The important question is: How can we blame Obama, or, deny him any credit for U.S. consumers' irrational exuberance?
By Jeannine Aversa
March 29, 2010 | Associated Press
March 29, 2010 | Associated Press
Tuesday, April 13, 2010
Sunday, April 11, 2010
Original teabagger Ron Paul explains 'limited gov't' to GOP
Ron Paul chastises at GOP conference: Conservatives 'like the empire'
By Andrew McLemore
April 10, 2010 | Raw Story
By Andrew McLemore
April 10, 2010 | Raw Story
Texas Rep. Ron Paul proved once again Saturday that his politics continue to divide the Republican Party.
He was met with both disapproval and applause during the Southern Republican Leadership Conference for describing conservatives as hypocritical when they call for a return to Constitutional values while supporting foreign wars.
"The conservatives and the liberals, they both like to spend. Conservatives spend money on different things. They like embassies, and they like occupation. They like the empire. They like to be in 135 countries and 700 bases.
"Don't you think it's rather conservative to say, 'Oh it's good to follow the Constitution. Oh, except for war. Let the President go to war anytime they want.' We can do better with peace than with war."
While most of the other speakers at the event used plenty of rhetoric for "easy applause," as Washington Post reporter David Weigel put it, Paul stuck to the outrage over American foreign policy that has defined his platform.
Whenever the boos grew loud enough, Paul returned to his "humble" foreign policy stance.
"It's been 60 years since we went to war in Korea," said Paul. "Why do we have to have troops there?"
Stupak's 'betrayal' and Tea Partiers' beliefs
Maybe it's the lib'rul media's fault for misinforming me, but I can't understand exactly what it is that Democratic ex-Congressman Bart Stupak did to "betray" his Michigan constituents, and incur the wrath of the Tea Party Express and its fundraising PAC. I mean, Stupak is a Democrat, he's not a Republican or a teabagger. Yes, he is pro-life, and so he conditioned his support of the health care bill on President Obama's promise to sign an executive order that the bill would not fund abortions. You may not agree with him, but his stance did make sense. He did not do a 180. And anyway, I thought the whole Tea Party thing was about fiscal conservatism, not anti-abortion. So why did the TPX single out Stupak?
All this goes to show that the teabaggers are just Republicans playing dress-up. The TPX in particular seems like a poorly disguised GOP front group. Looking at their web site, I can hardly figure out what they're for. The Tea Party Patriots site at least provides a Mission Statement and Core Values, which makes no mention of abortion. There are lots of other Tea Party groups if you care to look them up.
Um, and just as an aside, you know, the Tea Partiers are trying to field their own candidates for Congress, but more often, they simply support GOP candidates. Yet their national agenda is entirely domestically focused, and then narrowly. Not a mention of foreign policy. Why? The first view is that foreign policy questions could divide the movement between the pro-war, God & Guts Republicans, and the no-entangling-alliances, fiscally conservative Republicans who don't think America can afford to wage a decades-long two-front war. The more cynical view is that if you don't take a stand on something, you can say you never betrayed your beliefs, which is another way to say: most teabaggers are pro-national defense and want the Pentagon to spend whatever the hell it takes, the deficit be damned. Nor do they take any official stance on social issues.
Are we the people supposed to take the Tea Parties' electoral ambitions seriously when they have nothing to say officially on foreign policy and social issues like abortion? Or is the default assumption supposed to be something like, wherever our views are not expressed, we concur with the Republican party?
Thursday, April 8, 2010
Snopes founder: 'Truth doesn't stand a chance'
"When you're looking at truth versus gossip, truth doesn't stand a chance," said one of Snopes founders.
Alas, it's true. People want to believe these chain e-mails that support their political point of view. Then they forward them on to others. They spread ignorant lies and half-truths and reinforce like-minded friends' slanted beliefs.
The funny thing is how old some of these "news" items are. Often they are jokes or rumors recycled from 5, even 10, years ago and presented as current events.
And 99 percent of the time these e-mail forwards have an hysterical conservative bias. Actually, I can't really think of one liberally slanted hoax or rumor that I have received, but I won't say they don't exist. I just know I get several hoaxes a week bashing Obama, Democrats, liberals, and progressives.
In your half-hearted defense, I grant you it's harder than ever to be a news consumer. Talk radio, blogs, and paid scammers spend a great deal of their time generating and spreading rumors, hoaxes, lies, an half-truths. You don't know what to believe. And probably most of the people hitting Forward are over the age of 40, and grew up in a time when they could trust basically anything they heard in the news. Maybe they thought the news had a liberal slant, but they never doubted that the story referred to real facts and events.
So, you news consumers of the Information Age, please take the time to check some of this crapolla out before you click the Forward button. If you don't like Snopes, because they are in the tank for lib'ruls (an actual rumor spread in chain e-mails, claiming all sorts of bias in Snopes, but without one solid, verifiable example), then use PolitiFact.org, TruthorFiction.com, or UrbanLegends.com. The older false rumors will often appear on several sites.
Or, even better, if you have the time and want to be absolutely sure, be your own fact-checker. If the chain e-mail doesn't contain 1) the author's name, or 2) the source of the article (web site's name, or URL, and the date), then you must be extremely skeptical and regard it as bogus until proven otherwise. You can do this by googling a few key sentences to see if anything pops up. Google the author's name if one is included. If the story is only re-posted millions of times on blogs, then chances are it is a hoax or a rumor. If you choose to believe it anyway, then... you probably want to be deceived.
Snopes' fact-checking couple try to unravel Web of lies
By Brian Stelter
April 5, 2010 | New York Times
No, Kenya did not erect a sign welcoming people to the "birthplace of Barack Obama." No, Wal-Mart did not authorize raids to find illegal immigrants at its stores. No, Social Security numbers are not assigned by race.
David and Barbara Mikkelson investigate such claims — and hundreds of other rumors and legends — on Snopes, one of the most popular fact-checking destinations on the Web.
As the unassuming California couple know better than most, one of the paradoxes of the Internet is that the world's freest access to knowledge also comes with a staggering amount of untruth — from imagined threats of the health-care overhaul to too-easy-to-be-true ways to earn money by (naturally) forwarding an e-mail to 10 friends. Eric Schmidt, Google's chief executive, once memorably declared that the Web was "a cesspool."
