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.
AMY GOODMAN: Tell us the story of Lisa Pack, Matt.
MATT TAIBBI: Well, she was a county employee. Again, she was a person who had a small, you know, sewer bill. But she was laid off. She was put on forced leave last summer, along with thousands of other county employees, and ended up basically living on, you know, $250 a week, along with thousands of other people. They canceled her, you know, health insurance. She had to pay for that now. And she is now so disgusted by the fact that there were so many people indicted in this scheme that she’s now running for county commissioner herself. And that’s something that’s a consistent theme of the financial crisis. People are so fed up that they have to run for public office themselves just to get the government that they want.
AMY GOODMAN: And as many as twenty people have been convicted, public officials, involved in taking bribes in one form or another?
MATT TAIBBI: Public officials and contractors. There’s a whole list of county commissioners. Almost everybody who has served in county government in the last decade got indicted or investigated in one way or another. But nobody—here’s the key part—nobody from any of the banks has been criminally prosecuted [inaudible].
AMY GOODMAN: Name the banks.
MATT TAIBBI: Well, JPMorgan was the big one. The big player in this was a JPMorgan banker named Charles LeCroy. And there’s a hilarious record of—JPMorgan was taping their own phone conversations, and we actually hear this guy LeCroy talking about how he went to the county commissioner and said, “Just tell us how much you want, you know, for us to get this deal.” But he hasn’t been prosecuted for this. Nobody at JPMorgan has. They had to pay a fine, and they had to forgo a $647 million bill that they presented to the county, but nobody’s going to jail. And that’s—again, that’s another consistent theme of the financial crisis.
AMY GOODMAN: They paid off Goldman Sachs to stay away?
MATT TAIBBI: This is one of the—this is my favorite detail of this whole thing. When the county commissioner, Larry Langford, was first elected, he kind of put the word out that anybody who wanted to do business with the county had to go, quote-unquote, “see” his buddy Bill Blount, who was a local investment banker. Well, Goldman Sachs already had a relationship with this Blount. And JPMorgan wanted this deal so badly that they paid Goldman Sachs $3 million to disassociate itself from Bill Blount and leave the deal. And so, that was—you know, it’s obvious open-and-shut, anti-competitive behavior, but again, that hasn’t been prosecuted either.
JUAN GONZALEZ: And, of course, JPMorgan and Goldman Sachs have, of the major financial institutions, have come off probably the best throughout the—
MATT TAIBBI: Oh, yeah, they’re the—
JUAN GONZALEZ: —throughout the entire financial crisis.
MATT TAIBBI: JPMorgan, Goldman Sachs, Morgan Stanley, they’re really the kings of the hill. Obviously, a lot of the major investment banks have fallen by the wayside in the last couple years. But these are the two ascendant organizations left on Main Street.
JUAN GONZALEZ: And how widespread do you figure this problem is of major financial institutions bilking local governments with these kinds of schemes?
MATT TAIBBI: This scheme is not at all uncommon. I think in Jefferson County, it might have been a little bit more obscene and cartoonish than it is in other places. But there are communities all over America that are starting to see these interest rate swap deals blow up. The Pennsylvania school system, Detroit, the city of Detroit, Los Angeles, Oakland, Chicago—they’re everywhere. And so, we’re going to start seeing what happened in Jefferson County occur in counties all over the country.
AMY GOODMAN: How does this compare Greece, to what happened to Greece?
MATT TAIBBI: Well, it’s similar. In both cases, interest rate swaps were used. The situation was a little bit different in Greece, because they were using it basically to get some cash up front to qualify for an EU program. But it’s—again, it’s the same unregulated class of financial instruments. And a more exact parallel is what happened in Milan, Italy. They were also using interest rate swaps very similar to Jefferson County. And there are hundreds of communities across Europe that are in the same situation.
JUAN GONZALEZ: Could you explain how an interest rate swap works? Because I remember talking to chief controller here, deputy controller here in New York City, asked her to explain to me an interest rate swap, and she had trouble.
MATT TAIBBI: It sounds very, very complicated. Imagine that you have a variable-rate mortgage, so you’re paying a mortgage that—where the payment rises or falls every month along with interest rates. Well, that’s risky. So you might want to get some certainty in your rates. You’ll go to your bank, and you’ll say, “I’ll agree to pay you a fee, if you take over my variable interest payments and give me fixed payments.” So basically you’re paying the bank a fee to assume your variable rate risk. And that’s all it is. You’re swapping rates. And so, what happened was Jefferson County had variable interest rates on some of the bond deals that it had done. It wanted fixed rates. It went to JPMorgan and paid them fees to get their fixed rates.
JUAN GONZALEZ: So how does that blow up then?
MATT TAIBBI: Well, what ended up—first of all, it costs you something, all these fees. Every time they went and did one of these swaps, it pushed their debt situation farther into the future. And so, they didn’t just do it once or twice; they did it twenty-three times in Jefferson County. These politicians kept continually pushing the debt into the future. And every time they did that, they added more debt, because of course this costs something. So by the end, it just ballooned to the point where it exploded.
AMY GOODMAN: Matt, we have five seconds. Has any regulation been instituted to change all this?
MATT TAIBBI: No. I mean, we have the financial reform bill right now, but as currently written, it really wouldn’t do a whole lot to change this, but it might. There’s still a chance that it might.
AMY GOODMAN: Matt Taibbi, political reporter for Rolling Stone, his latest article is called “Looting Main Street.”