Here's Why Jefferson County, Alabama, Has to Go Bust: Joe Mysak

July 15 (Bloomberg) -- Jefferson County, Alabama, has to declare bankruptcy.

Here's why. The county needs protection.

It needs protection from creditors, from bankers, from politicians -- and from itself.

You may have heard of Jefferson County, which is home to the largest city in the state: Birmingham. It has been all the talk in public-finance circles for the past couple of years. Once it files for Chapter 9 bankruptcy, its notoriety will be complete.

In 1996, the county was ordered to clean up its sewer system, and sold $3.2 billion in bonds to do so.

Then the fun really began, as the county binged on financial instruments called interest-rate swaps, and also converted almost all of its fixed-rate debt to variable-rate. The collapse of the bond-insurance industry earlier this year and the speculative nature of swaps and derivatives now have the cost of that sewer debt exploding.

Somehow, the county's citizens have to stop the clock. Then they have to ask why all this happened. Then they have to tell everyone else the cautionary tale so that other public-finance officers don't get into the same mess.

The odd thing about municipal bankruptcy is that it's voluntary. If they had the opportunity, I imagine that the county's creditors, themselves hard-pressed, would have compelled it to enter financial rehab long before now.

Amateur Hour

Public officials have to agree that the problems they are desperately trying to deal with are well beyond their powers to fix. The Jefferson County politicians, in this case the county commissioners, have yet to admit this.

Each day brings more shame to the entire concept of local- government finance as more than an amateur-hour charade. The latest episode had the county fire a set of financial advisers -- one of whom had started just a month before -- and then hire another set on contingency.

That is, these new advisers won't get paid unless the county sells a new bond. This runs counter to the best policy set by the Government Finance Officers Association. If the advisers are paid only if an issuer sells bonds, guess what they will recommend?

Someone has to make the county commissioners see reason, before they sell more bazillions in bonds and enter yet more interest-rate swaps.

I repeat: Someone has to freeze time, ask questions, and, perhaps most importantly, compel the parties who put together the sewer financings to answer them.

`I'm Sorry'

Maybe the answers are as simple as ``I'm sorry, we really didn't know what we were doing,'' and ``We did all this to save the county money.''

The first answer would presumably come from past and present officials, the second from the legions of bankers and lawyers, advisers and consultants, who showed them how to use bonds and swaps, and who turned the sewer financing into a fee-fest.

Yet maybe there's a lot more to the story than amateur theatrics as performed by public officials and the usual fear and greed show practiced by bankers. If I lived in Jefferson County, I would want to know the answers.

Maybe the Securities and Exchange Commission can help. For the past couple of years, the SEC, the Justice Department and everyone else in the federal government, it seems, have been looking into what they have termed ``anticompetitive practices'' in the municipal market.

On April 30, the SEC filed a complaint alleging pay to play in the awarding of some swaps business in connection with the Jefferson County sewer deals, but maybe there's a lot more that the SEC isn't saying. And maybe that can help the county get off the hook for some of the millions of dollars it now finds itself owing to banks. If the SEC and everyone else don't bring the larger case soon, maybe some wise person somewhere can think of a way to compel the regulator to share what it knows.

The Jefferson County meltdown is a shameful chapter in municipal finance, and it's made even more humiliating by the state of Alabama's apparent inability or unwillingness to step up and aid its wayward municipality in some way.

Hasn't this horror show gone on long enough?

(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net