The Mikkelsons for 13 years have acted as arbiters in the Age of Misinformation by answering the central question raised by every chain letter — is this true? — complete with links to further research.
The popularity of Snopes — it attracts 7 million to 8 million unique visitors in an average month — puts the couple in an unusual position to evaluate digital society's attitudes toward accuracy. They have concluded that people are rather cavalier about facts.
"Rumors are a great source of comfort for people," Barbara Mikkelson said.
Snopes is one of a small handful of sites in the fact-checking business. Brooks Jackson, director of one of the others, the politically oriented FactCheck.org, believes news organizations should be doing more of it.
"The 'news' that is not fit to print gets through to people anyway these days, through 24-hour cable gasbags, partisan talk-radio hosts and chain e-mails, blogs and Web sites such as WorldNetDaily or Daily Kos," Jackson said in an e-mail. "What readers need now, we find, are honest referees who can help ordinary readers sort out fact from fiction."
Even the White House now cites fact-checking sites: It has circulated links and explanations by PolitiFact.com, a St. Petersburg Times project that won a Pulitzer Prize last year for national reporting.
The Mikkelsons did not set out to fact-check the Web's political smears and screeds. The site was started in 1996 as an online encyclopedia of myths and urban legends, building off the couple's hobby. They had met years earlier on a discussion board about urban legends.
David Mikkelson was a dogged researcher of folklore. When he needed to mail letters requesting information, he would use the letterhead of the San Fernando Valley Folklore Society, an official-sounding organization he dreamed up. He would investigate origins of classic tall tales, such as the legend of the killer with a prosthetic hook who stalked Lovers' Lane, for a small but devoted online audience.
After the Sept. 11 attacks, users overwhelmed the Mikkelsons with forwarded e-mail claims and editorials about the culprits and the failures of the government to halt the plot, and the couple reluctantly accepted a larger role. They still maintain a thorough list of what they call "Rumors of War."
Snopes became the family's full-time job less than a year later. Advertisements sold by a third-party network cover the $3,000-a-month bandwidth bills, with enough left over for the Mikkelsons to make a living — "despite rumors that we're paid by, depending on your choice, the Democratic National Committee or the Republican National Committee," David Mikkelson said.
Much of the site's resources is spent on investigating political claims, even though the Mikkelsons say politics is the last subject they want to write about. (Barbara cannot even vote in U.S. elections; she is a Canadian citizen.) Claims relating to Obama are the top searches on the site, but "even when there were Republicans in the White House, the mail was still overwhelmingly anti-liberal," David Mikkelson said.
In late August, David Mikkelson studied an e-mail chain letter titled "The Last of the Kennedy Dynasty," purporting to explain why the late Sen. Edward M. Kennedy was unfit for acclaim. Some of its 10 bullet points were true (yes, Kennedy was cited for reckless driving while in college), but others were misleading assumptions (no, his accomplishments were not "scant").
Barbara Mikkelson rolled her eyes at her husband's plans to fact-check the chain letter. "That's ephemera," she said.
He agreed, but the Kennedy report wound up being the Web site's most-searched subject the next weekend.
The Mikkelsons employ two others full time to manage the enormous volume of e-mail to the site. Readers increasingly are sending videos and photos as well as e-mail, requiring even more investigation. On average, one new article is published each day.
The enduring articles are the ones about everyday fears: computer viruses, scams, missing children. Some e-mail chain letters, such as the one offering users $245 for forwarding the message, never fade away.
"People keep falling for the same kind of things over and over again," David Mikkelson said. Some readers always seem to believe, for instance, that the government is trying to poison them: Barbara Mikkelson said rumors about AIDS have been recycled into rumors about swine-flu vaccines.
For the Mikkelsons, the site affirms what cultural critics have bemoaned for years: the rejection of nuance and facts that run contrary to one's point of view.
"Especially in politics," David Mikkelson said, "most everything has infinite shades of gray to it, but people just want things to be true or false. In the larger sense, it's people wanting confirmation of their world view."
The couple say they regularly receive grateful messages from teachers, and an award from a media literacy association sits atop the TV set in David Mikkelson's home office.
It is not just the naiveté of Web users that worries the "Snopesters," a name for the Web site's community of fans and volunteers. It is also what David Mikkelson calls "a trend toward the opposite approach, hyper-skepticism."
"People get an e-mail or a photograph and they spot one little thing that doesn't look right, and they declare the whole thing fake," he said. "That's just as bad as being gullible in a lot of senses."
But even though Snopes pays the bills for the couple now, through advertising revenue, they doubt they are having much of an impact.
"It's not like, 'Well, we have to get out there and defend the truth,' " Barbara Mikkelson said. "When you're looking at truth versus gossip, truth doesn't stand a chance."
Alas, it's true. People want to believe these chain e-mails that support their political point of view. Then they forward them on to others. They spread ignorant lies and half-truths and reinforce like-minded friends' slanted beliefs.
The funny thing is how old some of these "news" items are. Often they are jokes or rumors recycled from 5, even 10, years ago and presented as current events.
And 99 percent of the time these e-mail forwards have an hysterical conservative bias. Actually, I can't really think of one liberally slanted hoax or rumor that I have received, but I won't say they don't exist. I just know I get several hoaxes a week bashing Obama, Democrats, liberals, and progressives.
In your half-hearted defense, I grant you it's harder than ever to be a news consumer. Talk radio, blogs, and paid scammers spend a great deal of their time generating and spreading rumors, hoaxes, lies, an half-truths. You don't know what to believe. And probably most of the people hitting Forward are over the age of 40, and grew up in a time when they could trust basically anything they heard in the news. Maybe they thought the news had a liberal slant, but they never doubted that the story referred to real facts and events.
So, you news consumers of the Information Age, please take the time to check some of this crapolla out before you click the Forward button. If you don't like Snopes, because they are in the tank for lib'ruls (an actual rumor spread in chain e-mails, claiming all sorts of bias in Snopes, but without one solid, verifiable example), then use PolitiFact.org, TruthorFiction.com, or UrbanLegends.com. The older false rumors will often appear on several sites.
Or, even better, if you have the time and want to be absolutely sure, be your own fact-checker. If the chain e-mail doesn't contain 1) the author's name, or 2) the source of the article (web site's name, or URL, and the date), then you must be extremely skeptical and regard it as bogus until proven otherwise. You can do this by googling a few key sentences to see if anything pops up. Google the author's name if one is included. If the story is only re-posted millions of times on blogs, then chances are it is a hoax or a rumor. If you choose to believe it anyway, then... you probably want to be deceived.
