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 > Jefferson County Overview

Jefferson County Considers Chapter 9 Bankruptcy

The ongoing credit crunch and the failure of auction rate securities have rendered untold financial damage to thousands of individuals and communities across the country. No where is this more evident than in Jefferson County, Alabama.

Problems for Jefferson County, which has more than 650,000 residents and includes the state's largest city, Birmingham, began six years ago, when county commissioners unsuccessfully tried to refinance $3.2 billion of sewer system debt. More than $3 billion of the sewer bonds have interest rates that reset periodically, sometimes rising into the double digits.

At the center of Jefferson County's troubles are more than $5 billion of interest-rate swaps that the county purchased from a consortium of banks led by JP Morgan Chase. Initially, the plan concocted by Wall Street was supposed to protect the county from rising interest rates on its sewer bonds. That didn't happen, however, and the county not only faced interest rates as high as 10 percent, but also turned over $120 million in fees - six times the prevailing rate - to JP Morgan and others.

The questionable financing deals for Jefferson County have been the subject of state and federal investigations, with several former county officials and others convicted of bribery and corruption. The bond swaps are at the center of an investigation by the Securities and Exchange Commission (SEC).

Bankruptcy Looming?

With options running out and financial crises a daily occurrence, Jefferson County commissioners are now considering filing Chapter 9 bankruptcy.

Filing Chapter 9 bankruptcy would allow Jefferson County to essentially keep its creditors at bay while it attempts to resolve the sewer debt crisis and negotiate more favorable terms for taxpayers.

At a legislative meeting held August 15, David Bronner, CEO of Retirement Systems of America, offered to buy Jefferson County's sewer system if the county files for bankruptcy. He says he would then sell the system back to the county in seven years at the same price he paid for it.

Bronner's $32 billion pension fund has invested in a gamut of projects, including golf courses and nursing homes. His latest proposal entails buying Jefferson County's sewer system for up to $1.4 billion.

Not everyone is sold on Bronner's idea. Jefferson County Commissioner Shelia Smoot claims a bankruptcy would cause long-term damage to the county, the state and its municipalities for years to come, leading to possible tax increases and making it more costly to borrow money and harder to finance infrastructure improvements.

According to Bronner, more than 500 cities and counties have turned to Chapter 9 bankruptcy as a way to clean up their balance sheets. At the very least, Bronner's plan would put the Wall Street banks that initially created the county's financial troubles - and for which Jefferson County paid them more than $120 million in fees - on the hook to pay some of the county's astronomical debt.

A bankruptcy filing by Jefferson County would supersede the previous record set by Orange County, Calif., in 1994 of $1.7 billion.

In early August, Jefferson County agreed to a $44 million payment to Wall Street banks and creditors to extend a payment on overdue sewer bond debts until Nov. 17. It is the county's fourth forbearance since March 31.

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 Cases >


Top