Jefferson County, Alabama, the home of Birmingham, may soon be filing bankruptcy:
Officials of Jefferson County in Alabama told their lawyers to prepare a bankruptcy filing if the county was unable to reach an agreement with creditors over how to escape from $3 billion of bonds with soaring interest rates.
The Jefferson County Commission voted unanimously on Tuesday to have the law firm of Bradley, Arant, Rose and White and the county attorney take over negotiations with creditors led by JPMorgan Chase and draw up bankruptcy papers should talks falter. The two replace bankers and advisers, including Citigroup, whose proposals failed to win support.
[...]
Should the county renege on the debt, it would be the largest municipal bond default ever in the United States, outstripping the Washington Public Power Supply System’s $2.25 billion default in 1983 of revenue bonds sold for nuclear plants.
Jefferson County, which includes Alabama’s largest city, Birmingham, has unsuccessfully sought to refinance debt, amassed building a sewer system, which it now says it cannot afford. More than $3 billion of the bonds, including $2.2 billion of so-called auction-rate debt, have interest that resets frequently, a strategy intended to hold down costs. That backfired when the fallout from the credit crisis pushed the county’s rates as high as 10 percent.
Of course, this is untrue; the 1983 default would have been nearly $5 billion today [according to the BLS's CPI Inflation Calculator], so this one doesn’t really come close.
While the county must make good on its debts by tomorrow, August 29th, the commissioners are hedging:
The commission set no timetable for a bankruptcy filing and said it is working to avoid that. The Friday deadline expiration will place the county in default of its agreement with creditors.
“In a perfect world, we would work out a plan that would be the equivalent of bankruptcy without filing for bankruptcy,” Commissioner Jim Carns, a Republican, said. “If we can’t get an agreement, then our only alternative would be to file.”
Sewer fees have risen more than fourfold over the past decade and commissioners said the increases needed to pay the higher interest rates would be too great a burden on the county’s poor. A proposal by advisers, including Citigroup, that would have used county taxes to support the bonds drew criticism and would have required approval of the Legislature and voters.
Today’s resolution passed by a 4-0 vote. Commissioner Shelia Smoot, a Democrat, didn’t vote because she was in Denver for the national party’s convention.
“We were a divided commission, but not any longer,” Carns said. “We are moving to a better position. This gives us a way out. We were boxed in, because we couldn’t raise taxes and couldn’t raise rates, which are already too high anyway. We had to have a way to pursue other directions.”
The true irony here is that the county’s namesake, the 3rd US President, Thomas Jefferson, was sincerely and vocally opposed to government debt.
“I sincerely believe… that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale.” –Thomas Jefferson to John Taylor, 1816
What makes this news item so noteworthy? The US ain’t far behind. Vast transfer payments domestically and internationally, and an aggressive and needlessly adversarial foreign policy have combined, along with corporate rapacity in congressional lobbying, to bring the US economy to its knees.
The federal government is overextended in the extreme, with foreign and domestic committments estimated to be as much as 20 times its current annual receipts, and four times the GDP. This is not a sustainable level of spending:
“If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic. If it is not the end of the world, it is the end of the current international financial system. The seriousness of such failures could be beyond the stretch of people’s imagination.” These are the words of Yu Yongding, who is a Professor in Beijing and a former advisor to China’s central bank (August 22, 2008, in Bloomberg news).
We should listen to Prof. Yongding. The Bloomberg article reports: “Yu is ‘influential’ among government officials and investors and has discussed economic issues with Premier Wen Jiabao this year, said Shen Minggao, a former Citigroup Inc. economist in Beijing, now an economist at business magazine Caijing.”
China has loaned Fannie Mae and Freddie Mac huge amounts of money: “China’s $376 billion of long-term U.S. agency debt is mostly in Fannie and Freddie assets, according to James McCormack, head of Asian sovereign ratings at Fitch Ratings Ltd. in Hong Kong. The Chinese government probably holds the bulk of that amount, according to McCormack.”
Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that have invested in and supported the U.S. housing market these many years, have essentially already failed. The equity of stockholders is 95 percent gone, due to the bad loans these companies made and the prospects of further losses.
Professor Yongding is notifying everyone that China has first priority at the “bankruptcy” table. Even if there is no formal bankruptcy procedure, China, as the foremost creditor, does not want to absorb default losses on its loans to Fannie and Freddie. China is pressuring the U.S. to make good on its implicit guarantee to support the GSEs.
The U.S. taxpayer is the ultimate bagholder in this process. U.S. citizens borrowed heavily from the GSEs and thus from China to build and buy houses. They are being asked to pay off these loans and not stiff their creditors. If they do not pay, China will hasten to wind down its loans to U.S. institutions, and that includes the U.S. government. This process has already begun.
To have reached this phase in which creditors line up to see who is first means that the GSEs have already failed. This is not surprising. The entire enterprise of Government, in the bloated and intrusive form we know it as, is destined to fail. The failure of any and every coercive monopoly Government is assured by its own dynamics. Unaccountable monopolies blunder, fragment, lose direction, lose momentum, and fail. It is only a matter of time.
Strap yourself in; it’s gonna be a wild ride.
