[News] Wall Street Is Behind The Jackson, Mississippi, Water Crisis

[Anti-Imperialist News]

popularresistance.org
<https://popularresistance.org/wall-street-is-behind-the-jackson-mississippi-water-crisis/>
Wall Street Is Behind The Jackson, Mississippi, Water Crisis
By Matthew Cunningham-Cook and Ricardo Gomez, The Lever.
October 5, 2022
------------------------------
[image: image.png]

Above Photo: Jeremy Myers, left, of the Aids Healthcare Foundation,
delivers water to Shaun Brown in Jackson, Miss. AP Photo / Steve Helber.
A major credit rating agency jacked up interest rates in Jackson,
Mississippi, curtailing infrastructure investments in the years leading up
to the city’s recent disaster.

Jackson, Mississippi – In August, clean water stopped flowing from
residents’ taps in Jackson, Mississippi. The crisis lasted more than six
weeks, leaving 150,000 people
<https://news.yahoo.com/150-000-jackson-mississippi-without-230048644.html>
without
a consistent source of safe water. The catastrophe can be traced back to a
decision by a credit ratings agency four years ago that massively inflated
the city’s borrowing costs for infrastructure improvements, most notably
for its water and sewer system.

In 2018, ratings analysts at Moody’s Investor Service — a credit rating
agency with a legacy of misconduct
<https://www.justice.gov/opa/pr/justice-department-and-state-partners-secure-nearly-864-million-settlement-moody-s-arising>
—
downgraded Jackson’s bond rating to a junk status, citing
<https://www.moodys.com/research/Moodys-downgrades-City-of-Jackson-MS-GO-rating-to-Baa3--PR_905506078>
in
part the “low wealth and income indicators of residents.” The decision
happened even though Jackson has never defaulted on its debt.

Moody’s move jacked up the price of borrowing for Jackson, costing the
cash-strapped city between $2 and $4 million per year in additional debt
service costs — a massive financial roadblock to officials’ plans to fix
the municipality’s aging water system. And since the state of Mississippi
and the federal government refused to use their powers to address the
city’s infrastructure problems, that meant Jackson was essentially
powerless to stop the impending catastrophe.

The situation underscores how Wall Street works to prevent governments from
fixing their public works and contributing to an infrastructure crisis
nationwide. Such actions by ratings agencies are particularly harmful in
majority Black and Brown areas like Jackson, which have tight budgets and
often receive minimal federal support.

All major — and most minor — cities, states, school, and utility districts
take on debt to pay for infrastructure improvements. That debt is issued as
bonds, which are agreements to pay back loans at a set interest rate.
Bondholders are typically wealthy residents of the state where the bonds
were issued who are seeking to accrue tax advantages, banks, insurance
companies, and mutual funds.

To determine creditworthiness for this debt, bond ratings agencies give
state and municipal governments a credit rating, based on factors like the
community’s existing debt load and its current pension obligations. When
the rating is lower, the debt is considered higher risk, and the interest
rate to pay back the loans increases substantially.

Historically, the lowest possible bond ratings have been reserved for
Jackson, Puerto Rico, American Samoa, Detroit, and other places long
plagued by systemic disinvestment — meaning that it becomes almost
impossible for these communities to finance their way out of their
infrastructure crises.

“The practices of the ratings agencies are often extremely racist,”
Brittany Alston, research director at the Action Center on Race and the
Economy (ACRE), told *The Lever*. “We did an analysis
<https://acrecampaigns.org/research_post/outlook-negative/> that showed
that all the cities at the bottom of the ratings scale have been
majority-minority. As I’ve been monitoring the reporting, I’ve noted how
the local government is characterized, I’ve heard the term ‘mismanagement’
multiple times.”

