Showing posts with label Debts. Show all posts
Showing posts with label Debts. Show all posts

May 7, 2018

How Puerto Rico's Debt Created The Perfect Storm Before The Storm

Before Hurricane Maria hit last September, Puerto Rico was battered by the forces of another storm — a financial storm.
The island's own government borrowed billions of dollars to pay its bills, a practice that Puerto Rico's current governor, Ricardo Rosselló, now calls "a big Ponzi scheme."
But it didn't fall into financial ruin all on its own: Wall Street kept pushing the Puerto Rican government's loans even as the island teetered on default, with a zeal that bank insiders are now describing with words like "unethical" and "immoral."
NPR and the PBS series Frontline spent seven months looking into Puerto Rico's difficult recovery from Hurricane Maria. And beneath the storm damage, we found the damage from those economic forces, triggered by a government desperate for cash and banks and investment houses on Wall Street that made millions off that desperation. Some of those banks found ways to make even more money that risked the financial future of not only the island but thousands of residents as well.

'Puerto Rico Is In Dire Need'

Riding up the rickety elevator to the top of the Palo Seco power plant just outside San Juan, this convergence of natural and economic forces was apparent. As engineers fought to turn the plant back on and restore electricity to the island, weeds and rusted steel revealed decades of government neglect. "There are elements that have not been replaced in years," said José Sánchez, then the head of power grid restoration for the U.S. Army Corps of Engineers. "Puerto Rico is in dire need, not only of power plants but a reconstruction of the grid itself."
And it wasn't just the power grid. Water pumping stations, bridges, levees, roads — all had been starved for investment for years. Even people's homes weren't as strong as they should have been. Before the storm, the island could afford only five building code inspectors, for a population of 3.5 million people.
Banks involved in Puerto Rican finances declined NPR and Frontline's requests for an interview but said in statements that they have done nothing but try to help Puerto Rico when it was in need of money.
One thing that is clear: The island needed more help than it got.
"We've gone through not only Maria, but we've gone through the financial crisis," said top Puerto Rican banker Carlos Capacete. "It doesn't end. And there's no help coming. In the financial crisis, [Puerto Ricans] are the ones left holding the bag here. There was no life raft in the plane."

'Down The Rabbit Hole'

It wasn't always this dire. For decades, Puerto Rico's economy was booming. A special tax break on the island lured in pharmaceutical companies and manufacturers.
Then in 1996 Congress started phasing out the tax break, and a decade later the island spun into recession. Rather than cut spending to make up for declining tax revenue, the Puerto Rican government went the other way. It borrowed money.

About This Series

This series was produced in partnership with the PBS series Frontline.
You can listen to part one of the NPR investigation, which details how Puerto Rico descended into financial ruin before the storm even hit, at the top of this page or here.
And you can listen to part two of the NPR investigation, about the federal government's slow response to Hurricane Maria, here.
The Frontline documentary, Blackout in Puerto Rico, aired May 1 on PBS. Watch it online now, or check local listings.
Watch the trailer here: 

