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Related: Editorials & Other Articles, Issue Forums, Alliance Forums, Region ForumsHow a Broke Little Island Beat the Hedge Funds (Puerto Rico)
In 2015, the hearts of hedge funders fluttered when former Treasury Secretary Larry Summers wrote, in a Washington Post op-ed on Puerto Ricos debt crisis, How things play out from here will be an important test of whether Washington is, as some allege, controlled by financial interests. For anyone with deep pockets and an interest in maintaining leverage over the Puerto Rican government, killing congressional debt relief legislation must have looked like a slam dunk. To give Puerto Rico the option to legally restructure its debts, Congress would need a groundswell of bipartisan actionall to help poor, nonvoting quasi-citizens in an ugly election year. How would you have bet?
Yet, on June 30, Obama signed into law the Puerto Rico Oversight, Management and Economic Stability Act (or PROMESA, which means promise in Spanish), handing a rare loss to a group of powerful hedge fundsalong with banks and public mutual fund companies Franklin Templeton and Oppenheimer & Co.that saw in Puerto Ricos slow-burn fiscal crisis an opportunity for profit. In doing so, Congress preemptively decided what was shaping up to be a multiyear war between Puerto Rico and its creditors, giving leverage to Puerto Ricos previously overmatched government and pulling the rug out from under the funds doing the financial equivalent of turning the commonwealth upside down, shaking hard, and collecting the coins that fell out of its pockets. How did such a thing happen? How did some of the most powerful forces in American finance lose to a broke little island?
A quick refresher on government borrowing: Public authorities, towns, cities, states, our federal government, and sovereign states the world over frequently issue debt (i.e., borrow money from investors) for needs ranging from, say, building an aqueduct to bridging budget gaps between now and tax day. Once public entities decide when and how much they want to borrow, a bank steps in to underwrite the bonds, determining how to sell them, and how to fill in the blanks in the book-length prospectuses that accompany every bond issuance. The bank finds customers for the bond saleanyone from labor union pension funds looking for a safe place to invest members dues, to hedge funds using municipal bonds to balance complex, algorithmically risk-weighted portfoliosand the bonds continue to trade on the secondary market just like stock, with the issuing governments fiscal health driving the undulations in a bonds price.
Apart from some legal quirks (no taxes!), Puerto Ricos bonds were no different. What does make Puerto Ricos bonds different from the bonds of every state-level issuer since 1933when Arkansas defaultedis that Puerto Rico mostly isnt paying them back. The commonwealths government told the world mid-2015 that it couldnt pay its debt and proved it over the intervening year, defaulting on select issues of bonds on multiple occasions before July 1, the day after PROMESA passed, when it managed to make principal and interest payments on just over half the $2 billion that had come due that day. The latest budget proposed for Puerto Ricos next fiscal year includes no allotment for debt service payments. The Treasury estimates that hedge funds own about $23 billion, or more than one-third, of Puerto Ricos external debt. That sound you hear is teeth grinding in midtown Manhattan and Greenwich, Connecticut.
Read more: http://www.slate.com/articles/business/moneybox/2016/07/how_puerto_rico_beat_the_hedge_funds.html
hobbit709
(41,694 posts)TexasTowelie
(112,757 posts)knowing that their hedge fund manager has taken a loss on trading. They'll just take it as a capital loss deduction when they file taxes next year.
Snarkoleptic
(6,002 posts)were shuttered to make bond payments.
Sure, it was irresponsible for their leaders to amass so much debt, but I always default to the question "Are citizens here for the economy, or is the economy here for the citizens."
lostnfound
(16,203 posts)Important and thought provoking article.