Saturday, January 8, 2011

Alabama railroad bond repudiation in 1876

I think the story of the Alabama railroad bond repudiation in 1876 would make a fascinating book, if you were able to find the records to research it.

It seems obvious to me that the difference between the $16,000/mile state guarantee of the railroad bonds and whatever it cost per mile to lay track (probably $10k-$13k/mile) was stolen and split between bond underwriters, construction companies, and Republican state legislators.

When the Democrats subsequently took control of the legislature, they told the bondholders to pound sand because the losses were due to a corrupt graft scheme. (Although none of these matters are mentioned in the New York Times article, written on behalf of bondholders in New England.)

The book would have a tie-in to the current municipal debt crisis, which has two causes.

The first cause is just high, fixed municipal expenses made under the assumption that construction permit fees and high property tax revenues would last forever. To the extent that the expenses come from massive pensions for municipal workers, that is somewhat corrupt.

But, the real corruption involves derivatives deals between municipalities and Wall Street banks that exploited their low-IQ and corrupt decisionmakers.

One example is in Jefferson County, Alabama, where the SEC has accused the county commission president of accepting cash payments in exchange for agreeing to these derivatives deals.

And now, "The banks might be worried that Jefferson County, if pressed, could walk away from the derivatives trades on the grounds that they were signed in what might have been fraudulent deals written by the banks, Taylor says."

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