You may have seen the ads on television or heard the story on various news programs.
Puerto Rico is bankrupt. Well… not technically, but more on that in a minute.
Why should you care? Because although it’s not really general knowledge, Puerto Rico’s bonds are in about half of all open-ended mutual funds. That includes money markets.
That doesn’t even include hedge funds, insurance funds or exchange-traded funds. Hundreds of billions of dollars. That includes your investment dollars, whether you know it or not.
Like it or not, the fate of the Puerto Rican people, and the fate of your portfolio, are inextricably mixed.
Who’s to blame? The Three Horsemen of the Economic Apocalypse of course: bought politicians, greedy bankers and the untouchable multinational corporations.
Here’s the “quick and dirty” on how this U.S. protectorate and de-facto 51st state ended up where it is today. Another deeper dive can be found here, thanks to Bloomberg.
The strange world of the U.S. territory
First off, Puerto Rico is not a state in the U.S., nor is it an independent country. It’s a territory, which means it has lived in a weird netherworld since the U.S. won the island from Spain during the Spanish-American War.
It’s much like Washington, D.C. (with fewer politicians and lawyers and more beaches) in the sense that it has no voting rights or any U.S. representation in Congress.
To appease Puerto Rico, the U.S. offered them one awesome deal: their bonds will be tax exempt in the U.S. at the local, state and federal levels. That is why so many fund managers own these bonds. Their debt is backed by the U.S. government and they throw off big yields.
But the economy of Puerto Rico has been a basket case — much like the economy of D.C. — because Congress determines what can and can’t happen in Puerto Rico. Local Puerto Rican leadership doesn’t have control of much, and because they know that, are not very effective. Usually they realize it’s better to be corrupt than try to solve the problems.
In the 1980s the “solution” to Puerto Rico’s difficult circumstances was to make it a tax haven for big corporations. And a lot of major companies, especially Big Pharma (AbbVie, Amgen, Bayer, Novartis), moved operations there to keep their revenue offshore. Remember, since it isn’t a state, the federal government can’t require companies or citizens of Puerto Rico to pay U.S. taxes.
But this tax-haven status has never created much for Puerto Rico since it didn’t have laws to govern the multinationals (Washington did that) and couldn’t spend to build its own industry since there was little tax revenue. Money for infrastructure was always lacking for the citizens, but the corporations were self-sustaining islands in the mess.
The banks saw opportunity. If Puerto Rico needed cash, then they could issue bonds. Never mind the limbo state of the Puerto Rican government and the weird laws governing the island. And in the mid-1990s, the U.S. began to pull incentives for corporations to operate in Puerto Rico, likely to get some revenue back from these firms.
Oh, and one more thing: because Puerto Rico was not a state, it could not claim bankruptcy protection in case of an economic collapse.
So why would banks want to underwrite bonds for this bizarre nation?
Fees, of course.
Follow the money
According to Bloomberg, since 2000, Wall Street bankers have received at least $900 million in underwriting fees on $126 billion in bonds. And remember, the banks and insurance companies were also buying these bonds on the institutional side because they were high-yield and tax-free.
This for a territory that has a poverty rate double Mississippi’s and an economy that has contracted every year for the past decade. If you had a balance sheet that looked like Puerto Rico’s, no one would lend you a dime. But none of these barons of Wall Street could predict what was to come?
Oh, they did. You didn’t think the shenanigans of the Great Recession could happen again?
The bought and paid for politicians will bail out Puerto Rico with taxpayer money so that Wall Street can keep on making money for itself. That is the bill going through Congress right now. That is what’s behind those ads you see designed to prevent Puerto Rico from going bankrupt.
If Puerto Rico is allowed to declare bankruptcy and reorganize, it means all those bonds the banks are sitting on will be close to worthless. It will hurt them significantly. So, they push it off on U.S. citizens. The banks played a game and lost. And they’re forcing us to pay the bill. Again.
Fundamentally, Puerto Rico is a slave state, a zombie state with 3.5 million people that the U.S. oversees. It’s a very bad deal for everyone. The U.S. needs to decide whether Puerto Rico becomes the 51st state (the bill to decide that was referred to subcommittee) or becomes an independent nation.
For U.S. investors, you need to check to see what kind of exposure you have to Puerto Rican bonds in your funds and even what your insurers have their money in. If you can, move your money before any legislation passes because, in the short term, things will be messy, even if it goes Wall Street’s way initially.
As for those banksters and insurers, they should have to pay the price of mistakes in capital markets. They deserve to suffer the losses and reevaluate their models so they can’t continue to privatize the wealth and socialize their failures. But no one will force them to if no one knows about it, which was the plan all along.
— GS Early
The post Wall Street pushes U.S. ‘state’ into bankruptcy with your money appeared first on Personal Liberty®.
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