"When you start borrowing long term just to pay next month's payroll you know you are going down the rabbit hole," said Sergio Marxuach, the policy director for the nonprofit Center for a New Economy in Puerto Rico.
"It was crazy," he said. "The government was borrowing at an incredible clip."
Like most governments, Puerto Rico preferred to borrow money through the sale of bonds. The island would take an investor's money and essentially give him an IOU — a promise to pay the money back with interest. Investors liked the deal because they could earn that interest tax-free.
Banks liked the deal too. They stepped in to structure the bonds and find buyers — often pension funds, retirement accounts, maybe the bank's own investment clients — all in exchange for fees.
"Fund managers, they will not admit this now, but when Puerto Rico was selling debt like pancakes, they loved Puerto Rico debt," Marxuach said. "You would put ... these Puerto Rico bonds into your portfolio and since they had slightly higher interest rates and no taxes attached to them, you immediately looked like a genius. You just bumped up the entire return."
"So that's your bonus," he added. "That's your new Mercedes, your new yacht."
NPR and Frontline talked with more than a dozen bankers, advisers and brokers involved in Puerto Rican bonds who described a fast pace of moneymaking and competition, and politicians desperate for an influx of cash.
"All the major banks in New York would come to Puerto Rico on a regular basis to pitch deals," said Capacete, a former branch manager for UBS, the largest broker-dealer in Puerto Rico. "They make commissions. They make fees. This is kind of like a moneymaking machine. As long as there are transactions coming and going, they're making a ton of money."
But Capacete said that in 2011, he and other bankers started realizing what many bond investors hadn't yet figured out: Puerto Rico was in trouble. There was too much debt.And instead of moving away from bonds — and keeping the shaky investments out of their clients' portfolios — Capacete says the opposite happened. He said banks pushed brokers to sell more bonds.
Many of the bonds were specifically designed to be sold to Puerto Ricans, packaged into special funds that were less transparent than anything regulators would allow on the mainland. Regulations against things such as banks recommending their own bond deals to investors didn't apply on the island.  
According to court records filed in the aftermath of the island's economic calamity, brokers sold thousands of Puerto Ricans these special funds. This left hundreds of millions of dollars of the island's wealth concentrated in increasingly tenuous investments — at the worst possible time.
And then, Capacete says, he learned it was even worse than it looked. He says a client warned him that some brokers on the island were pushing Puerto Rican investors — who already had so much of their retirement or personal savings in these special funds — to borrow still more money, and invest that in the funds too. He says he sent emails complaining to the bank.
"It's unethical, it's against the banks' regulations and it puts the client in a really, really tough risk situation," Capacete said.
UBS declined NPR and Frontline's request for an interview but said the loan terms were fully disclosed to clients and that Capacete is a disgruntled former employee who has sued the bank. The bank said the loan program as a whole did not violate financial regulations, but that it had fired the one broker it discovered had been using the program incorrectly. And it pointed to a separate case where federal regulators determined the bank had not misled its customers.
Eventually federal regulators investigated and found the bank should have had a system in place to prevent the practice. They fined UBS $34 million for the loan scheme and other problems. They also fined UBS and four other banks for putting clients at risk in the special Puerto Rican funds.
The party came to an end for investors in 2013. Bond prices tanked. All those thousands of investors tied up in the same Puerto Rican funds were in serious trouble, and those who had taken out additional loans suddenly had to cover them.
Within months, hundreds of millions of dollars in Puerto Rican wealth was wiped out. Rating agencies downgraded Puerto Rican bonds to junk.
Looking back, Rosselló said at this point in the financial crisis it seemed like "the government of Puerto Rico was run as a big Ponzi scheme."
"What you had was essentially a black box of a government running, that had no clarity as to what was being borrowed and or what was being spent," Rosselló said in an interview with NPR and Frontline.

'The Banks Get Out'

Once again, at a time when you might think Puerto Rico and the banks would turn away from the bond business, they did the opposite. In 2014, Puerto Rico and a group of banks teamed up for another bond deal. At $3.5 billion, it was the largest municipal junk bond offering in U.S. history.
Puerto Rican officials told NPR and Frontline they needed the cash to make payroll.
But some bankers and brokers, several of whom worked on the deal, described the 2014 bond as more than just a bond deal. They said it was also an exit strategy for the banks.
Government records show banks had been lending Puerto Rico hundreds of millions of dollars and making other investments there in the years before the financial troubles began. And according to bond documents from the 2014 deal, nearly a quarter of the entire bond went to those banks.

Almost $900 million raised from the bond issue didn't go to Puerto Ricans — or even to keep the government afloat — but instead went to pay back loans, pay fees or eliminate the risk of banks directly involved in putting the deal together.
Barclays, which led the bond deal, received almost $500 million; Banco Santander received $99 million; JPMorgan, $74 million; Morgan Stanley, $24 million; among others.
Neither Barclays nor any of the other banks involved in the deal would agree to an interview. In statements, banks said that they fully disclosed their financial stake in the deal and did not influence how Puerto Rico used the money. Morgan Stanley noted that it also extended Puerto Rico $250 million in credit after the bond.
Axel Rivera, who worked at Morgan Stanley as a bond broker and financial adviser when the deal was done, said as the island got closer to default, banks were getting nervous.
"They had much more [debt] than they wanted and they needed to unwind that," Rivera said, adding that the bond deal allowed them to do that.
"The banks get out, and everybody else gets stuck with the bill," Rivera said. "Most of the general public didn't understand what was going on. The darkness of this bond deal made a lot of people in Wall Street happy, but it was immoral in many ways."
Fifteen months later, Puerto Rico announced it couldn't pay its debt. The island was broke.
The bond funds crashed. Many Puerto Rican investors lost savings, retirement funds or their pensions. The government started closing hospitals. There was little money to shore up bridges or strengthen the electrical grid.
And then, on Sept. 20, 2017, a Category 4 hurricane came barreling into Puerto Rico. The island was left to face the wrath of the storm in a place starved of investment for years by a government that had to borrow to pay its bills.
PBS Frontline's Emma Schwartz, Kate McCormick and Rick Young contributed to this report.

