Jefferson County – largest municipal bankruptcy ever

Jefferson County, Alabama thought they’d make extra money by doing interest rate swaps on their sewer bonds. It blew up in their faces. They have failed to post $184m in collateral, are in technical default, with bankruptcy apparently unavoidable.

A good rule of investing is, if you don’t understand it, don’t buy it. Did any of the Jefferson Country officials who ok’ed the swaps genuinely understand what they were doing and what the risks were? I doubt it. Robert Citron, who tanked Orange County in 1994 due to similar ultra-risky “investments” sure didn’t. He was responsible for the biggest county bankruptcy in US history. Until Jefferson County, that is.

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