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How JPMorgan Made Jefferson County Toxic

JPMorgan Chase & Co. (JPM)’s Charles LeCroy said the key to landing bond deals in Jefferson County, Alabama, was finding out whom to pay off. In one example, that meant a $2.6 million payment to Bill Blount, a local banker and longtime friend of County Commissioner Larry Langford.

“It’s a lot of money, but in the end it’s worth it on a billion-dollar deal,” LeCroy told a colleague in 2003, according to a complaint filed by the Securities and Exchange Commission.

That’s because in the $2.9-trillion market for state and local government debt, where 80 percent of all financings are negotiated in private, conflicts of interest prevail. While Langford and Blount are in jail, LeCroy is fighting an SEC action. JPMorgan, which provided most of the toxic debt that devastated Jefferson County, has suffered no loss of business as the nation’s third-largest underwriter of municipal bonds, according to data compiled by Bloomberg.

Just 21 months ago, JPMorgan agreed to a $722 million SEC settlement to end a case over secret payments to friends of Jefferson County commissioners. The financings arranged by JPMorgan, a package of floating-rate debt and derivatives, exposed taxpayers to the 2008 credit crisis and dealt a blow that may lead the county to approve the biggest U.S. municipal bankruptcy as soon as today.

Wow. This is impressively evil on the part of JP Morgan, although really it’s the commissioners’ fault too. Even the ones who weren’t massively corrupt were totally incompetent. I’m not even going to try to explain how the deal worked, but basically they tried to finance a new sewer system using an elaborate system of securities and derivatives. Along they way they managed to pay JP Morgan, Bear Stearns, Bank of America, and Lehmann around $120 million in fees, which is pretty ridiculous on a $3 billion project.

Anyway, now the county is going bankrupt and will therefore be unable to finance normal operations for decades, and JP Morgan is doing just fine. That seems to be par for the course on how these things go lately.

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Canada ranked worst of G7 nations in fighting bribery, corruption

Canada has again been scolded on the international stage for its “lack of progress” in fighting bribery and corruption by a watchdog agency that ranks it among the worst of nearly 40 countries.

Transparency International, a group that monitors global corruption, put Canada in the lowest category of countries with “little or no enforcement” when it comes to applying bribery standards set out by the Organization for Economic Co-operation and Development.

In a report to be released Tuesday, the group singled out Canada as the only G7 country that has been stuck at the bottom of bribery-fighting rankings since TI began issuing its reports in 2005.

[…]

Since the Corruption of Foreign Public Officials Act became law 13 years ago in Canada, a small fine against an Alberta company in 2005 has been the only conviction ever recorded. A trial set to start this August against an Ottawa man accused of bribery in India would be only the second time a charge has been laid under the act.

By contrast, the United States has prosecuted more than 200 companies and individuals, many of them “a veritable who’s who of the corporate world,” according to Peter Dent, a partner at Deloitte and Touche, LLP who also sits on the board of Transparency International.

“It is naive to think that you cross that 49th parallel and somehow we’re pure as the driven snow,” he said. “Canada does not have a great reputation when it comes to the enforcement of white-collar crime. If it’s not taken seriously by government, it won’t be taken seriously by the corporate sector.”

But when Transparency International or other organizations look at perception of corruption in Canada, it turns out to be really low too. Canadians think corruption is less prevalent in our country than people do about their own countries in the USA, the UK, Germany, Japan, or Australia, for example, despite our incredibly lax enforcement.

So this probably mean that Canada can get away with having more corruption without suffering the really bad systematic effects that start happening with pervasive corruption. Really, corruption only starts to be a problem when it’s so common that people stop trusting the willingness of the government to provide uniform service without bribery, in which case contracts and other institutions become more difficult as there are risk premiums on reneging and enforcement. As long as the vast majority of people don’t go into transactions expecting bribery, the existence of bribery doesn’t undermine the trust-based institutions that most interpersonal transactions rely upon. So we’re basically okay!

Obviously, this only works in the short run, because once you get approached for a bribe, or once you see your elected representative arrested for taking a bribe, your perception of corruption jumps drastically and stays high. (I saw the premier of my province arrested for taking a bribe, so I’m inclined to believe that it’s actually pretty pervasive here.) So this is something the government definitely has to make a show of enacting harsher penalties for, or else we’ll start to lose this awesome corruption-free perception of ourselves.

Plus, it’s kind of an obvious political move with no downside, right? (Assuming the government isn’t incredibly corrupt themselves.)

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