Hedges weren't such a beautiful idea

By DAVID MOON, Moon Capital Management
March 23, 2008

Governments have an extensive history of finding ways to lose money. They spend money on useless things like fruit fly mating research, midnight basketball, and North Dakota.

It's not just the federal government, though.

The politicians around Birmingham, Alabama have found a new way to demonstrate fiscal incompetence. According to the New York Times, JeffersonCounty, of which Birmingham is the county seat, is on the edge of bankruptcy after spending more than $5 billion dollars on hedges.

Apparently the municipality planned to eventually sell these hedges, but the market soured and the county is left with hundreds of millions in losses.

Why is a city or county government buying so many hedges? Surely they don't have that many parks. Was this part of a community beautification effort, a plan to frame the town in green? I like green. I've seen some fantastic things in green. But that's a lot of hedges.

When I lived in Alabama, only Patty Croyle's family had hedges. Hedges are for rich people. Hedges belong in noble places, like Biltmore or Birmingham, England ' not Birmingham, Alabama. Alabama is better suited for cotton fields.

Oh, wait a minute. I think I misunderstood something. It's not that kind of hedge. It was a financial hedge, not a landscaping hedge. Jefferson County entered into $5.4 billion of complex transactions called interest rate swaps, presumably to hedge certain risks in the events interest rates increased.

Whoops; my bad.

Larry Langford was the county commissioner in JeffersonCounty who originally signed off on the complex financial transactions. In a deposition, he says he needed someone to explain 'all that stuff' to him. 'And even when they told me,' he continued, 'I still didn't understand 99 percent of it.'

Mr. Langford is now mayor of Birmingham. In preparation for handling billions in taxpayers' dollars, Langford was previously a local television reporter and a PR director for a Budweiser distributor.

I'm sure Robin Wilhoit, Gene Patterson or Alan Williams could get elected to some position in Knoxville. They're smart, honest and liked by almost everyone around here ' which would put them in a very small political circle ' but I wouldn't want any of them using my tax dollars as collateral to borrow money and bet on interest rate changes.

The problem in Birmingham is that people who were completely incapable of sophisticated money management were in charge of the money. Ah, the unintended consequences of democracy.

Some people question if Birmingham's problems are rooted in incompetence, bad luck or something more sinister. The local government warned that it didn't have enough money to cover the losses when interest rates moved in unexpected ways.

Do interest rates usually move in expected ways?

Mayor Langford has refused to answer questions from the Securities and Exchange Commission. According to Alabama media, his prior testimony reveals potential federal securities and Alabama ethics laws violations.

I wonder if Mayor Langford knows any more about horticulture than he does financial management. Birmingham might have been much better off if they had bought $5 billion worth of boxwood plants.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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