Officials in Jefferson County, Ala., are furiously trying to stave off a bankruptcy filing tied to the county’s ill-advised use of fancy Wall Street funding techniques. Advisers for the county, which is home to the city of Birmingham, met with the Bush administration and the Fed Wednesday, the Birmingham News reports. Interest rates on the county’s sewer bonds surged earlier this year when investors fled paper insured by two struggling bond insurers, XL Capital and FGIC, Bloomberg reports. Also problematic is the county’s use of $5.4 billion of interest-rate swaps with JPMorgan Chase (JPM), Bank of America (BAC), Bear Stearns (BSC) and Lehman Brothers (LEH), Bloomberg notes.

The swaps were supposed to reduce the county’s borrowing costs, but this winter’s collapse of the auction rate bond market meant the opposite has happened, and now the county faces calls for additional collateral that it can’t meet. Blogger Accrued Interest points out that the county’s problems stem in part from its heavy use of leverage, which meant it couldn’t refinance its debt when market conditions tightened. S&P last week cut its rating on the county’s sewer revenue refunding warrants to D, reflecting the county’s failure to make a $53 million debt payment as originally scheduled.

But as questionable as the financing techniques used by Jefferson County were, other municipalities still need to find buyers for their bonds. That’s why the mess has other Alabama municipalities pitching a trip to Wall Street to reassure investors that the rest of the state is still good money. Fultondale Mayor Jim Lowery is urging the chamber of commerce to organize the outing, according to the Birmingham news. “We cannot continue to allow our County Commission and its financial advisers,” he wrote, “to drag the rest of us down into the abyss of financial destruction.”

More bad news for the investment banks. Wall Street’s fees from private equity dealings plunged more than 75% from a year ago in the first quarter, Bloomberg reports, as the once-hot takeover and loan underwriting businesses showed sharp slowdowns. Among the biggest losers were Deutsche Bank (DB), Europe’s largest investment bank, which saw its fees plummet to $5.8 million from $165 million a year earlier, according to data compiled by Freeman & Co. and Thomson Financial. In the United States, the biggest decline was at Goldman Sachs (GS), whose fees dropped 83% from a year ago to $42 million.

The drops come as private equity firms pull back from a market that has grown quite risk averse since last summer’s mortgage mess. Blackstone (BX), last year’s biggest revenue generator for Wall Street, paid out just $21million in fees in the first quarter, a 90% drop reflecting last year’s buyout boom and this year’s nearly empty deal calendar. With investors already worried about heavy leverage across the financial sector, signs that important earnings sources are drying up only adds to the sentiment overhang.

Financial stocks took a beating Thursday after the latest round of downgrades and estimate cuts. Analyst Meredith Whitney at Oppenheimer said she expects Citi (C), Merrill Lynch (MER) and UBS (UBS) to post aggregate first-quarter losses of $30 billion next month. “As many expected the fourth quarter to be the ‘kitchen sink’ for the industry,” she writes, “we believe first quarter results, to be reported in two weeks time, will be a rude awakening.”

But the rude awakening has already arrived for some observers. At Portfolio.com, Megan Barnett calls Wall Street research “worthless,” noting an overlooked disclosure line in a recent Whitney report: “We have very little earnings visibility and very little confidence in our estimates.” Meanwhile,  Michael Lewis suggests Wall Street analysts aren’t the only ones lacking an understanding of the securities business. “There is, of course, a reason that the market doesn’t understand Wall Street firms,” he writes at Bloomberg. “The people who run Wall Street firms, and who convey news of their inner workings to the outside world, don’t understand them either.” Comforting.

Wall Street could be in for another nasty-tasting serving of alphabet soup. In the wake of the debt market messes tied to collateralized debt obligations, or CDOs, and structured investment vehicles, or SIVs, Bloomberg reports that big banks could now face losses on another obscure asset class: variable interest entities, or VIEs.

