New Lawsuit Against JPMorgan Over Interest Rate Swaps; Cities Toppling from Swindles

June 18, 2010 (LPAC)—Counties, towns and other government entities—e.g., water, school, and other districts—are now reeling from the economic collapse, and also the effects of all kinds of floating-interest-rate debt, credit default swaps, and other deals foisted on them in recent years by the swarm of brokers and shysters associated with Wall Street and London. Dozens of major cities are bankrupt, though still mostly without official designation, for various legalistic reasons.

Last week, a grand jury in San Diego County issued a report recommending that the city declare bankruptcy. (California uses a grand jury system for civil insolvency as well as criminal cases.) The recommendation came with special attention to San Diego's unfunded pension obligation of $2.2 billion and unfunded retiree liability of $1.3 billion. "Unsustainable" was the grand jury report's opinion.

Hundreds of similar cases exist cross-country. Likewise, there are multiple cases involving unpayable exotic debt deals, and specifically, blood-sucking interest-rate swaps.

This week, a lawsuit was filed against JPMorgan, in the New York Supreme Court in Manhattan, by a former collaborator, Assured Guaranty Ltd., the top municipal bond insurer (by volume) in the United States, over their collapsed partnership in Jefferson County (Birmingham), Alabama. Assured is demanding recompense for its claim that when JPMorgan wrongly induced Jefferson County into debts and swaps on a sewer project, which the County soon couldn't pay, then Assured was wrongly put into a position of having insured the deals through—it claims—JPMorgan's false representations. And now, Assured wants to get out of having to pay default insurance. Suits and countersuits like this are becoming par for the course in dozens of states.

The Jefferson County saga is typical for the nation. Some years back, the County sought funding to pay for a sewer improvement project, and secured fixed-rate bonds. This has been the practice for over 150 years. Then in 2002-2003, JPMorgan came along, and induced (with bribes, an irrelevancy to the main point) the county to changeover to floating-rate bonds. This debt deal was accompanied with some $5 billion worth of interest-rate swaps, sold, like snake-oil, as a way to provide for lower borrowing costs.

The pile of deals fell apart. By January, 2008, Jefferson County faced interest rates of 10%, three times more than it had to begin with. In 2009, JPMorgan paid a $722 million settlement fine to the SEC to end an investigation on how JPMorgan had conducted its sale of bonds and swaps to Jefferson County.

The particulars differ, but the pattern is the same everywhere. In Harrisburg, Pennsylvania, for example, three rounds of interest rate swaps deals were settled on the local government, over the period 2003-2008, associated with a city incinerator project, by JPMorgan and the Bank of Canada.