Causes, Consequences and Implications for Reform
Edited by Lawrence E. Mitchell and Arthur E. Wilmarth, Jr
Chapter 10: The Sewers of Jefferson County: Disclosure, Trust and Truth in Modern Finance
Theresa A. Gabaldon INTRODUCTION In one sense, the story of Jefferson County’s sewer debt is a case study; in another, it is a morality tale. As a case study, it provides an opportunity to examine how the subprime mortgage crisis roiled the waters of municipal finance, contributing to a state of affairs in which governmental issuers of securities having nothing to do with subprime lending found themselves swamped with debt service. As a morality tale, it unhappily cautions against trust at the same time that it reminds us that trust of a sort is an inevitability of the modern age. As a logical matter, this reminder should prompt a rethinking of the disclosure to be made in connection with financings (municipal or otherwise). Perhaps more important, it should demand a great deal more systemic attention to the development of the conditions that nurture the trust that must be mustered to make modern finance continue to work. The first section of this chapter provides background on what promises to be the most significant failure of municipal finance in history. The next examines the disclosures that were and were not made along this particular road to perdition. There follows an inquiry into the disclosure and other needs of the various players, followed in turn by an analysis of the trust and trustworthiness exhibited by some of these same characters. This analysis suggests that trustworthiness is critical to the functioning of sound financial systems, but concludes that in some instances it is not...
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