The industry has already taken tens of billions of dollars of writedowns on CDOs and other mortgage-related securities. Now, Bloomberg reports, troubles in financing VIEs - another type of financial structure that lets firms keep risky assets off their balance sheets - could add new losses to the toll. Estimates of possible losses range from $30 billion at Moody’s to $88 billion at CreditSights, Bloomberg reports. Firms could have to recognize losses tied to the VIEs if they are forced to provide financing to the entities, as they did in the case of the SIVs that ran into financing trouble this fall. Beyond the usual suspects, such as Citi (C) and Merrill (MER), Bloomberg says the VIE mess could even touch two firms that have largely steered clear of the subprime swamp - Goldman Sachs (GS) and Lehman Brothers (LEH).

One factor working in the banks’ favor is that for now, it appears that bond insurers Ambac (ABK) and MBIA (MBI) are going to hold onto their triple-A ratings, forestalling a downgrade that could have forced the banks to backstop the VIEs. But that doesn’t mean the issue is going away. A top S&P exec told Bloomberg that “the disclosure on VIEs is hopeless,” which means investors in financial firms have just one more worry to add to an already sizable list.

The mess in an obscure corner of the municipal bond market is turning into another black eye for the banking industry. Bloomberg reports that the collapse of the $342 billion market for so-called auction rate bonds “demonstrates that regulators are no match for Wall Street.” Dealers such as Goldman Sachs (GS), Citi (C) and Merrill Lynch (MER) previously propped the market up by bidding for bonds that otherwise would have gone unsold, but they are now walking away from this once-lucrative niche in a bid to preserve their own strained balance sheets. Auctions failed on between $80 billion and $85 billion of auction-rate debt last week alone, The Wall Street Journal reports. As a result, even high-quality bond issuers such as the Port Authority of New York and New Jersey and the University of Pittsburgh Medical Center have ended up paying interest rates as high as 20 percent after the auctions for their bonds failed to draw any bidders.

The government hasn’t been totally blind to the possible conflicts of interest in the auction rate market: An earlier SEC probe of possible bid-rigging ended with 15 banks agreeing in 2006 to a $13 million settlement. Now, however, taxpayers are left footing the bill as Wall Street seeks to save its own hide. Meanwhile, understatement remains the order of the day in Washington. Referring to the possibility of bid-rigging in the auction rate market, an SEC official tells Bloomberg that the recent collapse of demand at auction “appears to indicate those concerns were well founded.”

Add Bear Stearns (BSC) to the list of Wall Street firms shuffling top management as the mortgage crisis drags on. CEO Jimmy Cayne will step down as chief executive but remain chairman, The Wall Street Journal reports, after a year that saw the firm report its first-ever quarterly loss and found Cayne playing golf during a hedge fund crisis that eventually cost investors $1.6 billion. The Journal reports that Cayne chose to depart after big investor Bruce Sherman told at least one director that he wasn’t happy with the stock’s year-long plunge. Cayne joins Merrill Lynch’s (MER) Stan O’Neal and Citi’s (C) Chuck Prince in taking the fall after big losses tied to big debt market bets. The question now is whether Bear Stearns’ shares, down more than 50 percent over the past year, can find some support as the firm tries to move forward in a declining earnings environment. The precedent at Merrill and Citi, which along with other financial stocks have fallen sharply this year, isn’t promising. As Sanford C. Bernstein analyst Brad Hintz told Bloomberg, “This is going to take a long time to play out.”

Top execs at Jefferies (JEF) are taking responsibility for the firm’s fourth-quarter swoon. The New York-based brokerage firm surprised Wall Street Monday by saying it will swing to a quarterly loss of 17 cents a share from a year-ago profit of 38 cents, due to “weak results in its high yield and asset management businesses, as well as losses in two principal trading efforts.” Those losses led to the usual terminations of hapless workers and pledges to crack down on noncompensation  expense.

But what’s unusual is that the firm’s top two execs - CEO Richard Handler and executive committee chairman Brian Friedman - will feel the latest quarter’s losses in their wallets too. Like John Mack at Morgan Stanley (MS) and Jimmy Cayne at Bear Stearns (BSC), Handler and Friedman won’t get any 2007 bonus as a result of the firm’s late-year pratfall. And in an unusual show of accountability, the two have also agreed to give back millions of dollars in stock they were given in 2006. “If we are asking our shareholders to make this investment for the long-term success of Jefferies,” Handler said, “we should put our money where our mouth is and pay our fair share.” Now if only more Wall Street hard hitters would follow their lead.

