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Bankruptcy Watch: Jefferson County Exiting, Detroit Entering


A deal was struck this week that should allow Jefferson County, the most populous county in Alabama, to exit bankruptcy by year’s end as the largest municipal failure in US history. The WSJ reports:

The county’s biggest creditor, J.P. Morgan Chase, will shoulder a loss of about $840 million as part of the agreement between Jefferson County officials and holders of $3.1 billion of debt linked to a troubled sewage system. Under the deal, $1.2 billion of the county’s debt would be forgiven and a group of investors will help with refinancing some of the remaining debt. The desire by the hedge funds and other distressed-debt investors to earn a return on their money was crucial in reaching an agreement that had eluded other creditors, people close to the matter say. […]

A bankruptcy-court judge is expected to review the proposed deal at a hearing in Alabama on Wednesday, but he won’t need to approve it until the county proposes a formal bankruptcy-exit plan.

Jefferson County first got into the mess in large part because of dodgy debt deals officials made to finance repairs to the county’s sewage system. Some of those officials and others were thrown in prison; J.P. Morgan was forced to pay fees and penalties to settle federal securities charges related to the dubious deal.

Unfortunately, Jefferson County isn’t the only place to suffer through economic havoc wreaked by a deadly combination of municipal corruption and Wall Street predation. Unless Detroit’s emergency manager Kevyn Orr can get stakeholders to agree to a deal restructuring $15.7 billion in long-term obligations, the Motor City will dive into Chapter 9 bankruptcy. Bloomberg:

Orr plans a hearing next week on his preliminary proposal, which paints a sobering picture of a government that since 2008 has spent an average of $100 million more each year than its revenue and has borrowed to stay afloat. Orr would reduce debt costs by lengthening payback terms, lowering interest rates or obtaining forgiveness on some obligations. Covering what it owes devours at least a third of Detroit’s $1.1 billion general-fund budget.

As the report notes, holders of Detroit’s general-obligation bonds will not be inclined to agree to take a loss on principle to spare Detroit the humiliation of bankruptcy.

When surveying the damage in situations like Detroit’s and Jefferson County’s, Republicans tend to lay the blame squarely on municipal corruption, while Democrats single out Wall Street vultures. The reality is that both urban machines and Wall Street crony capitalists are out of control and need better oversight.

[Money vortex image courtesy of Shutterstock]

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