01 Dec 2008, Peter Madigan, Risk magazine
Indicted by a grand jury at the United States district court for the northern district of Alabama, Larry Langford pled not guilty to charges he accepted cash and cheques worth $69,000 and clothing and jewellery worth $235,000 in exchange for "including Bill Blount and his company Blount Parrish in Jefferson Country transactions worth billions of dollars and thereby generated millions of dollars in fees for Blount".
According to court documents, between March 2003 and August 2006, Langford signed off on approximately $3.13 billion in new municipal bonds and warrants ostensibly to repair the counties crumbling sewer infrastructure.
The municipality issued the bonds into variable interest rate markets, including auction rate securities (ARS) and variable rate demand notes (VRDNs). Langford also authorised Jefferson County to engage in interest rate swaps worth approximately $5.3 billon with Wall Street counterparties, in an effort to synthetically fix interest repayments while taking advantage of cheaper rates available in variable markets.
The grand jury charges that Langford named Bill Blount's Montgomery, Alabama-based brokerage, Blount Parrish as underwriter, remarketer or otherwise services on both bond and swap transactions, allowing Blount to collect fees of approximately $7.1 million.
In return, Blount, often using fellow defendant lobbyist Albert LaPierre as a middleman, wrote cheques and passed gifts to Langford worth hundreds of thousands of dollars, including $12,000 spent on audio equipment and tens of thousands of dollars on luxury clothing items.
Langford was elected president of the Jefferson County Commission in 2002, with ultimate authority for the administration of the county's financial affairs, serving in the role until November 2007 when he was elected mayor of Birmingham, seat of Jefferson County.
The alleged malfeasance of Langford has left Birmingham residents facing the largest municipal bankruptcy in US history. As both the VRDN and ARS markets shuddering to a halt as a result of rating downgrades of monoline insurers in January and February, Jefferson County incurred massive penalty rates to bond holders to compensate them for the illiquidity of their notes.
These penalties of up to 275% of one month Libor were vastly out of kilter with the 0.67% of Libor that the County received on its interest rate swaps, leading to hundreds of millions of dollars of losses for the county.
In March, Jefferson moved into default after failing to meet a $184 million margin call from its swap counterparties, although investment banks have continued to extend a grace period to the county as it seeks to refinance the debt. The spectre of bankruptcy continues to loom large, however, as the commission has ruled out increasing the cost of utilities for taxpayers and is currently pinning its hopes on bond holders agreeing to accept lower payments on their notes as a means out of its plight.
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