October 6, 2013

Three Ways To Deal With The Debt Ceiling Before Default of The Nation

The United States is in the midst of its first government shutdown in nearly 20 years, and the practical effects on millions of Americans are significant. Even more worrisome: the impending debt ceiling, which the Treasury Department estimates the U.S. government will reach on or around October 17th.
The debt ceiling is the statutory limit of allowable federal debt, currently set at $16.7 trillion. Up until about one hundred years ago, Congress approved every individual new bond issue, but early in the 20th century Congress began to expedite the process by simply creating a debt limit and allowing the Treasury Department to borrow as it sees fit any amount below that. More recently, politicians have been squabbling over the debt ceiling and essentially threatening a default. Nobody is sure what the outcome of a default would be, but financial markets–which depend greatly on U.S. debt as a source of liquidity–would likely freeze up.
The possibility that Congress won’t reach an agreement to raise the debt ceiling has gotten economists and legal experts thinking of ways to get around the debt ceiling without Congress’ approval. Here are three possible strategies:
1. The Trillion-Dollar Coin: This idea, first raised by Jack Balkin, a Professor of Constitutional Law at Yale Law School, takes advantage of a loophole in the law which allows the Treasury to mint platinum coins without limit. The purpose of the law is to allow the creation of commemorative coins, but there’s nothing in the law that would prevent the minting a coin of any value. Therefore, to get around the debt ceiling, Balking suggests minting two platinum coins worth $1 trillion dollars and then just depositing them at the Federal Reserve in order to write checks based on the value.
2. The 14th Amendment: Another potential option is for the President to declare the debt limit unconstitutional because of in the 14th amendment. It states, ”the validity of the public debt of the United States, authorized by law . . . shall not be questioned.” The 14th Amendment was written to prevent Southern congressmen from threatening to default on U.S. debt unless the Confederacy’s debt was paid off too. University of Baltimore Law Professor Garrett Epps has argued that this amendment basically makes the debt limit unconstitutional and would allow the Treasury to continue to issue bonds without Congress’ approval.
3. Premium Treasury Bonds: While the previous two strategies for obviating the debt ceiling were prevalent during the last debt-ceiling showdown, the idea of issuing so-called “premium” Treasury bonds is newer. The idea was first raised earlier this year by Matthew Levine at Dealbreaker. Understanding the idea requires knowing a little bit about how bonds are sold. Bear with:
Bonds have both a “par” value and often times a different price at which a bond is actually sold to the public. Normally this is because interest rates can change pretty quickly: Say I want to issue a bond for $100 at a 4% interest rate, but a few weeks later, when I actually get around to issuing the bond, interest rate rises to 6%. To sell my 4% bond will require selling the bond at a discount to par–somewhat less than $100. The opposite would happen if interest rates falls to 2%. If I’m selling a 4% bond in a 2% environment, I’ll be able to garner more than $100 in that environment.
So how does this apply to the debt ceiling? The debt ceiling law only applies to the face value of bonds issued, rather than the actual value of the money raised. So when past Treasury debt expries, the Treasury Department could simply roll it over into bonds with much lower face values but that bring in higher revenues and pay out higher interest rates, allowing the total debt of the U.S. to continue to rise while still staying within the debt-limit law.
And as Levine points out, this is something that, unlike the platinum coin scheme, governments around the world have resorted to strategies like this before. It was a somewhat similar scheme involving derivatives that allowed the Greek government to hide the true value of its debt from EU officials until its debt crisis a few years ago. In our imagined scenario, however, Treasury wouldn’t be trying to hide the debt from the public. It would simply be looking for a way to skirt a law that doesn’t make a lot sense to begin with.
The brilliance of the premium bond scheme is that unlike the 14th amendment or platinum coin scenario, there isn’t an obvious way that opponents of it could challenge it in court. As former Treasury Chief of Staff told the Washington Postone of the reasons the Obama White House has shunned the 14th amendment strategy is because it could be challenged in the courts, and the reason it avoided the platinum coin strategy is because the Fed might not play along. As for premium bonds, all we would need would be willing buyers for the bonds. And if recent history is any indication, that won’t be a problem at all.

