May 25 (Bloomberg) -- In Homewood, Alabama, retiree Lynn Arnold says the U.S. government should crack down on Wall Street after bond and derivative deals arranged by JPMorgan Chase & Co. left Jefferson County in fiscal purgatory.
“There needs to be something to help so this doesn’t happen again to another county or another city,” said the former audiologist, whose sewer bill may increase 25 percent to pay for the debacle. “A lot of people are suffering.”
Her 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 led by JPMorgan. The House Financial Services Committee, which the Republican leads, yesterday voted along party lines to stall until September 2012 regulations for derivatives, including those aimed at keeping the rest of the nation from repeating Jefferson County’s mistakes.
Jefferson County officials have been considering bankruptcy since the deals unraveled more than three years ago. Similar financing burned localities 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.
Robbing the Poor
Less than a year after President Barack Obama enacted regulatory overhauls in the wake of the worst financial crisis since the 1930s, Bachus is leading the pushback. Opponents, including Democratic Representative Barney Frank, say the Republican approach would continue the excesses that caused Wall Street’s collapse -- and dealt Bachus’s district a lasting blow.
“Wall Street has enabled the greatest robbery of poor people that’s ever taken place in the history of this state,” said William Muhammad, a recruiter at the University of Alabama at Birmingham’s African-American Studies department. “We won’t recover from this for decades.”
Bachus’s regulatory delay faces long odds of becoming law while Democrats control the Senate and White House. Still, Republican criticism of the Dodd-Frank law that Obama signed may signal the party’s attitude toward Wall Street oversight should it gain power in next year’s national elections.
“If anyone should understand why the investment banks need to be reined in, a member of Congress who represents Jefferson County should,” said Barbara Roper, a Pueblo, Colorado-based 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, sandy-haired 63-year old from Vestavia Hills, represents a Republican stronghold that includes affluent suburban parts of Jefferson County, which encompasses Birmingham, the state’s most populous city.
Asked about his position, Bachus, who spurred the Securities and Exchange Commission in its investigation of the deals before they unraveled in 2008, said the misdeeds in Jefferson County were fostered by corruption and punished by existing laws.
The SEC will hold a hearing in Birmingham to probe how the county was “victimized by financial malfeasance,” Bachus said in a May 23 news release.
Bachus said in the interview that he has raised no objections to tighter rules for municipal derivative deals, and has denied Democrats’ claims that his party is trying to delay the rules in order to scrap them.
“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,” Bachus told reporters after speaking to a bankers group in Washington this month. “Jefferson County’s problem is a debt problem and a criminal problem. It was criminal behavior then, it is criminal behavior now.”
In 2009, JPMorgan agreed to cancel Jefferson County’s swaps, forfeiting more than $647 million in fees. It gave the county $50 million. It paid a $25 million penalty to settle a Securities and Exchange Commission investigation without admitting or denying the allegations. The SEC said the bank overcharged the county on the transactions so it could funnel payments to friends of county commissioners.
Persuasion and Overcharges
JPMorgan led 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 into floating-rate securities.
When the subprime loan market collapsed, interest rates on those bonds soared. The swaps failed to protect the county. After provisions in the contracts forced the county to pay off the debt early, it defaulted. Bond insurers sued and a court appointed a receiver to run the sewer system who is empowered to raise rates to pay off the debt.
Larry Langford, a former commissioner, was convicted of accepting bribes for arranging the financings and is serving a 15-year sentence. Two of his associates pleaded guilty, and two JPMorgan bankers are fighting charges from the SEC. In all, 21 former county officials or contractors have been accused or convicted of crimes related to sewer remediation projects, a federal judge said in 2009.
While banks said derivative-laden financings would save money, they instead exposed municipalities to unforeseen risks and hit them with billions of dollars in costs.
Redefining the Economy
Republicans, since taking control of the House, have been attacking what they call overreach in the Dodd-Frank law, enacted in July, which would regulate derivatives as part of its rewriting of market rules.
In January, Representative Michele Bachmann, founder of the House Tea Party Caucus, proposed repealing the law. Bachus has said it could foster more bailouts by giving regulators the power to take over failing banks, has advanced bills to limit the reach of the new Consumer Financial Protection Bureau and sought to delay rules for the $601 trillion over-the-counter derivatives market.
“I don’t find a lot of good in the bill,” Bachus told community bankers in Washington this month. “I see Dodd-Frank takes us in the opposite direction of what made us great. It will redefine the way our economy operates for decades, it’ll constrict jobs, and I think it’ll punish Main Street businesses.”
Bachus says the Commodity Futures Trading Commission, the Washington regulator entrusted with expanded authority over the derivatives business, shouldn’t race to meet July deadlines for setting rules. If done wrong, he says, they could hurt businesses that use them to mitigate market risks, put U.S. companies at a disadvantage and increase consumer costs.
