An agreement to resolve the largest municipal bankruptcy in U.S. history awaits a judge’s approval after officials in Jefferson County, Alabama approved the deal on Tuesday. The county, home to Birmingham, went bust in 2011 following the implosion of a complex web of bad deals and bribes between local officials and Wall Street firms including JP Morgan Chase, Goldman Sachs, Bear Stearns, and Lehman Brothers. While the proposed deal would erase most of the fees, penalties, and inflated costs the county owes to the firms that originated the predatory, graft-driven scheme, citizens of the bankrupt county will also face about a 30 percent hike in sewer fees over four years.
Combined with an earlier settlement, the pending bankruptcy deal would push JP Morgan’s balance-sheet losses on the Alabama sewer debacle to roughly $1.6 billion. But that eye-popping figure is unlikely to change the fact that the bank’s municipal debt business is still doing remarkably well.
While Jefferson slashed services and laid off about a thousand workers, JP Morgan registered record profits in quarter after quarter. Overall, its municipal-debt underwriting business has remained mostly unscathed by the Jefferson County scandal. The bank continues to be one of the largest players in the market, underwriting $64.7 billion worth of public debt offerings from 2009–2011. Even after JP Morgan employees openly discussed millions of dollars in bribes paid to local power brokers and extracted millions in fees on deals that turned a $250 million sewer project into a $3 billion expense for Jefferson County, local governments continue to give the firm their business.
The combination of flagrant bribes, predatory lending schemes involving Alabama’s largest city, and the readymade metaphor of a sewer system at the center of the story helped make the Jefferson County scandal national news. But it’s only one of dozens of tales like it, where local officials agreed to interest rate swaps and other long-term harmful arrangements that allowed Wall Street firms to extract massive profit from deals that bankrupted cities. Detroit has amassed nearly $4 billion in debt from such swaps.
The world’s biggest banks have been manipulating the rates underlying those swaps for years, as last year’s LIBOR scandal revealed, with the end result that borrowers go ever deeper into debt while lender profits climb. In the Detroit case, Wall Street has made nearly $500 million off of a city that’s so deep in the red that it’s slashing emergency services. One debt analyst estimated in 2012 that U.S. taxpayers have sent a combined $20 billion to Wall Street in fee payments stemming from swap agreements.