Matt Tiabbi via Michael Moore (without the Rolling Stone pop-ups):
...If you want to get all Glenn Beck about it, you could lay the blame for this entire mess at the feet of weepy, tree-hugging environmentalists. It all started with the Cahaba River, the longest free-flowing river in the state of Alabama. The tributary, which winds its way through Birmingham before turning diagonally to empty out near Selma, is home to more types of fish per mile than any other river in America and shelters 64 rare and imperiled species of plants and animals. It's also the source of one of the worst municipal financial disasters in American history.
Back in the early 1990s, the county's sewer system was so antiquated that it was leaking raw sewage directly into the Cahaba, which also supplies the area with its drinking water. Joined by well — intentioned citizens from the Cahaba River Society, the EPA sued the county to force it to comply with the Clean Water Act. In 1996, county commissioners signed a now-infamous consent decree agreeing not just to fix the leaky pipes but to eliminate all sewer overflows — a near-impossible standard that required the county to build the most elaborate, ecofriendly, expensive sewer system in the history of the universe. It was like ordering a small town in Florida that gets a snowstorm once every five years to build a billion-dollar fleet of snowplows.
The original cost estimates for the new sewer system were as low as $250 million. But in a wondrous demonstration of the possibilities of small-town graft and contract-padding, the price tag quickly swelled to more than $3 billion. County commissioners were literally pocketing wads of cash from builders and engineers and other contractors eager to get in on the project, while the county was forced to borrow obscene sums to pay for the rapidly spiraling costs. Jefferson County, in effect, became one giant, TV-stealing, unemployed drug addict who borrowed a million dollars to buy the mother of all McMansions — and just as it did during the housing bubble, Wall Street made a business of keeping the crook in his house. As one county commissioner put it, "We're like a guy making $50,000 a year with a million-dollar mortgage."
To reassure lenders that the county would pay its mortgage, commissioners gave the finance director — an unelected official appointed by the president of the commission — the power to automatically raise sewer rates to meet payments on the debt. The move brought in billions in financing, but it also painted commissioners into a corner. If costs continued to rise — and with practically every contractor in Alabama sticking his fingers on the scale, they were rising fast — officials would be faced with automatic rate increases that would piss off their voters. (By 2003, annual interest on the sewer deal had reached $90 million.) So the commission reached out to Wall Street, looking for creative financing tools that would allow it to reduce the county's staggering debt payments.
Wall Street was happy to help. First, it employed the same trick it used to fuel the housing crisis: It switched the county from a fixed rate on the bonds it had issued to finance the sewer deal to an adjustable rate. The refinancing meant lower interest payments for a couple of years — followed by the risk of even larger payments down the road. The move enabled county commissioners to postpone the problem for an election season or two, kicking it to a group of future commissioners who would inevitably have to pay the real freight.
But then Wall Street got really creative. Having switched the county to a variable interest rate, it offered commissioners a crazy deal: For an extra fee, the banks said, we'll allow you to keep paying a fixed rate on your debt to us. In return, we'll give you a variable amount each month that you can use to pay off all that variable-rate interest you owe to bondholders.
In financial terms, this is known as a synthetic rate swap — the spidery creature you might have read about playing a role in bringing down places like Greece and Milan. On paper, it made sense: The county got the stability of a fixed rate, while paying Wall Street to assume the risk of the variable rates on its bonds. That's the synthetic part. The trouble lies in the rate swap. The deal only works if the two variable rates — the one you get from the bank, and the one you owe to bondholders — actually match. It's like gambling on the weather. If your bondholders are expecting you to pay an interest rate based on the average temperature in Alabama, you don't do a rate swap with a bank that gives you back a rate pegged to the temperature in Nome, Alaska.
Not unless you're a fucking moron. Or your banker is JP Morgan...