JPMorgan To Lose $842 Million In Toxic Ala. Sewer Deal

June 5, 2013
by Jason M. Breslow Digital Editor

Freddie Jones of Birmingham, Ala., demonstrates outside the Jefferson County Courthouse in Birmingham, Ala., Thursday, Aug. 4, 2011. Jefferson County Commissioners are struggling to find a way to avoid declaring bankruptcy. (AP Photo/Dave Martin)

The saga of the botched bond deal that led to the largest municipal bankruptcy in U.S. history may finally be nearing an end. First, a federal judge will need to sign off on a plan by JPMorgan Chase to forgive nearly $1 billion in debt owed to it by Jefferson County, Ala.

The bankruptcy case dates back to 2002. Jefferson County had squandered $2 billion to build a new state-of-the-art sewage system, and was looking to refinance its debt by issuing another $3 billion worth of bonds.

The county turned to Wall Street banks, led by JPMorgan Chase, for help. The deal both sides agreed to involved a complex package of derivatives coupled with debt that, much like adjustable-rate mortgages, carried interest rates that would reset periodically.

When the financial crisis hit, those interest rates began to spike. Repayment schedules also sped up, ultimately leaving Jefferson County with $4.2 billion in debt it could not afford.

In time, federal prosecutors would uncover a bribery scheme tied to the transaction. FRONTLINE captured the drama in the below clip from Money, Power & Wall Street:

Under the proposed agreement, JPMorgan would forgive Jefferson County of $842 million in debt. That amount comes on top of the $722 million settlement the bank reached in 2009 with the Securities and Exchange Commission in connection to the Jefferson County deal.

In all, Jefferson County owes a total of $2.4 billion to a group of creditors that includes JPMorgan, three bond holders and seven hedge funds. JPMorgan holds about $1.22 billion of that debt. The county’s refinancing agreement would return $1.84 billion to its creditors.

Residents of Jefferson County, meanwhile, would see their sewer fees rise by 7.41 percent a year for the first four years of the refinancing deal. The agreement could help Jefferson County exit bankruptcy by the end of the year.

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