Alston continued: “I think that term has been used to really vilify local
governments who are working with what they have, and are struggling because
they’re stuck in a system that has denied them federal support for
decades.” The federal government’s share of contributions to water
infrastructure fell from 31 percent in 1977 to just 4 percent
<http://www.uswateralliance.org/sites/uswateralliance.org/files/publications/The%20Economic%20Benefits%20of%20Investing%20in%20Water%20Infrastructure_final.pdf>
in
2017.
Jackson’s Water Crisis Has Deep Roots

Some of Jackson’s water infrastructure dates to 1914
<https://mississippitoday.org/2022/09/15/jackson-water-system-by-the-numbers/>.
The city has a longtime problem
<https://www.clarionledger.com/story/news/local/2022/09/09/jackson-water-system-brandon-businessmen-accused-of-dumping-waste/67167873007/>
with
industrial concerns dumping their waste into the city’s water system, in
part driven by Environmental Protection Agency underfunding and weak
environmental regulations in Mississippi.

Nationally, federal government support for water infrastructure has
dwindled. And at the state level, Mississippi has seemed more interested in
diverting $8 million
<https://www.nytimes.com/2022/09/26/sports/football/brett-favre-mississippi-scandal.html>
of
state funding to enrich former NFL player Brett Favre than investing in
Jackson’s infrastructure, despite frequent water system failures in the
past.

In 2010, the transnational engineering firm Siemens made an offer to
automate Jackson’s water billing system, assuring the city that the energy
savings it could create would more than pay for the contract. In the largest
contract
<https://www.clarionledger.com/story/news/local/2019/11/25/siemens-jackson-ms-timeline-contract-lawsuit-water-meters-billing/4264596002/>
in
Jackson’s history, the city agreed to pay $90 million based on Siemens’
promise to create $120 million in “guaranteed savings,” according to a
lawsuit
<https://jacksonfreepress.media.clients.ellingtoncms.com/news/documents/2020/03/04/Jackson_amended_complaint_1.pdf>
the
city later filed against the company for what appeared to be
<https://www.jacksonfreepress.com/news/2020/mar/04/siemens-settlement-explained/>
a
fraudulent and defective system.

The Siemens performance contract put Jackson on the hook to Wall Street
bondholders for over $200 million, with more than 55 percent of that total
collected as interest <https://emma.msrb.org/EA538563-EA419692-EA816658.pdf> on
the $91 million principal loan amount.

Money that could have gone to new water infrastructure, in other words,
instead went to Siemens, as well as the banks and investors who owned
Jackson’s water sewer debt.

Progressive Jackson Mayor Chokwe Antar Lumumba pledged
<https://www.clarionledger.com/story/opinion/columnists/2017/11/03/lumumba-offers-vision-capital-city/829119001/>
during
his 2017 mayoral campaign to use the city’s bonding authority to fix the
water and sewer lines. But the following year, Moody’s downgraded Jackson’s
debt to junk status.

The drop in credit rating severely limited the city’s ability to refinance
the 2013 water bond it issued for the Siemens project. If Jackson had been
given the highest possible bond rating — AAA — it would have been able to
score a 3.55 percent <https://www.fmsbonds.com/market-yields/> interest
rate on the 20-year bond. Instead, it was forced to pay interest rates as
high as 6.75 percent <https://emma.msrb.org/EA538563-EA419692-EA816658.pdf>.

That move stopped Jackson from being able to get decent borrowing terms for
any new infrastructure investment, which is likely why the bond Lumumba
campaigned on was never issued.

One other major ratings agency, S&P Global Ratings, also rates Jackson’s
municipal debt. While S&P has been less critical
<https://www.jacksonms.gov/press-release-city-of-jackson-receives-a-long-term-rating-from-standard-poors-global-ratings/>
of
Jackson’s general obligation debt, which was issued to fund day-to-day
operations of the city, it has rated the city’s water and sewer debt harshly
<https://www.bondbuyer.com/news/drinking-water-crisis-envelops-junk-rated-jackson-mississippi-system>
.

Meanwhile, Jackson has faced significant challenges. A freeze in November
2021 that caused the city to lose potable water was the canary in the coal
mine, said Catherine Robinson, a community organizer based in Jackson.

“For me, when the Jackson water crisis first hit in November 2021, my mom
had just had a stroke,” Robinson told *The Lever*. “I had to go outside of
Jackson to take showers and to cook. It was a winter storm — we really
couldn’t travel like that because the roads were so icy.”

