Alabama Decides Not To Pay JP Morgan

Contracts? We don't acknowledge no steenkin' contracts. The Alabama state school construction authority has declined to make a payment due to JP Morgan under a derivatives deal until a federal court rules on a state lawsuit seeking to have the contract thrown out. Alabama finance director has said he won't make or accept any payment under the swap deal: the first contractual payment is due May 1.

“We filed the declaratory judgment action because there are significant legal issues associated with the swap transaction,” Main, the authority’s secretary, said in a statement e-mailed to reporters. “It would not be proper for me to authorize the use of taxpayer money for any payment due under the agreements until the court resolves those issues and determines our rights and obligations.”

In October a lawsuit was filed in Montgomery, AL district court saying that a sale of a swaption (option on an interest-rate swap) wasn't allowed under state law. The deal had been executed in connection with bonds sold by the Alabama Public School and College Authority.

Aside from the obvious implication that this is a preamble to a likely county default (how bad off do you have to be to be unable to pay a few hundred Gs on a swaption deal), especially after Moody's local government downgrade warning, the real question is what the hell are Alabama residents doing trading swaptions? Probably the same reason we have had a "bull market" for the past month.