Snopes' fact-checking couple try to unravel Web of lies
By Brian Stelter
April 5, 2010 | New York Times
No, Kenya did not erect a sign welcoming people to the "birthplace of Barack Obama." No, Wal-Mart did not authorize raids to find illegal immigrants at its stores. No, Social Security numbers are not assigned by race.
David and Barbara Mikkelson investigate such claims — and hundreds of other rumors and legends — on Snopes, one of the most popular fact-checking destinations on the Web.
As the unassuming California couple know better than most, one of the paradoxes of the Internet is that the world's freest access to knowledge also comes with a staggering amount of untruth — from imagined threats of the health-care overhaul to too-easy-to-be-true ways to earn money by (naturally) forwarding an e-mail to 10 friends. Eric Schmidt, Google's chief executive, once memorably declared that the Web was "a cesspool."
The Mikkelsons for 13 years have acted as arbiters in the Age of Misinformation by answering the central question raised by every chain letter — is this true? — complete with links to further research.
The popularity of Snopes — it attracts 7 million to 8 million unique visitors in an average month — puts the couple in an unusual position to evaluate digital society's attitudes toward accuracy. They have concluded that people are rather cavalier about facts.
"Rumors are a great source of comfort for people," Barbara Mikkelson said.
Snopes is one of a small handful of sites in the fact-checking business. Brooks Jackson, director of one of the others, the politically oriented FactCheck.org, believes news organizations should be doing more of it.
"The 'news' that is not fit to print gets through to people anyway these days, through 24-hour cable gasbags, partisan talk-radio hosts and chain e-mails, blogs and Web sites such as WorldNetDaily or Daily Kos," Jackson said in an e-mail. "What readers need now, we find, are honest referees who can help ordinary readers sort out fact from fiction."
Even the White House now cites fact-checking sites: It has circulated links and explanations by PolitiFact.com, a St. Petersburg Times project that won a Pulitzer Prize last year for national reporting.
The Mikkelsons did not set out to fact-check the Web's political smears and screeds. The site was started in 1996 as an online encyclopedia of myths and urban legends, building off the couple's hobby. They had met years earlier on a discussion board about urban legends.
David Mikkelson was a dogged researcher of folklore. When he needed to mail letters requesting information, he would use the letterhead of the San Fernando Valley Folklore Society, an official-sounding organization he dreamed up. He would investigate origins of classic tall tales, such as the legend of the killer with a prosthetic hook who stalked Lovers' Lane, for a small but devoted online audience.
After the Sept. 11 attacks, users overwhelmed the Mikkelsons with forwarded e-mail claims and editorials about the culprits and the failures of the government to halt the plot, and the couple reluctantly accepted a larger role. They still maintain a thorough list of what they call "Rumors of War."
Snopes became the family's full-time job less than a year later. Advertisements sold by a third-party network cover the $3,000-a-month bandwidth bills, with enough left over for the Mikkelsons to make a living — "despite rumors that we're paid by, depending on your choice, the Democratic National Committee or the Republican National Committee," David Mikkelson said.
Much of the site's resources is spent on investigating political claims, even though the Mikkelsons say politics is the last subject they want to write about. (Barbara cannot even vote in U.S. elections; she is a Canadian citizen.) Claims relating to Obama are the top searches on the site, but "even when there were Republicans in the White House, the mail was still overwhelmingly anti-liberal," David Mikkelson said.
In late August, David Mikkelson studied an e-mail chain letter titled "The Last of the Kennedy Dynasty," purporting to explain why the late Sen. Edward M. Kennedy was unfit for acclaim. Some of its 10 bullet points were true (yes, Kennedy was cited for reckless driving while in college), but others were misleading assumptions (no, his accomplishments were not "scant").
Barbara Mikkelson rolled her eyes at her husband's plans to fact-check the chain letter. "That's ephemera," she said.
He agreed, but the Kennedy report wound up being the Web site's most-searched subject the next weekend.
The Mikkelsons employ two others full time to manage the enormous volume of e-mail to the site. Readers increasingly are sending videos and photos as well as e-mail, requiring even more investigation. On average, one new article is published each day.
The enduring articles are the ones about everyday fears: computer viruses, scams, missing children. Some e-mail chain letters, such as the one offering users $245 for forwarding the message, never fade away.
"People keep falling for the same kind of things over and over again," David Mikkelson said. Some readers always seem to believe, for instance, that the government is trying to poison them: Barbara Mikkelson said rumors about AIDS have been recycled into rumors about swine-flu vaccines.
For the Mikkelsons, the site affirms what cultural critics have bemoaned for years: the rejection of nuance and facts that run contrary to one's point of view.
"Especially in politics," David Mikkelson said, "most everything has infinite shades of gray to it, but people just want things to be true or false. In the larger sense, it's people wanting confirmation of their world view."
The couple say they regularly receive grateful messages from teachers, and an award from a media literacy association sits atop the TV set in David Mikkelson's home office.
It is not just the naiveté of Web users that worries the "Snopesters," a name for the Web site's community of fans and volunteers. It is also what David Mikkelson calls "a trend toward the opposite approach, hyper-skepticism."
"People get an e-mail or a photograph and they spot one little thing that doesn't look right, and they declare the whole thing fake," he said. "That's just as bad as being gullible in a lot of senses."
But even though Snopes pays the bills for the couple now, through advertising revenue, they doubt they are having much of an impact.
"It's not like, 'Well, we have to get out there and defend the truth,' " Barbara Mikkelson said. "When you're looking at truth versus gossip, truth doesn't stand a chance."
Friday, April 2, 2010
Taibbi: How Wall St. bribed and looted Birmingham
Meanwhile Glenn Beck and the teabaggers are spitting mad at "progressives." That's like yelling at the firemen for trampling your lawn as your house is on fire!
Looting Main Street
How the nation's biggest banks are ripping off American cities with the same predatory deals that brought down Greece
By Matt Taibbi
March 31, 2010 Rolling Stone
If you want to know what life in the Third World is like, just ask Lisa Pack, an administrative assistant who works in the roads and transportation department in Jefferson County, Alabama. Pack got rudely introduced to life in post-crisis America last August, when word came down that she and 1,000 of her fellow public employees would have to take a little unpaid vacation for a while. The county, it turned out, was more than $5 billion in debt — meaning that courthouses, jails and sheriff's precincts had to be closed so that Wall Street banks could be paid.
