Puerto Rico's Dire Situation
From the Desk of Jim Eccleston at Eccleston Law:
Since 2006, Puerto Rico and its public agencies sold $61 billion in 87 bonds deals. The territory was eager to borrow money for capital projects, and Wall Street was eager to lend. Although originally intended to stimulate Puerto Rico’s economy, these deals are now under fire for creating a dire financial situation. Puerto Rico officials are trying to reassure investors on Wall Street while Washington officials evaluate the territory’s financial situation. Puerto Rico bond holdings have taken a dive recently, which raises questions of whether investors were aware of the potential risks associated with these bonds and what effect this might have on the municipal bond market.
Perhaps what is most troubling is that Puerto Rico paid $1.4 billion to lawyers and security firms to structure the deals. When its economy hit a recession in 2006, the government paid about $764 million in fees to lawyers, credit rating firms, and underwriters including Citigroup Inc., UBS AG, and Morgan Stanley. Puerto Rico also paid at least $690 million to Wall Street to reduce its borrowing cost through the cancellation of derivatives. This, of course, was unsuccessful and costly to the government. It reached a point where Puerto Rico was using bond proceeds to make interest payments on its bonds.
The banks’ actions are being scrutinized as predatory as a Thomson Reuters analysis shows banks charged Puerto Rico substantially more than other borrowers. In fact, Puerto Rico debt deals were thirty-one percent higher than the spreads (the difference between bond price for the underwriter and the bond price sold to the investor) charged to the City Detroit. Closed meetings among two dozen investment firms are also being criticized. Nuveen Asset Management, which held the meeting, sold Puerto Rico bonds that same day.
Some defend the excessive costs as being the result of complex financing structures with multiple government entities involved. The situation is clearly grim, but Wall Street’s role in feeding Puerto Rico’s borrowing machine should not be diminished.
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