Armageddon in Alabama Proves Parable for Local U.S. Governments
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Ken Wells, Bloomberg, October 19, 2009
In its 190-year history, Jefferson County, Alabama, has endured a cholera epidemic, a pounding in the Civil War, gunslingers, labor riots and terrorism by the Ku Klux Klan. Now this namesake of Thomas Jefferson, anchored by Birmingham, is staring at what one local politician calls financial “Armageddon.”
The spectacle—a tax struck down, about 1,000 county employees furloughed, a politician indicted over $3 billion in sewer debt that may lead to the largest municipal bankruptcy in history—has elbowed its way up the ladder of county lore.
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One target of their anger is Larry P. Langford, who was the county commission’s president in 2003 and 2004 and is now mayor of Birmingham. The 61-year-old Democrat goes on trial today, charged in a November 2008 federal indictment with taking cash, Rolex watches and designer clothes in exchange for helping to steer $7.1 million in fees to an Alabama investment banker as the county refinanced its sewer debt.
Jefferson County’s debacle is a parable for billions of dollars lost by state and local governments from Florida to California in transactions done behind closed doors. Selling debt without requiring competition made public officials vulnerable to bankers’ sales pitches, leaving taxpayers to foot the bill for borrowing gone awry.
Swaps Blew Up
Under Langford’s stewardship, the county bet on interest-rate swaps, agreements that a representative of New York-based JPMorgan Chase & Co. told commissioners could reduce their interest costs. Instead, the swaps—covering more than $5 billion in all—blew up during the credit crisis after ratings for the county’s bond insurers fell.
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Thousands of public borrowers across the U.S. chose a similar strategy, and many are now paying billions of dollars to escape the contracts, said Peter Shapiro, managing director at Swap Financial Group in South Orange, New Jersey. Even Harvard University, the world’s richest academic institution with an endowment of $26 billion, fell for Wall Street’s financing in the dark: It paid $497.6 million to investment banks during the fiscal year ended June 30 because it chose to cancel $1.1 billion of interest-rate swaps.
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Jefferson County’s collapse shows how people calling themselves financial engineers created borrowing schemes in the $2.8 trillion municipal-bond market that incorporated risk without the benefits of transparency. As state and local governments embraced floating-rate debt and interest-rate swaps, or agreements to exchange periodic interest payments with banks or insurers, they stopped requiring competition in bond sales.
No-Bid Sales
Less than 15 percent of $391 billion in new debt offerings were sold last year on the basis of public bidding—down from 83 percent of new sales in 1970. Most issues are now negotiated, meaning borrowing costs are set in private bargaining sessions.
In Jefferson County, the resulting opacity was a gateway to corruption, according to documents filed in Langford’s case. The Securities & Exchange Commission began probing the county’s swaps in 2004; the Federal Bureau of Investigation started inquiring later. In June 2007, SEC investigators deposed Langford in Miami about whether he used the sewer-debt refinancings to pay off political friends.
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Investigators’ interest in Langford didn’t stop him from running for mayor of Birmingham in 2007. He leveraged a pro-business message with a vow to repave streets and clean up neighborhoods into an October victory over the incumbent and eight other challengers.
Thirteen months into his term, he was named in a 101-count indictment and led into federal district court in leg irons.
After Langford’s departure from the commission, its financial troubles deepened. A state court last January struck down an occupational tax that accounted for 25 percent of the county’s operating revenue, setting the stage for massive service cuts.
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‘In a Heartbeat’
Friends and foes say his political stock remains strong in Birmingham. He would “win in a heartbeat” if an election were called tomorrow, says Patricia Todd, a Democratic state legislator whose district lies partly in the city of 229,000.
In Jefferson County’s bedroom communities, some are seething over Langford’s role in the sewer-bond crisis and the county’s financial woes.
“He’s a pure idiot,” says David King, a pharmacist from Vestavia Hills, a town of 25,000 about six miles south of Birmingham.
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In July and August, Langford’s two co-defendants pleaded guilty and agreed to testify for the prosecution. William B. Blount, a Montgomery investment banker and former chairman of the state Democratic party, and Albert W. LaPierre, a Birmingham lobbyist, admitted to taking part in a scheme to bribe Langford to get bond and interest-rate swaps business.