As public services in and around Birmingham were stripped to the bone, Pack struggled to support her family on a weekly unemployment check of $260. Nearly a fourth of that went to pay for her health insurance, which the county no longer covered. She also fielded calls from laid-off co-workers who had it even tougher. "I'd be on the phone sometimes until two in the morning," she says. "I had to talk more than one person out of suicide. For some of the men supporting families, it was so hard — foreclosure, bankruptcy. I'd go to bed at night, and I'd be in tears."
Homes stood empty, businesses were boarded up, and parts of already-blighted Birmingham began to take on the feel of a ghost town. There were also a few bills that were unique to the area — like the $64 sewer bill that Pack and her family paid each month. "Yeah, it went up about 400 percent just over the past few years," she says.
The sewer bill, in fact, is what cost Pack and her co-workers their jobs. In 1996, the average monthly sewer bill for a family of four in Birmingham was only $14.71 — but that was before the county decided to build an elaborate new sewer system with the help of out-of-state financial wizards with names like Bear Stearns, Lehman Brothers, Goldman Sachs and JP Morgan Chase. The result was a monstrous pile of borrowed money that the county used to build, in essence, the world's grandest toilet — "the Taj Mahal of sewer-treatment plants" is how one county worker put it. What happened here in Jefferson County would turn out to be the perfect metaphor for the peculiar alchemy of modern oligarchical capitalism: A mob of corrupt local officials and morally absent financiers got together to build a giant device that converted human shit into billions of dollars of profit for Wall Street — and misery for people like Lisa Pack.
And once the giant shit machine was built and the note on all that fancy construction started to come due, Wall Street came back to the local politicians and doubled down on the scam. They showed up in droves to help the poor, broke citizens of Jefferson County cut their toilet finance charges using a blizzard of incomprehensible swaps and refinance schemes — schemes that only served to postpone the repayment date a year or two while sinking the county deeper into debt. In the end, every time Jefferson County so much as breathed near one of the banks, it got charged millions in fees. There was so much money to be made bilking these dizzy Southerners that banks like JP Morgan spent millions paying middlemen who bribed — yes, that's right, bribed, criminally bribed — the county commissioners and their buddies just to keep their business. Hell, the money was so good, JP Morgan at one point even paid Goldman Sachs $3 million just to back the fuck off, so they could have the rubes of Jefferson County to fleece all for themselves.
Birmingham became the poster child for a new kind of giant-scale financial fraud, one that would threaten the financial stability not only of cities and counties all across America, but even those of entire countries like Greece. While for many Americans the financial crisis remains an abstraction, a confusing mess of complex transactions that took place on a cloud high above Manhattan sometime in the mid-2000s, in Jefferson County you can actually see the rank criminality of the crisis economy with your own eyes; the monster sticks his head all the way out of the water. Here you can see a trail that leads directly from a billion-dollar predatory swap deal cooked up at the highest levels of America's biggest banks, across a vast fruited plain of bribes and felonies — "the price of doing business," as one JP Morgan banker says on tape — all the way down to Lisa Pack's sewer bill and the mass layoffs in Birmingham.
Once you follow that trail and understand what took place in Jefferson County, there's really no room left for illusions. We live in a gangster state, and our days of laughing at other countries are over. It's our turn to get laughed at. In Birmingham, lots of people have gone to jail for the crime: More than 20 local officials and businessmen have been convicted of corruption in federal court. Last October, right around the time that Lisa Pack went back to work at reduced hours, Birmingham's mayor was convicted of fraud and money-laundering for taking bribes funneled to him by Wall Street bankers — everything from Rolex watches to Ferragamo suits to cash. But those who greenlighted the bribes and profited most from the scam remain largely untouched. "It never gets back to JP Morgan," says Pack.
If you want to get all Glenn Beck about it, you could lay the blame for this entire mess at the feet of weepy, tree-hugging environmentalists. It all started with the Cahaba River, the longest free-flowing river in the state of Alabama. The tributary, which winds its way through Birmingham before turning diagonally to empty out near Selma, is home to more types of fish per mile than any other river in America and shelters 64 rare and imperiled species of plants and animals. It's also the source of one of the worst municipal financial disasters in American history.
Back in the early 1990s, the county's sewer system was so antiquated that it was leaking raw sewage directly into the Cahaba, which also supplies the area with its drinking water. Joined by well — intentioned citizens from the Cahaba River Society, the EPA sued the county to force it to comply with the Clean Water Act. In 1996, county commissioners signed a now-infamous consent decree agreeing not just to fix the leaky pipes but to eliminate all sewer overflows — a near-impossible standard that required the county to build the most elaborate, ecofriendly, expensive sewer system in the history of the universe. It was like ordering a small town in Florida that gets a snowstorm once every five years to build a billion-dollar fleet of snowplows.
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.
In a small office in a federal building in downtown Birmingham, just blocks from where civil rights demonstrators shut down the city in 1963, Assistant U.S. Attorney George Martin points out the window. He's pointing in the direction of the Tutwiler Hotel, once home to one of the grandest ballrooms in the South but now part of the Hampton Inn chain.
"It was right around the corner here, at the hotel," Martin says. "That's where they met — that's where this all started."
They means Charles LeCroy and Bill Blount, the two principals in what would become the most important of all the corruption cases in Jefferson County. LeCroy was a banker for JP Morgan, serving as managing director of the bank's southeast regional office. Blount was an Alabama wheeler-dealer with close friends on the county commission. For years, when Wall Street banks wanted to do business with municipalities, whether for bond issues or rate swaps, it was standard practice to reach out to a local sleazeball like Blount and pay him a shitload of money to help seal the deal. "Banks would pay some local consultant, and the consultant would then funnel money to the politician making the decision," says Christopher Taylor, the former head of the board that regulates municipal borrowing. Back in the 1990s, Taylor pushed through a ban on such backdoor bribery. He also passed a ban on bankers contributing directly to politicians they do business with — a move that sparked a lawsuit by one aggrieved sleazeball, who argued that halting such legalized graft violated his First Amendment rights. The name of that pissed-off banker? "It was the one and only Bill Blount," Taylor says with a laugh.
