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‘Bond Predators’ On Puerto Rican Debt Want Their Bailout

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‘Bond Predators’ On Puerto Rican Debt Want Their Bailout


Puerto Rico is sinking in $73 billion of debt. Mired in a long-running depression, the U.S. territory has already cut essential services to bare bones. Puerto Rico can’t fully pay its bondholders without setting off total economic collapse.

One of two things can happen, short of doing nothing and setting off a humanitarian crisis. One is to let Puerto Rico restructure its debt in a federal bankruptcy court. The U.S. Treasury recommends that route.

A Chapter 9 bankruptcy would cost American taxpayers about nothing. Losses would be borne by the speculators who made the risky investments. The Financial Times has called hedge funds wagering on distressed Puerto Rican debt “bond predators.”

The other option is to have U.S. taxpayers bail out the island with enormous transfers of aid.

Guess which path the hedge funds want to take? The taxpayer bailout, of course.

And guess which side Washington Republicans are on? The hedge funds’. Funny how fast these “fiscal conservatives” forget their distaste for bailouts when their Wall Street benefactors come knocking for theirs.

Puerto Rico’s government debt comes with various levels of government guarantees, but none of it is safe. That some tax-exempt Puerto Rican bonds have recently traded for an average yield of nearly 42 percent illustrates how little that guarantee means.

Has the island’s government been guilty of mismanagement? For sure. The investors knew that all along.

Wall Street’s time-honored strategy for recovering from a bet gone south is to move the risk onto America’s taxpayers. To pull it off here, the funds have to stop a Chapter 9 bankruptcy, whereby the negotiations would move where they belong — between them and the Puerto Rican government.

But Congress must first pass legislation letting Puerto Rico use the bankruptcy option. As the law now stands, American cities can go into bankruptcy court (Detroit was an example), but U.S. states and territories may not.

A bankruptcy proceeding would cost the bondholders, but a flattened Puerto Rico wouldn’t be able to pay them, either. So Republicans are riding to the rescue with sneaky ways to get the American taxpayers to bear the losses.

Senate Finance Committee Chairman Orrin Hatch did a clever two-step. He blocked a vote on the bankruptcy legislation while proposing that U.S. taxpayers spend $3 billion helping Puerto Rico meet its obligations. The bondholders think that’s a dandy idea.

Presidential candidate Marco Rubio initially showed interest in the bankruptcy bill and participated in the drafting. After all, huge numbers of Puerto Ricans fleeing the economic disaster on the island have settled in central Florida. They are now the U.S. senator’s constituents — and also an influential voting bloc in a presidential swing state.

But then the Monarch Alternative Capital hedge fund apparently got to him. Rubio abandoned support for the bankruptcy bill shortly after Monarch’s founder helped throw the first of two fundraisers for him.

The predators are now trying to confuse the public by calling the bankruptcy option — the true alternative to a taxpayer bailout — a “bailout.” The Tea Party Patriots fell for the line. (Not so the conservative Americans for Tax Reform, which sees bankruptcy as a preferred alternative to transferring more taxpayer money to the island.)

BlueMountain Capital Management wrote, “Chapter 9 proceedings bail out Puerto Rico on the backs of the very bondholders Congress incentivized to invest in Puerto Rican municipal bonds.”

Some bond predators have no shame.

Adding another chapter to the sob story, some Republicans are now arguing that a bankruptcy could hurt average Americans who invested directly in Puerto Rican bonds or through a mutual fund. Yes, this can happen when average Americans speculate.

That’s capitalism, the grown-up version.

Follow Froma Harrop on Twitter @FromaHarrop. She can be reached at fharrop@gmail.com. To find out more about Froma Harrop and read features by other Creators writers and cartoonists, visit the Creators Web page at www.creators.comCOPYRIGHT 2015 CREATORS.COM

Photo: A protester holding a Puerto Rico’s flag takes part in a march in San Juan, Puerto Rico, November 5, 2015.  REUTERS/Alvin Baez

Froma Harrop

Froma Harrop’s nationally syndicated column appears in over 150 newspapers. Media Matters ranks her column 20th nationally in total readership and 14th in large newspaper concentration. Harrop has been a guest on PBS, MSNBC, Fox News and the Daily Show with Jon Stewart and is a frequent voice on NPR and talk radio stations in every time zone as well.

A Loeb Award finalist for economic commentary in 2004 and again in 2011, Harrop was also a Scripps Howard Award finalist for commentary in 2010. She has been honored by the National Society of Newspaper Columnists and the New England Associated Press News Executives Association has given her five awards.

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  1. Buford2k11 December 29, 2015

    this is nothing new…Predators know their prey…these investors are nothing more than gamblers in thousand dollar suits…they are scum of the earth…they need to finish last, and be destroyed like the many lives they have destroyed in the past years….the gop is the bastion of corruption in this nation…watch and learn how the republican congress screws us again, as they preach austerity to everyone,….May the GOP be destroyed by Donald Trump….

    1. Otto Greif December 29, 2015

      The investors bought bonds, how is that “destroying lives”.

  2. Otto Greif December 29, 2015

    These so-called “predators” want the law enforced as it was when they purchased the bonds, that is not unreasonable. Changing the rules now could affect the municipal debt market for all 50 states, that’s the consideration that needs to be looked at before enacting Super Chapter 9.

    1. Daniel Jones December 29, 2015

      Making rampant speculators have to own up would affect the market nationwide:

      …it would improve the market. Go collect your BS fees, little man.

      1. Otto Greif December 29, 2015

        It would drive up municipal borrowing costs.

        1. Rippie December 30, 2015

          It would also make budgets more likely to be hit in order to stay on repayment or dividend schedules.

          Lending money to at-risk borrowers is predatory… at this level, it’s just high-dollar loan-sharking, except that instead of breaking the borrower’s knees, you can break everyone ELSE’S knees AND make THEM pay a debt they never incurred.

          That cannot be legal.

          You loan your money, you take the risk. Yours to loan or not, to lose or not. Period. Lending money is never a “can’t lose” situation.

          So, if an entity shouldn’t be borrowing, don’t loan them. How do you think the economy got tanked in the first place? Speculative predatory loans to individuals for homes they could never possibly afford.

          Stop whining and take your licks like the man you apparently aren’t.

          1. Otto Greif December 30, 2015

            You don’t know what you are talking about.

          2. Rippie December 30, 2015

            Investing your own money, it’s yours to lose, if that turns out to be the case. However, gaming the system, which is what we’re talking about here, to have everyone else absorb YOUR bad investment losses may seem slick to you, but to most people, it seems like a criminal act, and should be considered as one.

          3. Otto Greif December 30, 2015

            Puerto Rico and the Obama administration are trying to “game” things by changing the rules after the fact.

    2. Rippie December 30, 2015

      Your money to invest and gamble, your loss to eat. You make a bad investment, why should others be on the hook to absorb YOUR losses from YOUR greed?

      Oh, but wait, you advocate huge taxes on profits that come from such speculative predatory investing… DON’T YOU???

      You can’t have it both ways… but you want to.

      Investors should be held responsible for their own investments. Period.

      And laws change.


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