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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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