Blount is a stocky, stubby-fingered Southerner with glasses and a pale, pinched face — if Norman Rockwell had ever done a painting titled "Small-Town Accountant Taking Enormous Dump," it would look just like Blount. LeCroy, his sugar daddy at JP Morgan, is a tall, bloodless, crisply dressed corporate operator with a shiny bald head and silver side patches — a cross between Skeletor and Michael Stipe.
The scheme they operated went something like this: LeCroy paid Blount millions of dollars, and Blount turned around and used the money to buy lavish gifts for his close friend Larry Langford, the now-convicted Birmingham mayor who at the time had just been elected president of the county commission. (At one point Blount took Langford on a shopping spree in New York, putting $3,290 worth of clothes from Zegna on his credit card.) Langford then signed off on one after another of the deadly swap deals being pushed by LeCroy. Every time the county refinanced its sewer debt, JP Morgan made millions of dollars in fees. Even more lucrative, each of the swap contracts contained clauses that mandated all sorts of penalties and payments in the event that something went wrong with the deal. In the mortgage business, this process is known as churning: You keep coming back over and over to refinance, and they keep "churning" you for more and more fees. "The transactions were complex, but the scheme was simple," said Robert Khuzami, director of enforcement for the SEC. "Senior JP Morgan bankers made unlawful payments to win business and earn fees."
Given the shitload of money to be made on the refinancing deals, JP Morgan was prepared to pay whatever it took to buy off officials in Jefferson County. In 2002, during a conversation recorded in Nixonian fashion by JP Morgan itself, LeCroy bragged that he had agreed to funnel payoff money to a pair of local companies to secure the votes of two county commissioners. "Look," the commissioners told him, "if we support the synthetic refunding, you guys have to take care of our two firms." LeCroy didn't blink. "Whatever you want," he told them. "If that's what you need, that's what you get. Just tell us how much."
Just tell us how much. That sums up the approach that JP Morgan took a few months later, when Langford announced that his good buddy Bill Blount would henceforth be involved with every financing transaction for Jefferson County. From JP Morgan's point of view, the decision to pay off Blount was a no-brainer. But the bank had one small problem: Goldman Sachs had already crawled up Blount's trouser leg, and the broker was advising Langford to pick them as Jefferson County's investment bank.
The solution they came up with was an extraordinary one: JP Morgan cut a separate deal with Goldman, paying the bank $3 million to fuck off, with Blount taking a $300,000 cut of the side deal. Suddenly Goldman was out and JP Morgan was sitting in Langford's lap. In another conversation caught on tape, LeCroy joked that the deal was his "philanthropic work," since the payoff amounted to a "charitable donation to Goldman Sachs" in return for "taking no risk."
That such a blatant violation of anti-trust laws took place and neither JP Morgan nor Goldman have been prosecuted for it is yet another mystery of the current financial crisis. "This is an open-and-shut case of anti-competitive behavior," says Taylor, the former regulator.
With Goldman out of the way, JP Morgan won the right to do a $1.1 billion bond offering — switching Jefferson County out of fixed-rate debt into variable-rate debt — and also did a corresponding $1.1 billion deal for a synthetic rate swap. The very same day the transaction was concluded, in May 2003, LeCroy had dinner with Langford and struck a deal to do yet another bond-and-swap transaction of roughly the same size. This time, the terms of the payoff were spelled out more explicitly. In a hilarious phone call between LeCroy and Douglas MacFaddin, another JP Morgan official, the two bankers groaned aloud about how much it was going to cost to satisfy Blount:
LeCroy: I said, "Commissioner Langford, I'll do that because that's your suggestion, but you gotta help us keep him under control. Because when you give that guy a hand, he takes your arm." You know?
MacFaddin: [Laughing] Yeah, you end up in the wood-chipper.
All told, JP Morgan ended up paying Blount nearly $3 million for "performing no known services," in the words of the SEC. In at least one of the deals, Blount made upward of 15 percent of JP Morgan's entire fee. When I ask Taylor what a legitimate consultant might earn in such a circumstance, he laughs. "What's a 'legitimate consultant' in a case like this? He made this money for doing jack shit."
As the tapes of LeCroy's calls show, even officials at JP Morgan were incredulous at the money being funneled to Blount. "How does he get 15 percent?" one associate at the bank asks LeCroy. "For doing what? For not messing with us?"
"Not messing with us," LeCroy agrees. "It's a lot of money, but in the end, it's worth it on a billion-dollar deal."
That's putting it mildly: The deals wound up being the largest swap agreements in JP Morgan's history. Making matters worse, the payoffs didn't even wind up costing the bank a dime. As the SEC explained in a statement on the scam, JP Morgan "passed on the cost of the unlawful payments by charging the county higher interest rates on the swap transactions." In other words, not only did the bank bribe local politicians to take the sucky deal, they got local taxpayers to pay for the bribes. And because Jefferson County had no idea what kind of deal it was getting on the swaps, JP Morgan could basically charge whatever it wanted. According to an analysis of the swap deals commissioned by the county in 2007, taxpayers had been overcharged at least $93 million on the transactions.
JP Morgan was far from alone in the scam: Virtually everyone doing business in Jefferson County was on the take. Four of the nation's top investment banks, the very cream of American finance, were involved in one way or another with payoffs to Blount in their scramble to do business with the county. In addition to JP Morgan and Goldman Sachs, Bear Stearns paid Langford's bagman $2.4 million, while Lehman Brothers got off cheap with a $35,000 "arranger's fee." At least a dozen of the county's contractors were also cashing in, along with many of the county commissioners. "If you go into the county courthouse," says Michael Morrison, a planner who works for the county, "there's a gallery of past commissioners on the wall. On the top row, every single one of 'em but two has been investigated, indicted or convicted. It's a joke."
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.
In the end, though, all this bribery and graft was just the table-setter for the real disaster. In taking all those bribes and signing on to all those swaps, the commissioners in Jefferson County had basically started the clock on a financial time bomb that, sooner or later, had to explode. By continually refinancing to keep the county in its giant McMansion, the commission had managed to push into the future that inevitable day when the real bill would arrive in the mail. But that's where the mortgage analogy ends — because in one key area, a swap deal differs from a home mortgage. Imagine a mortgage that you have to keep on paying even after you sell your house. That's basically how a swap deal works. And Jefferson County had done 23 of them. At one point, they had more outstanding swaps than New York City.