Sovereign wealth funds are on the march again. Funds based on the export-happy Pacific Rim and in the oil-producing states of the Middle East have already made headlines with massive investments in struggling U.S. banks like Citi (C), Merrill Lynch (MER) and Morgan Stanley (MS). Now, reports FTAlphaville, the deep-pocketed state-run investment firms are accelerating their efforts to hire Western financial executives to help deploy their massive cash hoards. FTAlphaville says China Investment Corp. even wants to add Alan Greenspan to its board, presumably for the sake of name recognition and political contacts rather than advice on how to handle rising asset prices. The site notes that as thick as their wallets are, the sovereign wealth funds may initially have trouble luring top talent, given the massive bonuses being handed out on Wall Street even with many top firms in distress. But with many top U.S. investment firms likely looking at big cutbacks in the year to come, the petrodollar types may yet find themselves in the right place at the right time once again.

As investors brace for Bear Stearns (BSC) to deliver the next round of bad news from Wall Street, FTAlphaville is turning a skeptical eye on Wednesday’s finger pointing at Morgan Stanley (MS). The big brokerage firm posted a $3.6 billion fourth-quarter loss, mostly as a result of $9.4 billion in writedowns tied to subprime mortgage-related securities.

CEO John Mack and finance chief Colm Kelleher made a point of blaming ”trading by a single desk in our mortgage business,” but FTAlphaville takes issue with the notion that “trading” was the problem at all. It notes that much of Morgan Stanley’s loss was tied to a big holding of so-called super senior tranches of CDOs — which, until recently, was seen as among the safest nongovernment paper around. “For a start,” Sam Jones writes, “why make such a huge, singular bet on such a dull, low-yielding product?”

Why indeed? Because, Jones continues, slicing and dicing products like collateralized debt obligations, and applying leverage to them to make them more profitable, has become standard operating procedure in the banking industry. Doing so while times were good padded the banks’ bottom lines, and now, with markets cranky and risk-averse, the banks’ lax attitude toward risk is coming back to haunt them.

Either way, what happened to Morgan Stanley is no aberration, Jones suggests. “Morgan Stanley’s super senior exposure goes way beyond being the responsibility of ‘one desk,’” he concludes. “It’s a pretty accurate reflection of banks’ way of conducting business in general.”

Morgan Stanley (MS) is trying to clean up its act. The big brokerage firm posted a massive fourth-quarter loss as mortgage-related writedowns continue to mount. The company lost $5.8 billion, or $3.61 a share, for the quarter ended Nov. 30, reversing the year-ago profit of $2.3 billion, or $1.44 a share. The latest quarter included $9.4 billion of subprime-related writedowns — up sharply from the $3.7 billion mortgage hit Morgan Stanley previously predicted for this quarter. The firm’s decision to throw out all but the kitchen sink in its fourth-quarter numbers will no doubt have some Wall Streeters predicting that the worst is over.

Adding to that line of thinking, Morgan Stanley lined up a $5 billion investment from China Investment Corp., joining with Citi (C) and countless others in tapping the rich vein of sovereign wealth funds. China will end up with a stake as big as 9.9 percent in Morgan Stanley, though the firm stresses the fund won’t end up with any special rights such as board representation.

And mimicking Bear Stearns (BSC), Morgan said CEO John Mack won’t take a bonus, which seems appropriate given that it was Mack’s bright idea to boost Morgan Stanley’s risk profile in the first place. That’s probably cold comfort to Zoe Cruz, the onetime heir apparent who was ousted earlier this month as Morgan’s mortgage problems surfaced. “Ultimately, accountability for our results rests with me, and I believe in pay for performance,” Mack said in Morgan Stanley’s press release Wednesday, “so I’ve told our compensation committee that I will not accept a bonus for 2007.” It’s a start.