There is an entrenched racial component to this state of affairs.
Mississippi’s leadership — every statewide official, the Speaker of the
House and the President Pro Tempore of the state Senate, and both U.S.
Senators — have been white since the Reconstruction era ended 140 years
ago, despite the state being 37 percent Black.

In an analysis of five million bonds issued to cities in the municipal bond
market between 1970 and 2014, economic historian C.S. Ponder at Florida
State University found
<https://www.tandfonline.com/doi/abs/10.1080/24694452.2020.1866487> that
majority-Black cities are categorically charged higher interest rates to
build basic infrastructure for water systems and sewage.

The same applies to Moody’s. The firm is very disconnected from life on the
ground in Jackson. Moody’s CEO Rob Fauber earned $9.7 million
<https://d18rn0p25nwr6d.cloudfront.net/CIK-0001059556/646e0ad4-8942-4577-b60e-024f6e350927.pdf>
in
2021. The firm spent $6.5 billion
<https://seekingalpha.com/article/4495209-moodys-corporation-the-more-it-drops-the-better-it-looks>
on
stock buybacks over the past decade, using the capital of the company to
drive up the stock.

Two of the largest municipal bankruptcies in U.S. history have been filed
by majority-Black urban areas — Detroit, Michigan, and Jefferson County
(Birmingham), Alabama — whose water systems were made targets of financial
extraction. In both places, the federal government mandated upgrades to
their water and sewage systems without providing funding to do so, creating
roughly $5.7 billion in debt for Detroit and $3.3 billion for Jefferson
County on the municipal bond market.

For its part, the Federal Reserve has the authority
<https://www.levernews.com/how-the-fed-rescued-corporations/> to purchase
municipal bonds directly to support the finances of communities like
Jackson, as it has done with bonds for major corporations, such as when the
Fed made a multi-trillion dollar intervention
<https://www.investopedia.com/government-stimulus-efforts-to-fight-the-covid-19-crisis-4799723>
in
the early stages of the COVID-19 pandemic.

However, a Fed facility set up to support municipalities during the
pandemic only purchased $16 billion
<https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8776343/> worth of municipal
debt, as opposed to the $42 billion
<https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8776343/> thrown at the
corporate market.
Flooding Cities With Toxic Debt

While state and federal government action, or lack thereof, has factored
into the shoddy infrastructure of several American cities, Moody’s also
bears significant responsibility for the current state of affairs.

The bonds ratings agency made incredibly consequential decisions in the
lead-up to the 2008 financial crisis, which caused 7.8 million
<https://www.mortgagenewsdaily.com/news/03142017-corelogic-foreclosures>
foreclosures
and nearly 9 million
<https://www.marketplace.org/2018/12/19/what-we-learned-jobs/> job
losses. Often
deemed
<https://www.rollingstone.com/politics/politics-news/the-last-mystery-of-the-financial-crisis-200751/>
the
most consequential factor contributing to the crisis was Moody’s decision
to rate large tranches of controversial Collateralized Debt Obligations
(CDOs) and mortgage-backed securities (MBSs), financial products composed
of low-quality mortgages, at the safest possible rating of AAA.

The firm did so because of a perverse incentive model whereby Moody’s and
other ratings agencies would inflate ratings to generate additional fees
from Wall Street firms. Holders of many of those assets, however, were
nearly wiped out
<http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/2010-0602-Credit-Ratings.pdf>
in
the 2008 financial crisis when the housing market collapsed.

The other two major ratings agencies, S&P
<https://www.justice.gov/opa/pr/justice-department-and-state-partners-secure-1375-billion-settlement-sp-defrauding-investors>
 and Fitch
<https://www.reuters.com/article/fimalac-fitch-lawsuit/fitch-settles-lawsuit-over-ratings-of-debt-vehicle-idINL1N0CA96Z20130318>,
also engaged in the ratings inflation of risky Wall Street financial
products leading up to the 2008 financial crisis.

At the same time, Moody’s and other agencies often rated many states and
municipalities with far lower ratings — even though they had much lower
probability of default, due to the unlimited taxing power of states and
municipalities, as well as harsh consequences for politicians that allow
defaults.

