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Jefferson County, Alabama

What began as a court-ordered water cleanup ended with a sewer district under receivership, a county on the brink of bankruptcy, and public officials, bankers, and building contractors serving prison terms. At the center of the municipal bond market’s scandal of the (new) century was a potent mixture of auction-rate and variable-rate debt and interest-rate swaps whose costs skyrocketed as the subprime crisis claimed the top ratings of the financial guarantors backing the debt.

The Jefferson County disaster epitomized all that was wrong with public finance in the 1990s and early 2000s. And it was almost uniquely a municipal finance story, unlike many of the other governmental collapses that have dotted the market’s ...

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