The Largest U.S. Municipal Bankruptcy Looms in Alabama. What caused this mess is an interest rate swap Jefferson County officials entered into when they financed a $3.2 billion sewer cleanup. For weeks county officials claimed they would work things out, but that is increasingly unlikely. Let's pick up the story from Bloomberg.

Talks on the sewer system's debt crisis aren't making progress, increasing the odds that the county will file municipal bankruptcy, Jefferson County Commission President Bettye Fine Collins said Tuesday.

This is how it ends for the little county that was going to teach America how to use interest-rate swaps. The Jefferson County bankruptcy, if it comes, and it's hard to see how it can be avoided, will eclipse that of the 1994 filing by Orange County, California. Derivatives are at the center of both death-spirals.

Jefferson County played the derivatives game as part of financing a $3.2 billion sewer cleanup. The county engaged in a batch of interest-rate swaps with the banks that helped underwrite the debt, in a strategy designed to save the county and its taxpayers some money. The strategy backfired, demonstrating the speculative, risky nature of swaps.