Lehman Brothers, the Wall Street firm at the epicenter of the 2008
financial crisis, was rated at A1 — seven notches above Jackson’s water and
sewer current debt — in July 2008, just two months before the firm
collapsed and Lehman’s bondholders received 25 cents on the dollar.

When government defaults do occur, as happened in Detroit in 2013
<https://www.reuters.com/article/us-usa-municipals-defaults/detroit-leads-2013-u-s-bond-defaults-moodys-idUSBREA4603920140507>
and
Puerto Rico in 2016
<https://www.reuters.com/article/us-puertorico-debt-suspension-idUSKCN0ZG34D>,
Wall Street is almost always the culprit. Wall Street firms loaded up these
<https://www.motherjones.com/politics/2010/03/swaps-deals-sinking-us-cities/>
 communities
<https://acrecampaigns.org/campaigns_programs-category/puerto-rican-debt-crisis/>
 with toxic debt <https://www.levernews.com/when-a-swap-becomes-a-swipe/> that
required huge debt service payments, precipitating their bankruptcies.

Moody’s largest shareholder
<https://www.wsj.com/articles/moodys-fined-for-ratings-linked-to-berkshire-hathaway-its-biggest-shareholder-11617116113>
is
America’s fifth-richest person, Warren Buffett, who has also waged an
aggressive
campaign
<https://www.levernews.com/railroad-ceos-were-paid-over-200-million-as-workers-suffered/>
to
keep rail workers from having paid sick days. In 2021, a European regulator
fined
<https://www.wsj.com/articles/moodys-fined-for-ratings-linked-to-berkshire-hathaway-its-biggest-shareholder-11617116113>
Moody’s
$4 million for inflating the credit ratings of other Buffett-owned
companies.

Moody’s has in the past justified the yawning discrepancies between its
corporate and financial ratings and its municipal ratings by saying
<https://acrecampaigns.org/research_post/outlook-negative/> that it had
different standards for each class of debt. Those claims were not taken
seriously when Congress wrote and passed the Dodd-Frank Wall Street Reform
and Consumer Protection Act in 2010 to address the misconduct leading up to
the 2008 financial crisis. The law mandated
<https://www.sec.gov/spotlight/dodd-frank/creditratingagencies.shtml> that
Moody’s and the other ratings agencies use “consistent application of
rating symbols and definitions,” and that the Securities and Exchange
Commission (SEC) initiate rulemaking to that effect.

However, under President Barack Obama, the SEC failed
<https://www.nytimes.com/2014/03/23/business/the-stone-unturned-credit-ratings.html>
to
mandate that the ratings agencies actually use consistent ratings symbols
and definitions across the board, allowing the ratings agencies to continue
to rate municipal debt more harshly than other forms of debt, despite its
far lower likelihood of default.

The massive discrepancies have continued to today. In November 2018,
Moody’s rated Pacific Gas & Electric’s (PG&E) debt at Baa3
<https://www.moodys.com/research/Moodys-downgrades-PGE-to-Baa3-and-Pacific-Gas-Electric-to--PR_391756?cy=asia&lang=en>
—
two notches above Jackson’s current water debt rating — just two months
before the long-troubled
<https://www.nytimes.com/interactive/2019/03/18/business/pge-california-wildfires.html>
utility
company suffered one of the largest bankruptcies in history.

Jackson, meanwhile, has never defaulted on its debt. And unlike PG&E
executives, who collected millions of dollars
<https://www.mercurynews.com/2021/04/08/pge-execs-pay-raises-2020-sec-docs-gas-electricty-wildfire/>
in
raises in the aftermath of the company’s bankruptcy, a default by Jackson
would likely prove to be a major blow to Lumumba and his expected campaign
for a third term in 2025.

Congressional Democrats are now proposing
<https://www.mississippifreepress.org/27591/rep-bennie-thompson-seeks-200-million-federal-aid-for-jackson-water-system>
$200
million in aid to Jackson, which is a fraction of the $1 billion
<https://www.wlbt.com/2021/02/19/lumumba-it-would-literally-cost-billion-dollars-replace-jacksons-entire-water-system/>
that
experts say is needed to meet the scale of the crisis. If Republicans gain
control of either chamber of Congress in November, it is likely that any
additional aid to the city will be cut off.
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