As if a decade of million dollar fines for their role in the collapse of Enron, World Com, the UK's Financial Services Authority, mortgage overcharges on active military personnel, misleading state and municipal governments with faulty advice, not to mention its contribution to the 2008 global economic collapse responsible for incalculable loss and suffering, JP Morgan, the largest bank in the U.S. with more than $2 trillion in assets and according to Forbes, the world's largest public company may now take credit for the largest municipal bankruptcy in American history.
Just as repercussions of the 2008 economic collapse continue to plague millions of Americans, the consequence of JPM's on-going advice to Jefferson County, Ala. officials in pushing their flawed municipal derivative products caused the county to file for Chapter 9 relief in November, 2011. Despite objections from JPM and other Wall Street bondholders which stood to lose $4.5 million in monthly payments, the Northern District Alabama Bankruptcy Court recently upheld the county's request for a $4.2 billion bankruptcy citing that the county had negotiated "in good faith." The bankruptcy decision allows the county to move forward with efforts to stabilize its debt.
Adding to JPM's list of earlier accomplishments is a $772 Million settlement brought by the Securities and Exchange Commission for an "unlawful payment scheme" related to the bank's municipal derivative business and the refinancing of Jefferson County's sewer system debt. While some local Jefferson County officials have served jail time, at least one for accepting $235,000 worth of designer clothes, a Rolex watch and cash, no JPM employee has been prosecuted to the full extent of the law or served jail time for the Jefferson County situation or for any of the above mentioned offenses. The SEC settlement allowed JPM no admission of guilt and included a $75 million cash payment with a waiver of $647 million contract cancellation fees.
With a population of more than 650,000 and home to Birmingham, Ala.'s largest city, Jefferson County was cited in 1993 by the EPA for dumping untreated sewage into the Cahaba River in violation of the Clean Water Act. The county began selling sewer bonds in 1997 with no competitive bidding and by 2002 had raised $2.8 billion in bonds for the project.
With municipal bond interest rates at their lowest in more than three decades, the county was advised by JPM's local banker to forgo fixed rate financing and to refinance using adjustable rate bonds and interest-rate swaps that reflected current market trends; thereby saving itself millions of dollars. Swaps, better known as unregulated derivatives, have proven, as a result of the subprime mortgage crisis, to be utterly unreliable.
According to Bloomberg News which did an in-depth analysis, Jefferson County records show that the bonds provided the banks with $120 million in excessive fees with JPMorgan selling the county $2.7 billion of interest-rate swaps, Bank of America sold the county $373 million in swaps and Lehman Brothers sold the county another $190 million of swaps.
In a 2002 speech just after the dot.com bubble burst but with the economy still intact, Jefferson County officials relied on outside experts like Federal Reserve Chairman Alan Greenspan who lent his support to "new financial products that have enabled risk to be dispersed more effectively" because derivatives "create a more flexible and efficient financial system" and that "shocks to the overall economic system are... less likely to create cascading credit failure."
By 2004, Jefferson County, naively assumed they would never be victimized by their own creditors, sponsored investor seminars to tout its cutting edge fiscal prowess with JPM evangelizing that "the worldwide use of privately negotiated derivatives has generated considerable momentum'' as "the need for prudent financial management continues to drive the wider use of privately negotiated derivatives.''
In recognition that their client could still be further wrung out in an even sweeter deal, JPM convinced the county in 2004 that it could generate necessary upfront operating cash by entering into additional swaps with Bear Stearns for $1.5 billion and $380 million for Bank of America. In exchange for $25 million cash, the county by then held $5.8 billion of interest-rate swaps, more than other county in the U.S.
The deal began to disintegrate in 2008 when politically-connected bond insurers experienced heavy losses forcing the county to increase its monthly debt payment from $10 to an unsustainable $23 million. Payments the county relied on under its swap agreements to cover the interest payments on its adjustable-rate bonds hit the skids when Moody's and Standard and Poor's cut the sewer bonds rating to just above 'junk'. The downgrade entitled the Wall Street banks to back out of the agreement and would have cost the county over $1 billion in additional fees.
The county's reliance on the swaps complicated the existing debt crisis when bank payments to the county dropped precipitously in response to the economic slump. After lengthy negotiations reminiscent of how the IMF deals with foreign countries teetering on default, JPM informed the county to raise its utility rates to cover its losses.
What JP Morgan, which never reported a losing quarter throughout the 2008 economic crisis, and Jefferson County's officials may never truly grasp is the real cost of their greed on the poorest neighborhoods of Jefferson County. As the county laid off up to 1000 employees decimating county services, residents who were paying as much as $250 a month for water/sewer service are now denied basic sanitation facilities including running water and are forced to share portable toilets.
Almost four years later, what remains a bitter pill is that four days after an incompetent Congress approved a $700 billion taxpayer bailout without any conditions, Jamie Dimon, once described by President Obama as a "savvy businessman" informed bank executives of his intention to not use the $25 billion from the American taxpayer for new loans but would instead pursue new acquisitions: "I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way."
While the sole purpose of privately-owned Wall Street banks is to lend money at interest rates that will make the greatest profit in the shortest amount of the time, the Federal government's unsustainable interest payment of $5 billion a day on the national debt to the banks raises the essential question of what value banks provide the American people -- and how corporate welfare for JPM and its Wall Street cronies denies meaningful assistance to local municipal or state government in a democratic society.
The publicly-owned State Bank of North Dakota has paved the way since 1919 depositing its profits into the State's general fund making those funds available for essential community services and long term municipal infrastructure projects like new sewer plants. If the State of North Dakota can do it, why can't the Federal government?
And finally, in 2011, JPM was fined an additional $228 million by the Department of Justice for bid rigging and 'anti-competitive' practices for its activity in the municipal bond investment market. In acknowledgment of having friends in very high places and while the DOJ investigation resulted in criminal charges against eighteen individuals (with nine pleading guilty), the DOJ "agreed not to prosecute JPMorgan for the manipulation and bid rigging of municipal investment... "
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