Jefferson County, Alabama, filed a counterclaim for more than $100 million against bond insurers, which seek to strip local officials of control over the sewer system that pushed the county toward bankruptcy.
Officials alleged that the insurers, Syncora Guarantee Inc. and Financial Guaranty Insurance Co., which back $2.8 billion of the system's $3.2 billion of sewer debt, didn't disclose risky investments in mortgage-backed securities. The insurers lost top-credit ratings after the investments soured, causing investors to shun the county's sewer debt and sending interest rates to as high as 10 percent.
Jefferson County bought bond insurance to boost the credit rating on its sewer bonds, lower borrowing costs and increase the marketability of the debt, a strategy thousands of U.S.
Alabama Governor Bob Riley is negotiating a restructuring plan with insurers and banks that hold the county's sewer debt. The county faces a Sept. 30 payment deadline.
Should the county renege on all of its sewer debt, it would be the largest municipal bond default in U.S. history, exceeding the Washington Public Power Supply System's $2.25 billion default in 1983 of revenue bonds sold for nuclear plants. A bankruptcy would be the largest for a U.S. local government since Orange County, California, sought protection in 1994.
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