April 10, 2008 (LPAC)--This week, Jefferson County, Alabama, which includes the city of Birmingham and is the state's most populous county (with more than 650,000 residents), is edging toward a bankruptcy filing on its $4.6 billion debt, as negotiations with its Wall Street creditors have proved largely fruitless. Local governments, caught between dropping revenues and rising costs, are facing drastic cutbacks in services and consequent chaos on the one hand, and trying to avoid relinquishing their responsibilities in banktruptcy filings that seem hopeless. In February, for example, the city of Vallejo, California averted bankruptcy only by drastic cuts in fire and police. Hundreds of the 3,067 U.S. counties are now sinking under debt and apparent lack of recourse.
Central to the debt in Jefferson County is how J.P. Morgan and other Wall Street outfits engaged the County in some 18 derivative instruments, related to financing the debt for its sewer system, now amounting to $3.2 billion and rising. Auction-rate bonds were used, which involved re-sets of interest rates. When this system shut down recently, Jefferson County has had to make other arrangements, and now interest costs on its sewer debt may reach $250 million, nearly twice the $138 million the system produces in revenue. Even the backup plan has gone awry and compounded the problem: the $5.4 billion of nterest-rate swaps arranged with major Wall Street banks have required the County to submit more collateral as its credit rating has dropped. County Commissioners do not want to jack up tax or water utility rates to pay this burden.
What to do? Lyndon LaRouche today advised Alabama leaders to see that a hearing is held on the question: Did J.P. Morgan commit fraud? This has to be investigated. Was what J.P. Morgan did, incompetence or fraud. J.P. Morgan must be called in to produce its facts. They have a history of this kind of thing. This may be criminal fraud. J.P. Morgan must make representations to the County on what it was doing. Morgan wants to play the free-market game? O.K. But did it commit fraud?
