Tuesday, July 28, 2015

Puerto Rico and the Vultures

Here’s the thing about money: Very few of us understand it, and most of us fear it.

Nor am I an expert, which may or may not be a good thing. Because the experts will throw you into an ocean of terms and concepts and expect you to swim. What can I do? Tell you a simple story.

Two people in their mid-80’s did everything they were supposed to do, and did it very well. They worked hard, they were frugal, they sent their children to get Master’s degrees even though they themselves had never travelled to Europe. The husband invested in Puerto Rico bonds, which were considered safe, and which had the advantage of being free of taxes on the federal, state, and municipal levels.

They didn’t do the one thing that everyone with a little money should do: Spread it around. Don’t put your eggs in one basket: buy real estate, invest broadly in the stock market, and invest in bonds, and throw some money into a savings account. Why? Because if one thing goes sour, well, at least two of the others are likely to be OK. (I know, if there’s a general collapse of the market—a financial melt-down—you’re screwed, but so is everyone else, so we can all be miserable together, and hey—there’s always the beach!)

So Puerto Rico issued bonds, as does every other municipality, and a bond is nothing more than a loan that bondholders make in return for—usually—very low interest. Why the low interest? Because the investments are considered safe: The municipality will repay, since the growth in the economy will mean increased revenue.

Now, the elderly couple mentioned above? Well, the husband was an excellent engineer, but what did he know about money? So he went to the expert, who did know about money, and who told him to buy Puerto Rico bonds, which were excellent investments, and which were tax-exempt. Being a proud Puerto Rican, he did just that.

That may have been a mistake, and when the red flags were raised, a couple of years ago, the engineer’s son scrambled to sell all those bonds, some at a profit, most not. But what about me? Am I any smarter? Because when I was working, I contributed to my 401K plan, and did I examine my fund’s portfolio, to see if it had any Puerto Rican funds? Of course not, who does? And look, it’s not just Puerto Rico, it has been variously Detroit, Spain, Greece and Argentina. So I very likely hold some Puerto Rican bonds, and the likelihood is that every small investor, frugally saving for retirement, does as well.

Now then, for people like me who are unwilling or disinclined to spend ten or twelve hours a day watching their money and probing into global markets, trends, and politics, there are the credit rating firms, and their job—in theory—is to protect the investor. And these people do what I don’t, and they saw very clearly the writing on the wall, and were very open in their warnings. They said it again and again, and they lowered our credit rating notch by notch, until we were at junk rating.

This was a disaster, but one that only now is beginning to be felt, because what did Puerto Rico do? Here’s Bloomberg on the topic:

The U.S. territory sold the securities March 11, in the largest junk deal ever for the $3.7 trillion municipal market. The borrowing came the month after the island was cut to speculative grade, and gave officials enough cash to pay bills through June 2015 as they try to revive a shrinking economy. Most of the original purchasers were hedge funds, and first-day trading in the bonds exceeded $5 billion.

Date of article: 23 March 2014. And the amount of debt sold? 3.5 billion.

The whole thing was profoundly immoral, but was it a secret? Did it happen behind closed doors? Of course not, since I was reading all about it and scratching my head and thinking, ‘who in God’s name would buy this terrible debt?’

Well, we now know, and even more cynical was that the bonds were marketed specifically for the hedge funds and their more rapacious cousins, the vulture funds. Why? Because the minimum price was 100,000$, and if anybody out there reading this has that kind of money, well, leave a comment below, because I’d really like to meet you!

The politicians got into bed with the hedge funds and now? The left is gearing to go nuts about the austerity measures, as evidenced by this headline:

Hedge funds tell Puerto Rico: lay off teachers and close schools to pay us back

That’s The Guardian, hardly a fly-by-night operation. Because the hedge funds have been keeping an eye on the island, and they are perfectly capable of producing a chart like this:

OK—firing teachers makes a great headline, but wait: Can you explain why spending on education has soared while the number of students has plummeted? I’m a teacher, myself, and the last group of people I’d go after is educators. But has all of that spending actually gotten down to the teachers? Are the parking lots filled with Porches? Are students issued MacBook Pros every year?

Sorry—wrong questions. How’s this: Is there even any toilet paper in the schools?

So the hedge funds own how much of Puerto Rico’s debt? About half, according to The Nation, and yes, it’s hard to weep for hedge funds, especially as compared to the little kids trooping into Escuela Luis Muñoz Marín. But I might have some tears for the engineer—remember him?—who saw half his wealth disappear. Might just as well have gone to Europe.

And I’m especially sorry for him, since I know very well who is going to take the hit, because the hedge funds? They’ve already lined up counsel, they’ve already planned their strategy, and the little guy who is left standing by the mailbox? All he can do is read his investment statement, and watch his money go down the drain.

The other element in all of this, unfortunately, is colonialism, but I wonder if the real issue at hand will be addressed. Because it is not the big bad United States that imposed…. Nor is it the incompetent, lazy leeches down in Puerto Rico….

Puerto Rico has excellent professionals; we have the expertise to run our government. What don’t we have? The curse of colonialism is that it maintains you societally in a perpetual adolescence: You are never fully responsible, nor do you enjoy full rights. And how irresponsible have the politicians--and by extension all of us, since by the way, didn't we elect them?--been. Well, check out this graphic….

Enter the last part of the equation: An uninformed, ill-educated populace that despite the billions of dollars poured somewhere into our education system cannot tell me basic facts, such as what part of the island Mayagüez is located. I know: I used to teach the cardinal points in ESL classes for 25 years. And what will happen as the busses are cut, the schools closed, the benefits slashed, and the austerity begins for real?

I think I know, and oh…

Do I wish I didn’t.