September 13, 2012

What If Americans Behaved Like Banks, A Bklyn Neighborhood Is Going To Find Out

Activists set fire to their debt papers Sunday in Brooklyn in a gesture meant to evoke the 1960s draft card burnings.
A few dozen people gathered in Brooklyn Inlet Park on the Williamsburg waterfront Sunday to talk about debt, have a picnic, and set some things on fire.

The mood was festive -- there was cake and lemonade, the air was crisp and clear, and the towers of Manhattan glittered across the East River.
But the purpose of the assembly was somber: to talk about the ways that different kinds of debt is strangling the people gathered there, and millions more across the nation.

Nick Mirzoeff, an NYU professor, explained that the Strike Debt group grew out of the Occupy movement over the summer.
"Over the course of the movement we came to a set of realizations that debt was a way to organize people and to clarify what the movement itself is," Mizroeff said. "Because it connects a very direct lineage between us as individuals -- the way we as the 99 percent have debt, whether it be student debt, mortgage debt, credit card debt, medical debt, or worst of all, the person who can't get into debt. if you can't get into debt you can't get any of those things: you cant be educated, you can't buy a car, you can't buy a house, you can't go to school."
Between his mortgage and credit card debt, Mirzoeff said,"I'm out debt when I'm dead. My daughter will close that up. And that's not a life that I want to bequeath to her."
Sarah Quinter, another organizer with Strike Debt, said that after months of weekend meetings in Washington Square Park, the group was ready to debut its first public action.
"We wanted to do a debt burning reminiscent of the draft card burning of the 1960s to demonstrate our refusal to be conscripted into a life of debt, which is becoming a ubiquitous feature of American life," Quinter said. "Since debt is such an isolating experience, we wanted to create an experience that could be the beginnings of community, where we could listen to each other's stories and be together and talk with one another. We're hoping this is just the first of many actions."
Amin Husain burns a statement from the IRS sent after he raided his 401k to help pay for treatment for his father's pancreatic cancer treatment.
So after mingling and chatting for a half an hour, the group gathered in a circle to tell their stories and burn the symbols of their debt.
Madeline Nelson told the circle that she has worked hard to avoid going into debt.
"But there's one thing that I can't really get out of is medical debt," she said. "Why is that? I pay for health insurance every single month. And yet I keep getting these statements that say 'We can't pay for that procedure, because the doctor didn't ask us beforehand.' Or 'We can't pay for that one because you were out of town when that illness happened.' And this builds up."
Nelson brandished a medical bill.
"Here we have something from Easy Choice Healthcare," she said, setting the bill on fire. "Fuck you, Easy Choice Healthcare!"
A recent college graduate described plunging into debt after discovering that she has a potentially fatal genetic blood disorder.
"I had health insurance, but I had to pay copays," she said. "When you have to go to the doctor three or four times a week, that's about my rent payment. There were times I didn't go to the doctor, because I couldn't afford to go."
Soon, she said, she was putting medical bills on her credit card.
"My husband and I began having conversations like 'Which one of us is going to eat lunch this week, because we don't have any more money," she said. "I didn't have any bills to bring with me [to burn], but I do have this referral from a doctor. It's a referral to see a specialist that wasn't in my health insurance plan, so I couldn't afford to go see him because the cost of seeing him was more than my rent. So that's what I'm burning."
Brad Young, facing $150,000 in education debt, described discovering his passion for research and teaching. "But to get that education and pursue what I'm passionate about, I'm punished with $150,000 in debt," he said, as he set fire to a statement from his student loan company. "The society doesn't want people to be educated. And I think that's wrong. As a society we should work together to educate each other. That's what being in a society is about."
Strike debt has more projects in development. This week they're releasing a Debt Resistors' Operations Manual, and, much further down the line, they're planning a "Rolling Jubilee" to buy cheap debt, forgive it, and pay the gesture forward.
In the meantime, organizers hope others facing debt will adopt the symbolism of the debt burn, which they designed to be easily replicable. They've already got more planned: The next debt burns are scheduled for September 17, the anniversary of Occupy Wall Street, and will take place both in Manhattan and California.
On Sunday, after about a dozen people had told their stories and burnt bills and collection notices to cinders in a coffee can, the group walked down to the rocky shore and tossed the ashes in the East River.
(Complete video of Sunday's debt burn can be seen here courtesty of livestreamer StopMotionSolo.)

By Nick Pinto

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