The cost of kleptocracy
Gary White, a former official of Jefferson County, Alabama, had his conviction on conspiracy and bribery charges affirmed by the U.S. 11th Circuit Court of Appeals today. White, a former county commissioner, is already serving a ten-year term in a South Carolina federal prison for his involvement in the sewer scandal that ended in the largest municipal bankruptcy ever. He’s just another piece of detritus from one of the largest cases of municipal corruption in recent American history. The Birmingham News reported the courts decision:
The opinion issued by the court, however, begins with stinging criticism of a period of corruption that included White and other Jefferson County commissioners.
“‘Kleptocracy’ is a term used to describe “[a] government characterized by rampant greed and corruption,” the court’s opinion began, citing three dictionaries. ”To that definition dictionaries might add, as a helpful illustration: “See, for example, Alabama’s Jefferson County Commission in the period from 1998 to 2008.”
It’s well known in the municipal bond market that Jefferson County’s default and subsequent bankruptcy are exceptional cases. Munilass, one of muniland’s most indispensable bloggers, said this of Jefferson County:
Portraying Jefferson County as a typical municipal credit is akin to portraying Enron as a typical corporate credit. With Jefferson County, various financial firms – but primarily JP Morgan – exploited an existing culture of corruption and made taxpayers the victims of one of the largest frauds in the history of the financial markets.
Because the issues of fraud and corruption were so well known in the markets, I’ve been wondering about the statements that Robert Bentley, Alabama’s governor, made after the bankruptcy filing. From the November 9th Birmingham News:
“I believe you pay your debts,” he said. “That’s what I told them and I still believe that.”
He said the county’s situation already has affected borrowing throughout the state and he expects the bankruptcy to increase the cost of borrowing even more. “The credit rating of Jefferson County is terrible already so it can’t get much worse, but certainly filing bankruptcy does not help,” he said. “I know they were frustrated but at some point, you have to step up and have to be a leader and have to be a statesman and you have to do what’s right. “Bankruptcy is not right.”
Contrary to what Governor Bentley stated at the time of Jefferson County’s bankruptcy, the municipal bond markets have barely blinked. The chart above, from Thomson Reuters Municipal Market Data, shows the additional spread (or penalty) that Alabama has to pay for their general obligation bonds over an AAA-equivalent bond. Since the bankrutpcy filing on November 9, the bonds have traded 10 basis points — or one-tenth of one percent — higher. This is a very mild penalty. The markets inflicted a much harsher penalty between Oct 21, 2009 and January 15, 2010. Looking back on what happened during that period, the former Birmingham mayor Larry Langford was convicted in federal court of bribery and fraud in connection with refinancing of the county’s sewer debt during his tenure as President of the Jefferson County Commission in 2002 and 2003. Bond yields spiked the highest once heads started to roll. When the kleptocracy was exposed, bond investors fled.
Municipal bond markets don’t like bankruptcy and they don’t like uncertainly. But what they absolutely will not tolerate is criminal activity. Jefferson County is hopefully a one-off for Alabama. If it is, the governor has nothing to worry about.