We've Got Trouble,Right Here In Lewisburg, Tennessee

And that starts with T, and that rhymes with B, and that stands for "bond derivatives".

Lewisburg is one of hundreds of small cities and counties across America reeling from their reliance in recent years on risky municipal bond derivatives that went bad. Municipalities that bought the derivatives were like homeowners with fixed-rate mortgages who refinanced by taking out lower-interest, variable-rate mortgages. But some local officials say they were not told, or did not understand, that interest rates could go much higher if economic conditions worsened — which, of course, they did.

The municipal bond marketplace was so lightly regulated that in Tennessee Morgan Keegan was able to dominate almost every phase of the business. The firm, which is based in Memphis, sold $2 billion worth of municipal bond derivatives to 38 cities and counties since 2001, according to data compiled by the state comptroller’s office.

After The New York Times made inquiries, the Tennessee comptroller, Justin P. Wilson, ordered a statewide freeze on bond derivatives and a review of the seminar taught by Morgan Keegan and others.

Representatives of Morgan Keegan pointed out that they saved cities and counties money for years by delivering lower interest rates, and that the economic decline that created the turmoil in the bond market was beyond their control. Moody’s credit rating agency on Tuesday issued a negative outlook for the fiscal health of municipal governments.

Everyone sing along now: "Nobody could have predicted, etc." It's a nice excuse. "It's not our fault the city couldn't pay up and didn't understand wheat they were getting into"...

In Lewisburg, the fallout from the bad bonds confronted the city of 11,000 people at an inopportune moment. Unemployment just nudged past 10 percent, businesses like Penny’s Home Cooking are shuttered, and a sprawling new corporate park sits mostly empty. A nearby employer, Sanford Pencil, the maker of Sharpie pens, is preparing to move to Mexico.

Unlike most states, Tennessee was one of the few where the legislature passed a law intended to regulate the sale of these complicated municipal bond derivatives to local governments. But the profusion of those deals and the various roles of Morgan Keegan have left leaders of those cities and counties furious at both the firm and the state.

In Claiborne County, north of Knoxville, officials said they were recently told by Morgan Keegan bankers that extracting themselves from a municipal bond derivative would cost $3 million, a sum the poor county cannot afford.

“I told the Morgan Keegan man here in my office, ‘It seems to me, you are all trying to slip paperwork by us like a small, shady loan company,’ ” said Joe Duncan, the mayor of Claiborne County.

It wasn't just homeowners who got played by the banksters, but entire cities and counties too.

Ahh, but I'm sure these city and county governments were run by poor minorities and the Big Mean Democrats forced companies like Morgan Keegan to sell derivatives to them, right?