“What we’re dealing with is not repealing any rule,” he said at a hearing yesterday. “It’s just setting a more deliberative rulemaking process. There’s no need to rush to meet arbitrary deadlines when the rest of the world is at least 18 months behind the United States.”
Frank, the committee’s top Democrat, said regulators face no penalties for missed deadlines.
“It’s not a bill to give the regulators more time,” Frank said yesterday. “This prevents the regulators from acting when they think they are ready.”
During his two decades in Congress, Bachus -- like Frank, his predecessor as chairman -- has nurtured ties to Wall Street donors who have poured cash into campaign chests of both Democrats and Republicans. He has received more than $7.1 million from political committees of finance, real estate and insurance companies and their employees, according to the Center for Responsive Politics, a Washington group that tracks campaign donations. That’s more than any House member since 1989 aside from the Republicans’ two top leaders, Speaker John Boehner and Majority Leader Eric Cantor.
During the first three months of this year, his campaign received $28,150 through Richard Roberts, a lobbyist whose clients have included Goldman Sachs Group Inc. and American Express Co., according to Federal Election Commission and U.S. Senate records. Roberts didn’t respond to telephone messages and an e-mail seeking comment.
Bachus’s biggest contributor is JPMorgan, whose employees and committees have given him $118,000 since 1992, according to the Center for Responsive Politics.
Roper, the Consumer Federation lobbyist, said fighting regulations may boost the party’s support from Wall Street.
“If you look at who has the money in the economy now, Wall Street is back,” she said. “They will certainly be well funded for their next election.”
Among the proposed rules that Bachus would stall are those inspired by Jefferson County, whose financings were tied to a sewer project dogged by cost overruns. What happened there -- while enabled by bribery -- illuminated gaps in securities laws.
JPMorgan and three other banks locked the county into above-market rates, according to an analysis by former county financial adviser Porter White & Co. of Birmingham. JPMorgan’s charges incorporated more than $8 million in undisclosed payments to friends of local officials who worked at firms that did little or no work on the deals, according to the SEC.
Lawyers for the two former JPMorgan bankers accused of defrauding the county have argued that the case should be dismissed because the SEC didn’t have jurisdiction over interest-rate swaps at the time.
‘Transparency and Oversight’
The Dodd-Frank Act gave regulators the authority to police that market and imposed requirements on banks. Rules being drafted by the Commodity Futures Trading Commission would make banks divulge more about risks; disclose daily market prices for contracts, making it harder to overcharge; and require banks that pitch the deals to act in the customers’ best interests.
The chairman of the Municipal Securities Rulemaking Board, which sets rules for underwriters and financial advisers, criticized the proposed delay.
“We’re dealing with the public’s money here,” the chairman, Michael Bartolotta, told reporters May 23.
“The sooner we can get some transparency and oversight into what’s happening in the municipal market with respect to derivatives, I think the issuers would be well served by that,” said Bartolotta, who is a vice chairman of First Southwest Co. in Dallas.
Banks’ fees were rarely disclosed and officials said they didn’t understand the dangers.
Appalled by Banks
JPMorgan passed risks onto Jefferson County that it would never take itself, said Robert Brooks, a professor of finance at the University of Alabama in Tuscaloosa, and the author of a textbook on derivatives.
“There’s not a bank in the world that would behave that way with their own money,” he said. “It does reveal just how disgustingly the banking industry can abuse a client.”
Groups including the Securities Industry and Financial Markets Association and pension funds including the California Public Employees’ Retirement System have pressed for changes in the CFTC rules, saying they would limit Wall Street’s ability to trade with customers like pension funds and endowments aware of the risks.
Larry Powell, a University of Alabama at Birmingham professor of communications who tracks politics, said Bachus’s wariness of regulation is in line with his career.
“You can make the argument that he’s not looking out for the county, but I don’t think he’s thinking of it from that viewpoint,” he said. “One of the reasons he’s not being touched by this is they’re not blaming him and they’re not blaming Washington for this.”
“I don’t think the public as a whole blames Wall Street as much as it should.”
In 2009, Bachus compared such derivative deals to gambling in a “casino where the house always wins.”
Jim White, the chairman of Porter White, which was brought in to analyze the deals after questions were raised about them, said Bachus has helped Jefferson County.
In January 2007, before the deals fell apart, he wrote to then-SEC Chairman Christopher Cox urging him to press the SEC to require banks to pay back ill-gotten gains. In November 2009, JPMorgan agreed to settle, saving the county from the termination fees and providing it with $50 million for county employees, residents and sewer customers.
“He went as far as a congressman can appropriately go,” said White.
At a Starbucks in Bachus’s hometown of Vestavia Hills, a 31,000 person Birmingham suburb, Jack Tester, an employee-benefits broker who lives in next-door Hoover, said he’d welcome greater scrutiny on banks after the way JPMorgan sold the county on the deal.
“Probably, all marketing sales people are more interested in making the sale than having someone understand the downside,” he said. “That’s where I think they had some responsibility.”
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