Birmingham on the brink (cont.)

"You're kidding me!" shouts lawyer Tom Baddley into the phone, having excused himself for a moment to take this call. It's a Tuesday morning in late September, a pleasant time of year in Birmingham. Baddley's office overlooks the leafy bowl of Caldwell Park, one of many public spaces tidied up recently by Mayor Langford. But Baddley's not looking out the window. He's staring into space, his eyes wide, his jaw tight. After he hangs up, he shares what he has just learned from a source downtown: Mary Buckelew, former president of the Jefferson County Commission, will plead guilty to obstruction of justice.

Buckelew's fatal mistake was lying to a federal grand jury about who paid for $2,619 of fashion goodies mailed to her office in the county courthouse in Birmingham from the Salvatore Ferragamo boutique in Manhattan, as well as for a $1,400 visit to a New York City spa. Both were gifts from a Montgomery, Ala., investment banker who had business with the county. Only when the feds showed Buckelew proof did she come clean. Now she's facing up to 20 years in prison. Chances are she won't have to serve all of it. As part of her plea, she agreed to cooperate with federal authorities. Buckelew's a bit player in all this. But if she sings, that can't be happy news for Mayor Langford. He's the guy the feds really want. That's why Baddley looks so shaken: Langford is his client.

Langford didn't join the county commission until after most of the money for the sewer system had been borrowed and spent. But his election in 2002 marked the beginning of a period of aggressive refinancing of the county's debt, which he presided over as commission president. As Langford later recalled in an SEC deposition, once it became known that Jefferson County was in the market for a re-fi, Wall Street pitchmen descended en masse. "They would line up out the door, down the hall, down to the main street, making proposals," Langford explained. "I didn't know America had that many investment bankers."

Langford has been in the public eye in Jefferson County for more than 30 years. He's a proud son of Titusville (the Birmingham neighborhood where Condoleezza Rice grew up) who rose from selling Popsicles from a pink pushcart as a kid to become a sports reporter on Channel 6, a PR man for the local Budweiser distributorship, and a three-term mayor of the Birmingham suburb of Fairfield. He left his commission post when he was elected mayor of Birmingham in 2006.

The man defies easy classification. To some he's a scoundrel who's been cavalier with the public trust ever since, as mayor of Fairfield, he built Visionland, an amusement park financed with $90 million in muni bonds and featuring a statue of himself near the entrance. Visionland soon went into Chapter 9. (If Jefferson County follows suit, it will be a rare and ignominious twofer for a public official.) He has also been through personal bankruptcy. "He is the most creative politician you've ever seen," says Langford's friend Jesse Lewis, publisher of the weekly Birmingham Times. "If he had to run a business by himself, he wouldn't do too good, in my mind. Larry will spend whatever money he has. He'll just spend it."

Langford's solution to the need for more public transportation in Birmingham? Spend millions on retro-style trolleys. In June he shocked everyone - that is, everyone who didn't think it was a joke - by proposing to make a bid for the 2020 Olympic Games. He once suggested building a canal from the Tennessee - Tombigbee Waterway so that cruise ships from the Gulf of Mexico could dock in Birmingham, some 250 miles inland. "What saves him," says Whitmire, "is, with the exception of Visionland, these things never materialize."

But Langford never runs out of ideas. In July he made a big show of delivering his budget rescue plan, entering a meeting with a case labeled TOP SECRET and accompanied by machine-gun-toting police officers. The substance of the secret plan? Shuffle around some funds already committed to other projects. He's a fiscal liberal and a social conservative who has counseled parents to beat their kids more often, and once said, "Alabama needs a knee-high electric chair." Fortune would have asked him if he was joking, but Langford declined to grant an interview.

The substance of the SEC complaint is that Langford, who admits to having had personal money problems, obtained suspicious loans arranged and in some cases paid off by William Blount, a Montgomery banker. Blount's firm earned more than $6.7 million for work related to the county's refinancing. A former chairman of the Alabama Democratic Party, Blount is widely believed to be the banker who went shopping for Mary Buckelew at the Ferragamo boutique. Blount declined to comment to Fortune.

