Please Note: You are viewing the unstyled version of Subprimelosses. Either your browser does not support CSS (Cascading Style Sheets) or it is disabled. As a result, much of this website will not look the way it was intended, although all of its contents will be accessible to you. For more information, visit our Browser Support page.

Skip to Primary Site Navigation, Secondary Site Navigation, Content

Home > Cases > Auction-Rate Securities > Wall Street Banker Investigated For Jefferson County Debacle

Wall Street Banker Investigated For Jefferson County Debacle

More than any other U.S. municipality in recent memory, Jefferson County, Alabama, is living and breathing the consequences of complex bond deals gone bad. Now, one of the Wall Street bankers responsible for creating the high finance deal that has landed Jefferson County on the brink of bankruptcy is the target of a federal investigation for possible wrongdoing in the municipal bond market.

As reported March 12 in the New York Times, at the root of Jefferson County's troubles is a series of complex transactions called interest-rate swaps. Many of these transactions were arranged by Charles LeCroy, former managing director at JP Morgan Chase. In order to pay for a massive overhaul of the county's sewer system, LeCroy devised a financing deal in which the county would convert its debt from fixed interest rates to adjustable rates, as well as use interest-rate swaps that LeCroy claimed would provide protection in the event interest rates rose.

Jefferson County officials, including the now-elected mayor of Birmingham, Larry Langford, ultimately signed off on the program, which included 18 different interest-rate swaps worth $5.4 billion.

Now, the county may be facing public bankruptcy. In April, Jefferson County commissioners said they did not have enough money to cover the hedges. A bad situation became even worse when the insurance companies guaranteeing the bonds saw their credit ratings slashed to junk status.

Meanwhile, the Wall Street banks that concocted the deal for Jefferson County in the first place have been rewarded to the tune of millions of dollars in fees and commissions. Of the 11 swaps and similar contracts Jefferson County entered into from 2001 to 2003, eight were with JPMorgan Chase, according to the New York Times article.

The situation in Jefferson County is indicative of the need for greater transparency and accountability on the part of Wall Street. Throughout the country - from Wisconsin to New York - municipalities and investors alike are finding themselves at the center of financial chaos because the financial instruments they were sold on by investment banks and securities firms failed to live up to the hype.

As for Jefferson County, residents there are paying the price for Wall Street's financial engineering. Sewer rates have skyrocketed, and the county's coffers are dwindling by the day.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.


Return to Auction Rate Securities >


Top