by Guest Author Shah Gilani, Capital Waves Strategist, Money
But believe it or not, that’s not the biggest story here.
The big story is how J.P. Morgan Chase & Co. (NYSE:JPM) – specifically, J.P. Morgan’s Securities arm – has a filthy hand in the whole Jefferson County saga.
This isn’t breaking news. I’ve written about it before and so have others. You just may have missed it because the spin machine was so effective that the story got buried fairly quickly.
It’s really an interesting story – albeit a long one. But unfortunately, I don’t have the space and you don’t have the time for all the grisly details, so here’s the short version.
Jefferson County is full of characters – and a few who made it into the local government turned out to be good old boy crooks.
Jefferson County, home to Birmingham, had an aging and stinky sewer system. The Environmental Protection Agency (EPA) demanded that the county do something about it as far back as 1996.
And it did.
County administrators decided that a brand new sewer system needed to be built at an expected cost of about $1.5 billion. With that decided, the county commission had to decide who would run the financing operations, craft a plan to manage the debt, and float bonds to pay for the project.
Here’s where I’m cutting out all the starch and getting to the meat of the story: Local politicians, who were in cahoots with local broker-dealers (securities firms), wanted a piece of all the money that was going to be sloshing around. They ended up demanding, and getting, hefty bribes from big securities firms to let them become the chosen ones to run this lucrative muni finance deal.
I’m not going to get into how Goldman Sachs Group Inc. (NYSE:GS) got involved in 2002 and ended up being paid some $3 million (some of which it passed along to “consultants”) to get in on the deal – which incidentally it ended up doing nothing on, other than participating in a back-door swap arrangement with J.P. Morgan Securities. Nor am I going to get into Bear Stearns’ dealings, nor the small securities dealers who acted as conduits for money being exchanged between J.P. Morgan and others.
Instead, I’m going to focus on J.P. Morgan, which ended up constructing the finance arrangements and doing most of bond deals that served to finance the building of the new sewer system – because that’s where the story takes a truly ugly turn.
You see, J.P. Morgan overcharged Jefferson County by some $100 million in fees (according to an adviser subsequently hired by the county) and jointly with its co-conspirators paid out some $8.2 million in bribes.
But what’s truly appalling is that J.P. Morgan actually imbedded the cost of the bribes it paid into the finance deal it constructed.
In other words, taxpayers and bondholders paid the bribes J.P. Morgan conveyed to get to run the county’s financing of the sewer system.
It doesn’t end there, either. Before J.P. Morgan came to run things, some 95% of Jefferson County’s debt was in fixed rate obligations. J.P. Morgan turned that around to the point that the County ended up with some 93% of its outstanding debt being variable and floating rate debt, subject to interest rate hikes.
Then J.P. Morgan created a neat little swap deal so the county was “protected.” It didn’t work out that way, and interest costs on the county’s debts rose as high as 10%.
In the end, J.P. Morgan admitted no wrongdoing. Yet, amazingly – considering it did nothing wrong – the firm paid some $75 million in penalties to settle a fraud complaint with the Securities and Exchange Commission (SEC).
J.P. Morgan paid $25 million in penalties to the SEC and $50 million to Jefferson County. It also agreed to decline a $648 million “termination fee” that it was due when the county backed out of the swap deal that helped bankrupt it.
No one at J.P. Morgan went to jail – although others were convicted of conspiracy and fraud, with some folks going to jail for 48 months, 52 months and even15 years.
But no one from J.P. Morgan. And as much as I’d like to think this case is unique, I know it’s not. Sadly, this is just one of many cases of corruption plaguing our financial system.
In fact, there’s too much to even cover here. That’s why I recently launched a new, free newsletter: Wall Street Insights & Indictments. I intend to blow the top off of more scandals just like this, and in the process, show average investors how they can level the playing field and make real money. You can sign up to receive it by clicking here.
The Virgin Crisis: Systematically Ignoring Fraud as a Systemic Risk by William K. Black
William Black: Building the Bigger Regulatory State by The Daily Bell
Scandal: Hedge Fund Traders Run the U.S. Treasury! by Mike Norman
Financial Engineering as Dental Surgery by John Lounsbury (Seeking Alpha)
About the Author
Shah Gilani is the editor of the highly successful trading research service, The Capital Wave Forecast, and a contributing editor to both Money Morning and The Money Map Report. He is considered one of the world’s foremost experts on the credit crisis. His published open letters to the White House, Congress and U.S. Treasury secretaries have outlined detailed alternative policy options that have been lauded by academics and legislators. Read his full bio here.