Birmingham On The Brink (of bankruptcy)

With $3.2 billion in debt, the county that is home to Alabama's largest city is about to go bust. How the credit crisis went South.

By David Whitford, editor at large
Last Updated: October 15, 2008: 10:36 AM ET

(Fortune Magazine) -- Bob Riley wanted to help. It was Sunday, Oct. 5, and the Alabama governor was on the phone with Neel Kashkari, a Treasury Department official who the next day would be named by Treasury Secretary Hank Paulson as interim leader of the government's just-approved $700 billion Troubled Asset Relief Program. But Riley couldn't wait for Kashkari's role to become official. He needed to impress upon the new bailout boss the seriousness of the exploding financial crisis in Jefferson County, home to Birmingham. Riley argued that it was urgent that the federal government come to the aid of his state - now.

As he would describe it in a follow-up letter to Kashkari, the situation in Jefferson County was "the single biggest threat to the municipal bond market today and a poster child for how the subprime mortgage crisis is hurting Main Street America."

For months now, Riley and other civic leaders in Alabama have been battling to avert what appears almost certain - that Jefferson County will file for Chapter 9 protection, in what would be the largest municipal bankruptcy in our nation's history. The county has fallen hopelessly behind on payments to service the $3.2 billion it borrowed - on reckless terms - from Wall Street over the past decade to build a new sewer system. As Fortune went to press, the Jefferson County Commission was days away from a vote that could make the bankruptcy official.

Simply put, municipalities aren't supposed to go bankrupt - and rarely do, at least compared with businesses. According to a study by the law firm Mintz Levin, since the bankruptcy laws were written in 1934, there have been fewer than 600 filings for Chapter 9, which provides for the reorganization of municipalities. That's about how many private sector Chapter 11 filings occur, on average, every two weeks. Local governments using stable tax income to pay off money borrowed at a fixed rate may not be sexy, but over history this arrangement has tended to be a pretty reliable bet.

Every decade or so, something big and scary does happen in the normally staid world of public finance: There was a near miss in the '70s when New York City almost went broke ("Ford to city: drop dead" was the famous headline in the Daily News); in the '80s the Washington Public Power Supply System (or WPPSS; the traders called it "Whoops") defaulted on $2.25 billion in loans when it stopped construction of two nuclear power plants; and California's Orange County went into Chapter 9 in the '90s, after the county treasurer made bad bets on interest rates and lost $1.6 billion.

MORE...

FORTUNE MAG: http://money.cnn.com/2008/10/13/news/economy/Birmingham_brink_Whitford.fortune/index.htm

http://uselectionatlas.org/RESULTS/state.php?f=0&year=2004&fips=1

George Bush 62.46%

John Kerry 36.84%

How will Jefferson County be voting this year?

Voting against your own best interests is never a good thing.

They might have spent some tourist money down in Alabama.

"And we are proving it."

- Yellowhammers

"That Jefferson County got taken by Wall Street is clear.
But as if that wasn't bad enough, there has been plenty of waste and corruption over the years too. There have been 22 indictments, 21 convictions, and one guilty plea so far in an ongoing investigation by federal authorities, and the list keeps growing."

Bob Riley is neck deep in Rovian cahoots.

When will they learn there is no loyalty among thieves?

Our state is poor and people in this state vote based on the bible which as I can tell never mentions Alabama or the US. Its sad but if Bham went under it might send a powerful message. If you have ever been there you know that being on the brink of bankruptcy is not a new thing, the city has hit a geographic wall it can no longer expand and its coal and steel industries are drying up. The downtown area is very poor, and the city has a very 1980s feel to it, not good.