In Homewood, Ala., retiree Lynn Arnold says the U.S. government should crack down on Wall Street after bond and derivative deals arranged by JPMorgan Chase (JPM) left Jefferson County in a fiscal mess. "There needs to be something to help so this doesn't happen again to another county or another city," says the former audiologist, whose sewer bill may increase 25 percent to help pay for the debacle. "A lot of people are suffering."
Arnold's congressman is seeking to delay rules meant to do just that. During the past two decades, Spencer Bachus has been the U.S. House of Representatives' third-biggest recipient of donations from financial companies, totaling some $7.1 million, according to the Center for Responsive Politics. JPMorgan—and its employees—constitute the congressman's single biggest contributor. On May 24 the House Financial Services Committee, which the Republican leads, voted along party lines to stall regulations for derivatives, including those aimed at keeping the rest of the nation from repeating Jefferson County's mistakes, until September 2012. Bachus's regulatory delay faces long odds of becoming law while Democrats control the Senate and the White House.
Jefferson County officials have been considering bankruptcy since the deals, involving interest rate swaps, unraveled in 2008. Similar financing burned communities throughout the country, from Pennsylvania school districts to a California bridge operator, costing taxpayers more than $4 billion in bank fees to back out of the trades, according to data compiled by Bloomberg. "If anyone should understand why the investment banks need to be reined in, a member of Congress who represents Jefferson County should," says Barbara Roper of Pueblo, Colo., a lobbyist on financial issues for the Consumer Federation of America. "Unfortunately, we're still seeing the same deference in Congress to Wall Street that we did before they blew up the world economy."
Bachus, a soft-spoken 63-year-old, represents a Republican stronghold that includes affluent suburbs of Jefferson County, which encompasses Birmingham, the state's most populous city. When buttonholed by reporters at a May 2 conference in Washington hosted by a trade group that represents community banks, Bachus said that the misdeeds in Jefferson County had been fostered by corruption and had been punished by existing laws. He also said that he has raised no objections to tighter regulations for municipal derivative deals. In separate comments, he has denied Democrats' claims that his party is working to kill off the rules. "The people who wreaked havoc on our district were the people who took bribes and the people who bribed the contractors, they were people that did unnecessary swaps," says Bachus. "Jefferson County's problem is a debt problem and a criminal problem."
JPMorgan led a team of banks that overcharged as much as $100 million on interest-rate swap deals after they persuaded Jefferson County to refinance nearly all its $3.2 billion of debt for a sewer project from fixed-rate bonds into floating-rate securities. When the subprime loan market collapsed, interest rates on those bonds soared. After provisions in the contracts forced the county to pay off the debt early, it defaulted. In 2009, JPMorgan agreed to cancel Jefferson County's swaps, forfeiting more than $647 million in fees. The bank gave the county $50 million and paid a $25 million penalty to settle an SEC investigation without admitting or denying the allegations.
The SEC said the bank overcharged the county on the transactions so it could funnel illicit payments to friends of county commissioners. Larry P. Langford, a former commissioner, was convicted of accepting bribes for arranging the financing and is serving a 15-year sentence. Two of his associates pleaded guilty, and two JPMorgan bankers are fighting civil charges from the SEC.
Bachus is a leading critic of the Dodd-Frank law, enacted in July, which would regulate derivatives as part of its rewriting of market rules. "I see Dodd-Frank takes us in the opposite direction of what made us great," Bachus told bankers at the conference in May. "It will redefine the way our economy operates for decades, it'll constrict jobs, and I think it'll punish Main Street businesses."
Roper, the Consumer Federation lobbyist, expects Wall Street to reward its allies in Congress in the coming months. "They will certainly be well funded for their next election," she says.
The bottom line: Representative Bachus backs a GOP push to delay reforms on the same derivatives that drove his county to the brink of bankruptcy.