Bad Party, Terrible Hangover

The good news?

I did not wake up this morning with a hangover.

The bad news?

The island did.

Whatever you think of the current governor, nobody can dispute that, on at least one point in the news conference yesterday, he was right: both the major parties that rule Puerto Rico got us into this mess. And that is? Yesterday, after years of waving red flags, Standard & Poor’s degraded our credit rating to junk status.

Terrible golpe al país shouts the The New Day’s headline in a special 15-page extra to today’s regular printed edition. Conscientious blogger that I am, I read all 15 pages, which told me basically what I knew, as well as some things I didn’t.

The gist of it is that for forty years, the public has allowed our political leaders to engage in politicking, instead of providing services, making fiscally responsible decisions, and running efficient governments. And how did they do that? By doing on a collective basis what many of us do on a personal level: living on credit.

There’s nothing too sexy about economics—nothing as sexy as building a great whacking (thanks, Franny!) stadium or investing a billion dollars in “special communities,” which today remain just as special as they were when the program began. (The program identified poor communities and tried to invest funds for improvements to infrastructure and social services…)

OK—so how bad is it? Some facts lifted from the special edition of today, as well as a New York Times article on the topic:

•       Our debt is almost 70 billion dollars
•       Each person—man woman and child—would have to pay $10, 635 dollars up front to clear this debt. That’s ten times the average per state
•       As a result of this decision, we’re going to have to pay about 940 million bucks, since we promised we would if our rating was sunk to junk status
•       We had been planning to go ask the market to buy bonds that would give us an additional 1 to 2 billion next month
•       Puerto Rico is the third largest issuer of municipal bonds, after California and New York
•       Many of these bonds are collected in mutual funds, which are attractive: you don’t have to pay taxes on the interest you collect on them. Therefore, a lot of mutual funds in the US hold Puerto Rico bonds. However, a lot of the bonds are held by the Puerto Rican middle and upper classes, especially retirees; some 1.5 billion dollars of Puerto Rico debt is held on the island

Now, how’s the economy doing?

•        In December of 2013, the rate of unemployment was (officially) 15.4%
•       Largest employer in Puerto Rico is…the government of Puerto Rico: 27.8% of the work force works for the government. Estimates for the average state public sector range from 10% to 15%
•       Manufacturing accounts for only 9% of the non-farming Gross National Product
•       25% of the commonwealth budget comes in federal funds
•       The population of Puerto Rico is 3.67 million: in 2013, the government estimated that 1.3 million people were working. That means that one in three Puerto Ricans is working

OK—so what was the response on the island? Well, the editorial in The New Day called for…unity. Now is not the time, it said, for finger pointing. The governor, as well, said that now is the time for all Puerto Ricans to come together and figure out what to do with this mess.

Though there were some who couldn’t resist, of course. The governor himself couldn’t resist suggesting that his government, though young, had acted like adults, but that it was time for the local Supreme Court to “put on the toga of adulthood.” Why the jab? Because the Supreme Court had put the reform of the teacher retirement system on hold until the lawsuit brought by the unions had been resolved.

And the President of the Senate came out and said that the current government had been firm and financially responsible; nowhere else in the states had a government acted as Puerto Rico had to correct their problems. Puerto Rico didn’t deserve this betrayal.

The teachers, too, pointed out that since we got degraded to junk status, it was clearly proof that a reform of the retirement system wasn’t needed in the first place.

Yes, you say, but beyond calls for unity—however successfully heeded—what does the government propose to do?

It would be premature, said the governor—donning the mantle of a serious and wise leader—to discuss any specific measure until they had been carefully and thoroughly scrutinized and examined in order to assure that the measures taken will have the maximal impact on the economy while minimizing any adverse effects on the private lives of the people of Puerto Rico, who working together, hand in hand, making ties that extend beyond petty politicking, can go forward confidently towards a better future.

All right—I made that up. That’s what I would have said. The governor doesn’t know what he’s gonna do—so he fell back on rhetoric.

Nor does the average person know what this means: according to The New Day, even business people didn’t really understand what all this meant. The reality is that almost 90% of the students I have taught over the last 20 years have tuned out politics. And now that the crisis is here? Many people are confused.

And the worst of it? However bad the hangover, it was never a very good party anyway….   

As our Governors Fiddled

Ouch—I’ll give it to you first in Spanish, and then in English:

“Esto es de lo peor que he visto”, comentó Zamansky, quien ha visto todo tipo de casos, incluyendo el sonado caso de Bernard Madoff.

