Did Birmingham mayor bet city's future on a Wall Street scheme?
Birmingham Mayor Larry Langford has been charged with money laundering and bribery. No-bid bond financing schemes have led to billions of lost taxpayer dollars across the US.
Now on trial in US Federal District Court in Tuscaloosa, Ala. on 60 counts of money laundering and bribery charges, Mr. Langford is at the center of a spectacular scandal where, prosecutors say, a popular mayor whose motto is “Do something!” gambled a city’s future on a risky Wall Street scheme, all while taking bribes in the form of cash, Rolex watches, and designer clothes.
Langford’s trial is sure to illuminate how a gung-ho investment atmosphere played into small-time municipal corruption only to explode into what could become the nation’s largest-ever municipal bankruptcy, dwarfing the 1994 default of Orange County, Calif.
But behind the details of Langford’s personal and political life lies a surprising fact: Across the US, billions of dollars have been lost in similarly risky municipal bond deals, leaving US taxpayers on the hook.
“Bringing justice where fraud has occurred is a very important component to bringing back a culture of trust on which financial markets operate, and that’s why the Larry Langford trial is important,” says Robert Brooks, an economist at the University of Alabama in Tuscaloosa. “If you find transactions being done [by elected officials] with an effort to be opaque ... there’s good reason to wonder why.”
Justice Department investigations
The US Justice Department is investigating half a dozen former Wall Street investment bankers and scouring municipal bond deals from Florida to California, looking for more instances where taxpayers were essentially swindled by secretive gambling on the $2.8 trillion municipal bond market.
In the Langford case, “You basically had local officials setting terms, and the banks didn’t have a problem with that,” says Joe Adams, research coordinator at the Public Affairs Research Council of Alabama.
Langford’s alleged scheme involved a new fleet of financial instruments that hundreds of other cities and counties across the US have also utilized.
Those new instruments -- which include derivatives and interest rate swaps -- came on the scene as municipal governments started making no-bid agreements with bankers behind closed doors, says Mr. Brooks at the University of Alabama.
As the credit crisis undermined many of those deals, public borrowers began paying billions of dollars to escape the contracts.
Alabama’s unique Constitution, which leaves county government basically unregulated, has created a system “that’s structurally designed for corruption,” says Mr. Adams. But the Langford case proves that wherever the new bond financing deals involve collusion and corruption, the results can be dire.
Interest rate swaps
Specifically, the refinancing that Langford structured for Jefferson County involved interest-rate swaps, which JPMorgan Chase bankers said could reduce the county’s interest costs. (In SEC testimony last year, Langford, who attended Harvard’s Kennedy School of Government in 2000, said he couldn’t tell a bond swap advisor from a rubber band.)
Instead, rates skyrocketed after ratings for the county’s bond insurers fell during last year’s credit crisis. Debt payments for the county’s sewer system ballooned to $460 million a year -- twice the annual revenues of the system.
A former TV news anchor, Langford had emerged as a pragmatic pro-business visionary by the time he became president of the Jefferson County Commission in 2002.
Trusted by both the city’s majority black community and suburban whites, Langford pushed a vision that sleepy Birmingham could become “the best ‘New South’ city in the nation.” (He was easily elected mayor of Birmingham in 2007 and sustains a lot of political support even today.)
As county president in 2003 and 2004, Langford, according to prosecutors, received lavish gifts -- including cash, cars, and fancy shoes -- from Bill Blount, a former Democratic Party state chairman turned investment banker.
In return, Langford insisted that Wall Street banks do business directly with Mr. Blount, who racked up over $7 million in fees from the Jefferson County bond deals, according to testimony.
The two men would travel to New York and spend more time in the city’s shopping district than on Wall Street, Blount said in testimony this week. Langford would put clothes on the counter and Blount would pay with a credit card.
“Thank you,” Langford always said, according to testimony.
The Birmingham Weekly has continuous coverage of the trial, including a Live Blog feature here.
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