Judgment Day was coming — just like it was for the Delaware River Port Authority, the Pennsylvania school system, the cities of Detroit, Chicago, Oakland and Los Angeles, the states of Connecticut and Mississippi, the city of Milan and nearly 500 other municipalities in Italy, the country of Greece, and God knows who else. All of these places are now reeling under the weight of similarly elaborate and ill-advised swaps — and if what happened in Jefferson County is any guide, hoo boy. Because when the shit hit the fan in Birmingham, it really hit the fan.
For Jefferson County, the deal blew up in early 2008, when a dizzying array of penalties and other fine-print poison worked into the swap contracts started to kick in. The trouble began with the housing crash, which took down the insurance companies that had underwritten the county's bonds. That rendered the county's insurance worthless, triggering clauses in its swap contracts that required it to pay off more than $800 million of its debt in only four years, rather than 40. That, in turn, scared off private lenders, who were no longer interested in bidding on the county's bonds. The banks were forced to make up the difference — a service for which they charged enormous penalties. It was as if the county had missed a payment on its credit card and woke up the next morning to find its annual percentage rate jacked up to a million percent. Between 2008 and 2009, the annual payment on Jefferson County's debt jumped from $53 million to a whopping $636 million.
It gets worse. Remember the swap deal that Jefferson County did with JP Morgan, how the variable rates it got from the bank were supposed to match those it owed its bondholders? Well, they didn't. Most of the payments the county was receiving from JP Morgan were based on one set of interest rates (the London Interbank Exchange Rate), while the payments it owed to its bondholders followed a different set of rates (a municipal-bond index). Jefferson County was suddenly getting far less from JP Morgan, and owing tons more to bondholders. In other words, the bank and Bill Blount made tens of millions of dollars selling deals to local politicians that were not only completely defective, but blew the entire county to smithereens.
And here's the kicker. Last year, when Jefferson County, staggered by the weight of its penalties, was unable to make its swap payments to JP Morgan, the bank canceled the deal. That triggered one-time "termination fees" of — yes, you read this right — $647 million. That was money the county would owe no matter what happened with the rest of its debt, even if bondholders decided to forgive and forget every dime the county had borrowed. It was like the herpes simplex of loans — debt that does not go away, ever, for as long as you live. On a sewer project that was originally supposed to cost $250 million, the county now owed a total of $1.28 billion just in interest and fees on the debt. Imagine paying $250,000 a year on a car you purchased for $50,000, and that's roughly where Jefferson County stood at the end of last year.
Last November, the SEC charged JP Morgan with fraud and canceled the $647 million in termination fees. The bank agreed to pay a $25 million fine and fork over $50 million to assist displaced workers in Jefferson County. So far, the county has managed to avoid bankruptcy, but the sewer fiasco had downgraded its credit rating, triggering payments on other outstanding loans and pushing Birmingham toward the status of an African debtor state. For the next generation, the county will be in a constant fight to collect enough taxes just to pay off its debt, which now totals $4,800 per resident.
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.
Looting Main Street
How the nation's biggest banks are ripping off American cities with the same predatory deals that brought down Greece
By Matt Taibbi
March 31, 2010 Rolling Stone
If you want to know what life in the Third World is like, just ask Lisa Pack, an administrative assistant who works in the roads and transportation department in Jefferson County, Alabama. Pack got rudely introduced to life in post-crisis America last August, when word came down that she and 1,000 of her fellow public employees would have to take a little unpaid vacation for a while. The county, it turned out, was more than $5 billion in debt — meaning that courthouses, jails and sheriff's precincts had to be closed so that Wall Street banks could be paid.
As public services in and around Birmingham were stripped to the bone, Pack struggled to support her family on a weekly unemployment check of $260. Nearly a fourth of that went to pay for her health insurance, which the county no longer covered. She also fielded calls from laid-off co-workers who had it even tougher. "I'd be on the phone sometimes until two in the morning," she says. "I had to talk more than one person out of suicide. For some of the men supporting families, it was so hard — foreclosure, bankruptcy. I'd go to bed at night, and I'd be in tears."
Homes stood empty, businesses were boarded up, and parts of already-blighted Birmingham began to take on the feel of a ghost town. There were also a few bills that were unique to the area — like the $64 sewer bill that Pack and her family paid each month. "Yeah, it went up about 400 percent just over the past few years," she says.
The sewer bill, in fact, is what cost Pack and her co-workers their jobs. In 1996, the average monthly sewer bill for a family of four in Birmingham was only $14.71 — but that was before the county decided to build an elaborate new sewer system with the help of out-of-state financial wizards with names like Bear Stearns, Lehman Brothers, Goldman Sachs and JP Morgan Chase. The result was a monstrous pile of borrowed money that the county used to build, in essence, the world's grandest toilet — "the Taj Mahal of sewer-treatment plants" is how one county worker put it. What happened here in Jefferson County would turn out to be the perfect metaphor for the peculiar alchemy of modern oligarchical capitalism: A mob of corrupt local officials and morally absent financiers got together to build a giant device that converted human shit into billions of dollars of profit for Wall Street — and misery for people like Lisa Pack.
And once the giant shit machine was built and the note on all that fancy construction started to come due, Wall Street came back to the local politicians and doubled down on the scam. They showed up in droves to help the poor, broke citizens of Jefferson County cut their toilet finance charges using a blizzard of incomprehensible swaps and refinance schemes — schemes that only served to postpone the repayment date a year or two while sinking the county deeper into debt. In the end, every time Jefferson County so much as breathed near one of the banks, it got charged millions in fees. There was so much money to be made bilking these dizzy Southerners that banks like JP Morgan spent millions paying middlemen who bribed — yes, that's right, bribed, criminally bribed — the county commissioners and their buddies just to keep their business. Hell, the money was so good, JP Morgan at one point even paid Goldman Sachs $3 million just to back the fuck off, so they could have the rubes of Jefferson County to fleece all for themselves.
Birmingham became the poster child for a new kind of giant-scale financial fraud, one that would threaten the financial stability not only of cities and counties all across America, but even those of entire countries like Greece. While for many Americans the financial crisis remains an abstraction, a confusing mess of complex transactions that took place on a cloud high above Manhattan sometime in the mid-2000s, in Jefferson County you can actually see the rank criminality of the crisis economy with your own eyes; the monster sticks his head all the way out of the water. Here you can see a trail that leads directly from a billion-dollar predatory swap deal cooked up at the highest levels of America's biggest banks, across a vast fruited plain of bribes and felonies — "the price of doing business," as one JP Morgan banker says on tape — all the way down to Lisa Pack's sewer bill and the mass layoffs in Birmingham.
