Largest US Municipal Bankruptcy Looms... Jefferson County

Joe Mysak of Bloomberg thinks that the largest municipal bankruptcy is almost imminent. If it happens, Jefferson Country in Alabama will overtake Orange County as the largest municipal bankruptcy in US history.

(source: Largest U.S. Municipal Bankruptcy Looms in Alabama, Joe Mysak, April 11, 2008. Bloomberg.com)

They're talking more about Chapter 9 municipal bankruptcy in Jefferson County, Alabama, the home of the largest city in the state, Birmingham.

Who can blame them?

The county is now being whipsawed by an ill-thought-out debt policy and the collapse of the bond insurers...

The bankruptcy will be the biggest in the municipal market's history by virtue of the county's debt load, according to the News. Jefferson County has $3.2 billion in sewer debt; Orange County lost $1.6 billion in its investment pool.


Well, chaulk another one up to the derivatives monster. Like other unfriendly derivatives monsters elsewhere, this one hasn't been too kind to the victim.

No doubt the government will attempt to pass the blame and liability onto the bankers who sold the swaps to the municipality. But the fact of the matter is that the county accepted these deals. They were trying to save money but my guess is that they probably couldn't have carried out some of the projects without the lower costs (or would have had to scale back the projects.) So, it is easy to blame bad bets but my suspicion is that the involved parties knew what the worst case would have been.

I had been following this story for a while because it involves the monoline bond insurers. FGIC and XL Capital have insured the county's bonds and a municipal default is probably the last thing either of those monolines expected right now.

This default, although bad for the county and involved monolines, may turn out to help the bond insurance industry. There have been some question marks raised lately about the need for bond insurance. Assuming FGIC and XL pay the bond claims, this might increase the appetite for bond insurance from investors.

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