Matt Taibbi: How Wall Street Made a Fortune off Alabama Sewers

Wall Street has been posting record profits, and big banks are doling out billions of dollars in bonuses. How is this possible?  A new article in Rolling Stone magazine by journalist Matt Taibbi takes an in-depth look at the experience of one small Alabama town. The article says banking giant JPMorgan bribed city officials in Jefferson County to get exclusive rights to help finance the construction of a new sewer system for that city.

AMY GOODMAN: Matt Taibbi writes, quote, “On a sewer project that was originally supposed to cost $250 million, the county now owed a total of $1.28 billion just in interest and fees on the debt.”

He goes on to write, “The destruction of Jefferson County reveals the basic battle plan of these modern barbarians, the way that banks like JP Morgan and Goldman Sachs have systematically set out to pillage towns and cities from Pittsburgh to Athens.”

Matt Taibbi joins us here in our firehouse studio. His article is called “Looting Main Street.”

Welcome to Democracy Now! Lay it out for us. What did the banks do?

MATT TAIBBI: Well, basically, it’s a very long story, but what happened was the—Birmingham, the city of Birmingham in Jefferson County, they were sued by the EPA back in the early ’90s. They had a faulty sewer system. They were forced to build a new sewer system, and so they borrowed a ton of money to build this new sewer system. All the local politicians used about $3 billion of this money. They funneled it to all their buddies who were contractors. And then, when the rent came due on all of this, when they had to start paying for this, they didn’t want to do it, because raising rates would have been politically unpopular. So they went to Wall Street, and they basically refinanced their debt. And that’s what this is all about.

And these deals for refinancing the debt were so lucrative that the banks basically fought over who would get these contracts. And the method for getting the contracts was to funnel millions of dollars to buddies of the county commissioners, who would then, in turn, follow the county commissioner around with charge cards and paid for their Ferragamo suits and Rolex watches. And that’s how Jefferson County ended up getting into a situation where they had $5 billion in debt on a $250 million sewer project.

JUAN GONZALEZ: And the actual project was about $3 billion to build, or was it—

MATT TAIBBI: Yeah, the initial estimate for this project was $250 million. They ended up spending about $3 billion on this. And they ended up owing about $5 billion in the end, after you look at all the refinancing and the interest rate swaps and everything.

JUAN GONZALEZ: And you go through the various schemes that the banks came up with. Credit default swaps, was it? Or—

MATT TAIBBI: Yeah, interest rate swaps.

JUAN GONZALEZ: Interest rate swaps.

MATT TAIBBI: Right. These are also derivatives. Again, there’s this whole galaxy of financial instruments that are basically unregulated, thanks to a law that was passed in 2000 called the Commodity Futures Modernization Act—credit default swaps, collateralized debt obligations, interest rate swaps. These are all derivatives. They’re all totally unregulated. So there’s no SEC or CFTC that’s really looking at these things. And so, as a result of this, a lot of these deals fly under the radar completely, and there’s no way to really enforce or prevent fraud in any of this stuff.

JUAN GONZALEZ: And then the people who live in the county ended up paying sewer bills that, what, quadrupled in price?

MATT TAIBBI: Right, and that was only one part of the cost. You know, the average sewer bill in the mid-’90s for a Jefferson County resident was between ten and fourteen dollars. The bill, by the time I got there a couple of months ago, was at least 400 percent of that. But I met people who had sewer bills that were as high as $200 when I went down to Jefferson County. And that’s—again, that’s one small part of the cost, because what happened was when Jefferson County failed to pay off some of this debt, their credit rating was downgraded, and their cost of borrowing across the board skyrocketed. So, as a result, their taxes went up, and they had to lay off lots of county employees. And so, it’s a—even beyond the sewer bill, it was a major catastrophe.