Once you follow that trail and understand what took place in Jefferson County, there's really no room left for illusions. We live in a gangster state, and our days of laughing at other countries are over. It's our turn to get laughed at. In Birmingham, lots of people have gone to jail for the crime: More than 20 local officials and businessmen have been convicted of corruption in federal court. Last October, right around the time that Lisa Pack went back to work at reduced hours, Birmingham's mayor was convicted of fraud and money-laundering for taking bribes funneled to him by Wall Street bankers — everything from Rolex watches to Ferragamo suits to cash. But those who greenlighted the bribes and profited most from the scam remain largely untouched. "It never gets back to JP Morgan," says Pack.
If you want to get all Glenn Beck about it, you could lay the blame for this entire mess at the feet of weepy, tree-hugging environmentalists. It all started with the Cahaba River, the longest free-flowing river in the state of Alabama. The tributary, which winds its way through Birmingham before turning diagonally to empty out near Selma, is home to more types of fish per mile than any other river in America and shelters 64 rare and imperiled species of plants and animals. It's also the source of one of the worst municipal financial disasters in American history.
Back in the early 1990s, the county's sewer system was so antiquated that it was leaking raw sewage directly into the Cahaba, which also supplies the area with its drinking water. Joined by well — intentioned citizens from the Cahaba River Society, the EPA sued the county to force it to comply with the Clean Water Act. In 1996, county commissioners signed a now-infamous consent decree agreeing not just to fix the leaky pipes but to eliminate all sewer overflows — a near-impossible standard that required the county to build the most elaborate, ecofriendly, expensive sewer system in the history of the universe. It was like ordering a small town in Florida that gets a snowstorm once every five years to build a billion-dollar fleet of snowplows.
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.
In a small office in a federal building in downtown Birmingham, just blocks from where civil rights demonstrators shut down the city in 1963, Assistant U.S. Attorney George Martin points out the window. He's pointing in the direction of the Tutwiler Hotel, once home to one of the grandest ballrooms in the South but now part of the Hampton Inn chain.
"It was right around the corner here, at the hotel," Martin says. "That's where they met — that's where this all started."
They means Charles LeCroy and Bill Blount, the two principals in what would become the most important of all the corruption cases in Jefferson County. LeCroy was a banker for JP Morgan, serving as managing director of the bank's southeast regional office. Blount was an Alabama wheeler-dealer with close friends on the county commission. For years, when Wall Street banks wanted to do business with municipalities, whether for bond issues or rate swaps, it was standard practice to reach out to a local sleazeball like Blount and pay him a shitload of money to help seal the deal. "Banks would pay some local consultant, and the consultant would then funnel money to the politician making the decision," says Christopher Taylor, the former head of the board that regulates municipal borrowing. Back in the 1990s, Taylor pushed through a ban on such backdoor bribery. He also passed a ban on bankers contributing directly to politicians they do business with — a move that sparked a lawsuit by one aggrieved sleazeball, who argued that halting such legalized graft violated his First Amendment rights. The name of that pissed-off banker? "It was the one and only Bill Blount," Taylor says with a laugh.
Blount is a stocky, stubby-fingered Southerner with glasses and a pale, pinched face — if Norman Rockwell had ever done a painting titled "Small-Town Accountant Taking Enormous Dump," it would look just like Blount. LeCroy, his sugar daddy at JP Morgan, is a tall, bloodless, crisply dressed corporate operator with a shiny bald head and silver side patches — a cross between Skeletor and Michael Stipe.
The scheme they operated went something like this: LeCroy paid Blount millions of dollars, and Blount turned around and used the money to buy lavish gifts for his close friend Larry Langford, the now-convicted Birmingham mayor who at the time had just been elected president of the county commission. (At one point Blount took Langford on a shopping spree in New York, putting $3,290 worth of clothes from Zegna on his credit card.) Langford then signed off on one after another of the deadly swap deals being pushed by LeCroy. Every time the county refinanced its sewer debt, JP Morgan made millions of dollars in fees. Even more lucrative, each of the swap contracts contained clauses that mandated all sorts of penalties and payments in the event that something went wrong with the deal. In the mortgage business, this process is known as churning: You keep coming back over and over to refinance, and they keep "churning" you for more and more fees. "The transactions were complex, but the scheme was simple," said Robert Khuzami, director of enforcement for the SEC. "Senior JP Morgan bankers made unlawful payments to win business and earn fees."
Given the shitload of money to be made on the refinancing deals, JP Morgan was prepared to pay whatever it took to buy off officials in Jefferson County. In 2002, during a conversation recorded in Nixonian fashion by JP Morgan itself, LeCroy bragged that he had agreed to funnel payoff money to a pair of local companies to secure the votes of two county commissioners. "Look," the commissioners told him, "if we support the synthetic refunding, you guys have to take care of our two firms." LeCroy didn't blink. "Whatever you want," he told them. "If that's what you need, that's what you get. Just tell us how much."
Just tell us how much. That sums up the approach that JP Morgan took a few months later, when Langford announced that his good buddy Bill Blount would henceforth be involved with every financing transaction for Jefferson County. From JP Morgan's point of view, the decision to pay off Blount was a no-brainer. But the bank had one small problem: Goldman Sachs had already crawled up Blount's trouser leg, and the broker was advising Langford to pick them as Jefferson County's investment bank.
The solution they came up with was an extraordinary one: JP Morgan cut a separate deal with Goldman, paying the bank $3 million to fuck off, with Blount taking a $300,000 cut of the side deal. Suddenly Goldman was out and JP Morgan was sitting in Langford's lap. In another conversation caught on tape, LeCroy joked that the deal was his "philanthropic work," since the payoff amounted to a "charitable donation to Goldman Sachs" in return for "taking no risk."
That such a blatant violation of anti-trust laws took place and neither JP Morgan nor Goldman have been prosecuted for it is yet another mystery of the current financial crisis. "This is an open-and-shut case of anti-competitive behavior," says Taylor, the former regulator.