“This is the worst I’ve ever seen,” Zamansky commented, who has seen all kinds of cases, including the famous case of Bernard Madoff.

And what is Jake Zamansky, a security and investment fraud attorney, talking about? Well, the case of the Puerto Rican branch of UBS, which has been selling Puerto Rican bonds to its clients for years now.

And what’s wrong with that? Aren’t bonds supposed to be a safe investment?

It seems not—especially in the case of Puerto Rico, whose credit rating is one step above junk bond rating, and whose government is seriously broke. How seriously broke? Well, how serious is 70 billion bucks? Our pension program is 37.3 billion underfunded.

“Of course,” said my friend Tony, “that’s just a guess-timate. Because you know what? There’s no actuarial work or studies done on the plan….”

My years with Mr. Fernández have taught me about actuaries; they’re statisticians who predict how much money a plan will need based on the number of people in the plan, the age, expected life span, etc. And if you don’t have that info? You’re operating completely in the dark.

This caused the governor, last month, to scurry up to New York to tell Moody’s and the other credit rating houses that all was well on the island, and that he / they had raised taxes and had a solid, solid plan to deal with the mess.

Did they? Well, it’s true that they had raised taxes—but what had they not done? The one thing that would really bring howls: cut the size of the government.

They did, however, take on the retirement system, and high time, since one of the senators…well, let him speak for himself:

"No retirement system in the world is as broken as ours," Senate President Eduardo Bhatia said on Thursday, before the overhaul legislation was approved by both houses of the Caribbean island's legislature.

The overhaul was bitterly protested, and went to the local Supreme Court, which upheld it. So now the protests have died down, but it’s anybody’s guess when the money will run out….

Now then, into this gloomy picture—oh, and I have told you the unemployment rate is about 15% and the per capita household income is half that of the poorest state, haven’t I?—steps UBS, which is one of the three biggest brokerage houses on the island.

And because of a unique feature in the law, Puerto Rico bonds happen to be rather attractive, at least potentially. Why? Here’s Bloomberg—and who should know but they?—on the subject:

Interest on debt issued by Puerto Rican governments is typically tax-free across the U.S., and yields on some issues topped 10 percent in recent weeks amid doubt about whether investors will be repaid. The bonds’ high yields and tax-exempt status make them popular with retail investors, according to the statement.

Nice, hunh?

Not so nice, said the Commonwealth of Massachusetts Secretary William F. Gavin in the same Bloomberg article:

“Puerto Rico is currently on the verge of insolvency and many of its obligations are at or near junk rating,” according to the statement. “The risks associated with its municipal debt obligation are disproportionally high.”

‘Well,’ you are perhaps thinking, ‘let the rich suffer. I, for one, only have the shirt on my back, the roof over my head, and the rice and beans in my stomach. So, however bad the losses in the bond market may have been, it’s hardly my problem….’

Wish that were true. But first, you should know that the losses were 2.2 billion in the month of September alone. Nor is it just the wealthy affected.

In fact, here’s Zamansky again:

“He atendido por lo menos a 150 personas y escucho, esencialmente, lo mismo. Son retirados, personas que son inversionistas conservadores y que se le dijo que invirtieran todo o una gran parte de su dinero en estos fondos cerrados y en bonos de Puerto Rico”, sostuvo el abogado. “A más de la mitad de estas personas se les instó a que tomaran prestado”.

“I’ve taken care of at least 150 people and have heard, essentially, the same tyhing. They are retired, people who are conservative investors and were told to invest all or a great part of their money in these closed funds and bonds of Puerto Rico,” he stated. “And more than half of these people were told to take out a loan to do so.”

The problem? Was UBS informing these people of the risks of investing in Puerto Rico? No bond is guaranteed if the government goes broke. And the advisability of offering or urging a line of credit or a loan to investors?

The Government Will Decide Whether to Sue UBS—reads the headline in The New Day, our local paper.

In the meantime, Zamansky and other lawyers are sitting in hotels, interviewing hundreds of mostly middle class retirees, many of whom have suffered significant losses. How significant? Some people are so old that they’re in nursing homes, and now the families are having to take them out of them: there’s no money left.

The handwriting has been on the wall for a long time, of course. A few years back, a Reuter’s blog came out and said it bluntly: Puerto Rico is America’s Greece. If our folly and foolishness had hurt the rich, I might cheer. But the idea of hard-working, prudent, conservative people losing their life savings?

…heart breaking.