‘Political Witch Hunt’
Unbowed, the bespectacled, mustachioed Langford, known for tailored suits, oratorical flourishes and frequent evocations of his Christian religion, has declared his innocence, denouncing the charges against him as “a political witch hunt.” {snip}
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Not Safe
The county’s story shows what can happen when creative financing meets old-school thinking, he [Richard A. Ciccarone, director of research at McDonnell Investment Management,] says.
“You always hear that sewer and water-service bonds are safe,” Ciccarone said. “This is a good example of how that’s just not true.”
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Lines Form
Lines soon formed outside the courthouse as such tasks as renewing driver’s licenses slowed.
A kind of legal civil war broke out when three county agencies, the sheriff’s department, an indigent-care hospital and the tax-assessor’s office, sued the county commission to stop the budget cuts on the grounds that they posed a danger to public safety.
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The fight over the occupational tax, a 0.50 percent levy on personal income, dates to 1999 when state lawmakers repealed it. The county appealed that action and won a series of state court decisions until January when a judge ruled the repeal was legal.
That left county leaders to find $75 million in cuts while they took the case to the Alabama Supreme Court, which upheld the lower court’s ruling in August. In parallel action, the state legislature reauthorized a modified version of the tax at a lower rate, 0.45 percent.
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Langford, who rose from public housing in Birmingham’s Titusville neighborhood to its mayor’s office, is at the eye of Jefferson County’s storm.
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Political Career Begins
His political career began in 1977, when he won a Birmingham City Council post. In 1988, he was elected mayor of Fairfield, a suburb of 11,300 about nine miles southwest of the county seat. He studied at the Harvard University Kennedy School of Government during 2000 and in 2002 ran for the county commission.
His October 2007 Birmingham mayoral victory was powered largely by his popularity among the city’s 74 percent black majority. Once elected with 50.3 percent of the vote, “he had a lot of white corporate leaders who were quickly at his side currying his support,” says Robert G. Corley, a Birmingham native and director of UAB’s Global and Community Leadership Honors Program. “And in many ways he’s delivered on key projects that they wanted.”
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Theory of the Deal
Under the deal, the county would pay JPMorgan a fixed rate in return for receiving floating-rate payments from the bank. In theory, the payments to the county would match its debt obligations, leaving its swap payments to the bank as the county’s only cost.
In 2003 and 2004, with Langford as president, the commission plunged into interest-rate swaps with JPMorgan, Bear Stearns Cos., Bank of America Corp. and Lehman Brothers Holdings Inc. Over time, the county, whose fiscal 2010 operating budget is $808.6 million, entered swaps on more than $5 billion in bonds.
Langford said in 2005 that the swaps would save $214 million—an assumption based on the county and its bond insurers maintaining their credit ratings.
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Federal Investigations
JPMorgan disclosed in May that the SEC is investigating the bank’s role in selling the financing structure to the county. The regulatory agency, along with the U.S. Justice Department, is also conducting a nationwide investigation into alleged bid-rigging or collusion in the sale of “municipal derivatives.”
As for Langford, he “sold out his public office to his friends Blount and LaPierre for about $235,000 in clothes, watches and cash to pay his growing personal debt,” said a Department of Justice press release that accompanied the unsealing of his indictment in December. Of more than $7 million in fees Blount allegedly received, he kicked back $371,932 to LaPierre, according to federal documents in the case.
In one instance, Langford demanded $69,000 “to influence and reward him in connection with Jefferson County financial transactions,” according to a July 29 plea agreement LaPierre filed in Birmingham federal district court. In June 2003, Blount wrote a $69,000 check to LaPierre who, three days later, wrote a $69,000 check to Langford, according to the agreement.
Upscale Clothier
Between May and November 2004, Blount and LaPierre—using checks and American Express cards—spent $12,000 on clothing and luxury goods for Langford at Remon’s Clothier, an upscale Birmingham retailer, the government alleges.
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  Larry P. Langford. |
Email Ken Wells at kwells8@bloomberg.net.
(Posted on October 20, 2009)