With Goldman out of the way, JP Morgan won the right to do a $1.1 billion bond offering — switching Jefferson County out of fixed-rate debt into variable-rate debt — and also did a corresponding $1.1 billion deal for a synthetic rate swap. The very same day the transaction was concluded, in May 2003, LeCroy had dinner with Langford and struck a deal to do yet another bond-and-swap transaction of roughly the same size. This time, the terms of the payoff were spelled out more explicitly. In a hilarious phone call between LeCroy and Douglas MacFaddin, another JP Morgan official, the two bankers groaned aloud about how much it was going to cost to satisfy Blount:
LeCroy: I said, "Commissioner Langford, I'll do that because that's your suggestion, but you gotta help us keep him under control. Because when you give that guy a hand, he takes your arm." You know?
MacFaddin: [Laughing] Yeah, you end up in the wood-chipper.
All told, JP Morgan ended up paying Blount nearly $3 million for "performing no known services," in the words of the SEC. In at least one of the deals, Blount made upward of 15 percent of JP Morgan's entire fee. When I ask Taylor what a legitimate consultant might earn in such a circumstance, he laughs. "What's a 'legitimate consultant' in a case like this? He made this money for doing jack shit."
As the tapes of LeCroy's calls show, even officials at JP Morgan were incredulous at the money being funneled to Blount. "How does he get 15 percent?" one associate at the bank asks LeCroy. "For doing what? For not messing with us?"
"Not messing with us," LeCroy agrees. "It's a lot of money, but in the end, it's worth it on a billion-dollar deal."
That's putting it mildly: The deals wound up being the largest swap agreements in JP Morgan's history. Making matters worse, the payoffs didn't even wind up costing the bank a dime. As the SEC explained in a statement on the scam, JP Morgan "passed on the cost of the unlawful payments by charging the county higher interest rates on the swap transactions." In other words, not only did the bank bribe local politicians to take the sucky deal, they got local taxpayers to pay for the bribes. And because Jefferson County had no idea what kind of deal it was getting on the swaps, JP Morgan could basically charge whatever it wanted. According to an analysis of the swap deals commissioned by the county in 2007, taxpayers had been overcharged at least $93 million on the transactions.
JP Morgan was far from alone in the scam: Virtually everyone doing business in Jefferson County was on the take. Four of the nation's top investment banks, the very cream of American finance, were involved in one way or another with payoffs to Blount in their scramble to do business with the county. In addition to JP Morgan and Goldman Sachs, Bear Stearns paid Langford's bagman $2.4 million, while Lehman Brothers got off cheap with a $35,000 "arranger's fee." At least a dozen of the county's contractors were also cashing in, along with many of the county commissioners. "If you go into the county courthouse," says Michael Morrison, a planner who works for the county, "there's a gallery of past commissioners on the wall. On the top row, every single one of 'em but two has been investigated, indicted or convicted. It's a joke."
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.
In the end, though, all this bribery and graft was just the table-setter for the real disaster. In taking all those bribes and signing on to all those swaps, the commissioners in Jefferson County had basically started the clock on a financial time bomb that, sooner or later, had to explode. By continually refinancing to keep the county in its giant McMansion, the commission had managed to push into the future that inevitable day when the real bill would arrive in the mail. But that's where the mortgage analogy ends — because in one key area, a swap deal differs from a home mortgage. Imagine a mortgage that you have to keep on paying even after you sell your house. That's basically how a swap deal works. And Jefferson County had done 23 of them. At one point, they had more outstanding swaps than New York City.
Judgment Day was coming — just like it was for the Delaware River Port Authority, the Pennsylvania school system, the cities of Detroit, Chicago, Oakland and Los Angeles, the states of Connecticut and Mississippi, the city of Milan and nearly 500 other municipalities in Italy, the country of Greece, and God knows who else. All of these places are now reeling under the weight of similarly elaborate and ill-advised swaps — and if what happened in Jefferson County is any guide, hoo boy. Because when the shit hit the fan in Birmingham, it really hit the fan.
For Jefferson County, the deal blew up in early 2008, when a dizzying array of penalties and other fine-print poison worked into the swap contracts started to kick in. The trouble began with the housing crash, which took down the insurance companies that had underwritten the county's bonds. That rendered the county's insurance worthless, triggering clauses in its swap contracts that required it to pay off more than $800 million of its debt in only four years, rather than 40. That, in turn, scared off private lenders, who were no longer interested in bidding on the county's bonds. The banks were forced to make up the difference — a service for which they charged enormous penalties. It was as if the county had missed a payment on its credit card and woke up the next morning to find its annual percentage rate jacked up to a million percent. Between 2008 and 2009, the annual payment on Jefferson County's debt jumped from $53 million to a whopping $636 million.
It gets worse. Remember the swap deal that Jefferson County did with JP Morgan, how the variable rates it got from the bank were supposed to match those it owed its bondholders? Well, they didn't. Most of the payments the county was receiving from JP Morgan were based on one set of interest rates (the London Interbank Exchange Rate), while the payments it owed to its bondholders followed a different set of rates (a municipal-bond index). Jefferson County was suddenly getting far less from JP Morgan, and owing tons more to bondholders. In other words, the bank and Bill Blount made tens of millions of dollars selling deals to local politicians that were not only completely defective, but blew the entire county to smithereens.
And here's the kicker. Last year, when Jefferson County, staggered by the weight of its penalties, was unable to make its swap payments to JP Morgan, the bank canceled the deal. That triggered one-time "termination fees" of — yes, you read this right — $647 million. That was money the county would owe no matter what happened with the rest of its debt, even if bondholders decided to forgive and forget every dime the county had borrowed. It was like the herpes simplex of loans — debt that does not go away, ever, for as long as you live. On a sewer project that was originally supposed to cost $250 million, the county now owed a total of $1.28 billion just in interest and fees on the debt. Imagine paying $250,000 a year on a car you purchased for $50,000, and that's roughly where Jefferson County stood at the end of last year.
Last November, the SEC charged JP Morgan with fraud and canceled the $647 million in termination fees. The bank agreed to pay a $25 million fine and fork over $50 million to assist displaced workers in Jefferson County. So far, the county has managed to avoid bankruptcy, but the sewer fiasco had downgraded its credit rating, triggering payments on other outstanding loans and pushing Birmingham toward the status of an African debtor state. For the next generation, the county will be in a constant fight to collect enough taxes just to pay off its debt, which now totals $4,800 per resident.
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.
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