgages they couldn't afford and didn't understand, Jefferson County officials rejected fixed- rate debt and borrowed instead at rates that varied with the market."
- Nicely done Jefferson County with generational lows in interest you shun fixed rate debt and go with adjustable. Fabulous.
"Jefferson County -- which weathered the U.S. Civil War in the 1860s and racial strife in the 1960s -- is now scrambling to avert what would be the biggest municipal bankruptcy in the nation's history, measured by outstanding bonds."
- Gotta hand it to Wall St. they can accomplish what war and racial strife cannot. What a legacy.
"It's ironic that the Fed can do corporate welfare for the banks, but they can't bail out a county that was victimized by these banks,'' says Craig Greer, a Catholic chaplain at a Birmingham hospice."
- Ironic is not the word I would use but he is a man of the cloth so I understand his discretion.
"Jefferson County was so enthusiastic about its sophisticated debt management techniques that in 2003 and 2004 it held "Investor Relations'' seminars each year in a Birmingham hotel.
The events were sponsored by 32 banks, advisers, law firms, bond insurers and rating companies, including CDR Financial Products, the county's Beverly Hills, California-based swap adviser, Bear Stearns and JPMorgan. County officials solicited sponsorships, including $27,000 from JPMorgan, $15,000 from Bear Stearns and $10,000 from CDR.
We have so many little municipalities around here that can't afford to go for any kind of training,'' says Linda Goldblatt,, the county's investor relations director. ``We thought it would be a good idea to help get them some idea of what's going on out there.''
- Sounds like the blind leading the blind to slaughter no less. I would love to see the internal e-mails by the bankers ridiculing the abject stupidity of these hapless county pols.
"The worldwide use of privately negotiated derivatives has generated considerable momentum,'' a JPMorgan presentation said. ``The need for prudent financial management continues to drive the wider use of privately negotiated derivatives.''
- Prudent financial management and privately negotiated derivatives, all used in one sentence. If that doesn't qualify as the oxy moron on the year I don't know what does.
"The phrase privately negotiated is a euphemism bankers use to describe debt deals that are struck without competitive bidding -- as all of Jefferson County's were."
"Then JPMorgan banker Matthew Roggenburg quoted Federal Reserve Chairman Alan Greenspan, who lauded derivatives because they create a more flexible and efficient financial system. "
- I am surprised the Maestro himself didn’t show up to these Vaudevillian dog and pony shows. Now do you see why Greenspan is roaming the country pleading his innocence to the masses.
"New financial products have enabled risk to be dispersed more effectively to those willing, and presumably able, to bear it,'' Greenspan said in an April 2002 speech. ``Shocks to the overall economic system are accordingly less likely to create cascading credit failure.''
- Yeah risk was dispersed all right, from Wall St. to the taxpayer. Heads we win tails y'all lose! Now do you see why Greenspan is roaming the country pleading his innocence to the masses..... oooops I said that already, sorry.
"A year after the swaps deals with Jefferson County, JPMorgan's LeCroy ran into legal trouble. He was indicted in June 2004 on federal fraud charges in a municipal finance corruption scandal in Philadelphia. JPMorgan fired him. In January 2005, LeCroy pleaded guilty and was later fined $15,000 and imprisoned for three months. He declined to comment. "
- Declined comment did he?, they left out that he neither admitted nor denied wrongdoing. I can assure you that if this Ponzi fella oops I meant LeCroy tried this scam on cats by the name of Washington, Monroe, Hamilton, and Jefferson, he would have needed a gravedigger rather than an attorney when apprehended.
"Some of Jefferson County's commissioners agree. Collins, a Republican and one of the two current members of the five-person board who were there when the deals were struck, says it's now clear that the financing was wrong for the county."
- Really ! You don’t say! How insightful. I know some people who think buying Nortel at $90 was wrong as well.
"Commissioner Smoot says the commission misplaced its confidence in the bankers and advisers. I blame the people who said they were the experts,'' Smoot says. The big Wall Street bankers. Where are they now? We trusted them. We asked our folks to trust them. And you know what- -- they violated our trust.''
- you wanna bet dollars to doughnuts that most of these county officials are still getting personal financial advice from the likes of Wall. St. The irony couldn't be greater. Wall St. the drug dealer runs the detox center, the ultimate business plan.