Langford has known Blount for years, Langford's lawyer acknowledges. They exchange Christmas gifts. And so when Langford was looking for an investment bank to handle this new bond deal, it made perfect sense that he would turn to Blount Parrish, his trusted friend's firm. And when, at the same time, Langford needed money - for credit card and clothing store bills - it was natural that he would discuss his need with another old friend, Albert LaPierre, a lobbyist. How was Langford supposed to know, wonders Baddley, that the money to pay off those loans would ultimately come from Blount? And let's not forget: The whole point was to save the county some money.

Unfortunately, the opposite occurred. Jefferson County wound up with 68% of its debt in auction-rate securities, instruments for which the interest rates are regularly reset. When that market froze last winter, effective rates on the debt shot up. Then, in the spring, the two principal bond insurers that served the county had their credit ratings cut from AAA to junk, because of exposure to subprime mortgages. That automatically reduced the credit ratings for Jefferson County itself, and its interest payments doubled within weeks, from $130 million a year to $260 million. Add an accelerated annual principal payment of $200 million, and here's the bottom line: $190 million a year in gross sewer revenues chasing $460 million a year in debt service. The numbers don't add up.

It was Blount who arranged some of biggest interest rate swaps. According to an analysis by Porter White, the county ended up being overcharged a total of $100 million by JPMorgan and other issuers for its $5.6 billion in swaps. The swaps were supposed to protect Jefferson County. But when rates behaved unexpectedly, terminating the swaps cost the county an extra $277 million. A JPMorgan spokesman declined to comment on specifics, but said the bank, along with other creditors, continues to make proposals that would help Jefferson County avoid bankruptcy.

Langford made "a mistake," Baddley concedes, but "I don't think any crime was committed. I'll go to my grave thinking that." He adds, "I think the SEC is loading up on Larry Langford, African-American mayor, county commissioner. They're making him a scapegoat."

Jefferson County commissioner Jim Carns has been trying to clean up the mess since he took office in 2006. He spent much of the summer working with Governor Riley and the bankers at Porter White on a restructuring plan, in hopes of avoiding bankruptcy. By early July, he says, they were almost there. Among the plan's main features: another increase in sewer charges and an extension of the county's 1-cent sales tax (originally intended for new schools).

Large hurdles remained, but Carns was hopeful. On July 3, however, commission president Bettye Fine Collins, also a Republican, sided with the two Democrats on the commission on a 3-2 vote to fire Porter White and start over. "I was blindsided," says Carns. "It was the biggest double-cross that ever happened to me in 18 years in the political arena." Says Collins: "It didn't seem to me that we were going forward. I still don't think they had anything that would have sold."

Carns has since hardened his position, to the point where he's now advocating bankruptcy. It's a step "fraught with risk and uncertainty," he acknowledges, but one he now believes is necessary, if only to force Wall Street to bargain more realistically. He has a powerful ally in Bronner, the state pension fund CEO. Bronner - who back in 2002 made an ill-fated $240 million investment in bankrupt US Airways - tossed what he calls a "bomb" into the debate in August when he offered to buy the sewer system and operate it for the county - but only if the county declares bankruptcy first and lops off enough of the debt to meet his criteria for "fair value." What's fair, Bronner insists, "has nothing to do with what you owe. Do you owe people when you buy into a Ponzi scheme? I don't think so. When you have a contract that is fraught with corruption, do you think you really owe somebody? I don't think so."

Slaughter, whose law firm was hired by Collins to advise the county in July before he, too, was fired, is dead set against bankruptcy. "Even though I may live in Jefferson County," says Slaughter, his lip trembling with emotion, "I am not a Jeffersonian. I am not a populist. I believe in the payment of debt." He says he has "unutterable contempt" for Bronner and calls him "the biggest fool and most irresponsible person in Christendom."

Meanwhile, the clock keeps ticking. Every day, it seems, brings news of another lawsuit and more gossip about backroom maneuvering to cut a deal with Wall Street. Mayor Langford, never one to sit still - his winning campaign slogan was "Let's do something!" - keeps coming up with new plans to spend money the city doesn't have. His latest pitch: repaving all the city streets.

In his letter to Kashkari, Governor Riley said that although he's lined up $650 million in concessions from Wall Street, he still needed a $2.7 billion "backstop" from the federal government to cement a deal. In normal times, that would be an extraordinary request. But these days, well, it's all relative.

Reporter associate Doris Burke contributed to this article. 

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