Jackson Jambalaya

Jefferson County is bankrupt. It laid off two-thirds of its employees this week and its government is close to being non-existent. The crisis was caused by the county's decision to refinance its water and sewer bonds with financial derivatives known as interest-rate swaps, something Jackson is considering right now (see posts on this subject in lower sidebar). The Wall Street Journal reported Jefferson County's woes are of no concern to Wall Street as it wants not just the blood but the turnip also:
NEW YORK (Dow Jones)--The Bank of New York Mellon Corp. (BK) Monday filed suit against Alabama's financially-strapped Jefferson County, seeking to expedite payments for holders of the county's $3.2 billion in outstanding debt.
The bank, which is the trustee for the owners of Jefferson County's auction-rate and variable-rate debt issued by the sewer system, argues the county failed to pay $331.7 million in principal payments on warrants due for redemption since June 2008.
In a complaint filed this week with the Circuit Court of Jefferson County, BNY Mellon asked to appoint a receiver, or custodian, for the county's sewer system. It also seeks a court order that would require the county to raise sewer fees and levy other charges to pay bondholders.
BNY Mellon also says in the suit that the county has failed "to operate the system in a manner that will generate net revenues sufficient to service the county's warrant obligations," and that the work on the county's sewer system has been "fraught with fraud and abuse."
The most densely populated county in Alabama, Jefferson's finances have been in dire straights after it placed interest rate bets using derivative instruments that backfired. The derivatives were meant to help the county lower its financing costs.
Since last summer, the county has been struggling to meet payments and keep up with services. In an effort to raise funds, the county tried to impose an occupational tax that was ruled invalid by a circuit court judge earlier this year.
As a result, this week Jefferson County furloughed roughly one-third of its 3,000 employees.
The 36-page lawsuit points out that 21 former county officials and three former county commissioners have been indicted or convicted of crimes related to work on the system.
The Bank of New York Mellon lawsuit follows a similar lawsuit last fall in the U.S. District Court for the Northern District of Alabama, involving the bank as well as municipal bond insurance companies Financial Guaranty Insurance Company, Syncora Guarantee Inc. and XL Capital Assurance. The court said in June it lacked jurisdiction to grant the request.
Standard & Poor's Ratings Service Monday warned it could lower its junk bond rating on the county's sewer system revenue bonds to default status if the county misses principal or interest payments on outstanding auction-rate bonds. S&P in April 2008 lowered its rating to default status on certain of the county's variable-rate debt because it missed a principal payment.
Moody's Investors Service has a junk rating on all of Jefferson County's outstanding sewer revenue debt."

Harvey: Hope you are paying attention.