A stunning new report has just been released on Wall Street’s role in creating Puerto Rico’s $70 billion debt crisis. According to the ReFund America Project, nearly half of the debt owed by Puerto Rico is not actually money that the island borrowed, but instead interest owed on bonds underwritten by Wall Street firms that include Goldman Sachs, Citigroup, Merrill Lynch, Morgan Stanley, Bank of America, etc. While the Puerto Rico—while the Puerto Rican people are facing massive austerity cuts, bondholders are set to make mind-boggling profits in what has been compared to a payday lending scheme. The ReFund America Project suggests that Puerto Rico should not be required to pay back much of its debt, since it’s illegitimate.
The crux of the crisis centers on what are known as capital appreciation bonds. According to the ReFund America Project, Puerto Rico borrowed $4.3 billion using this costly and risky form of debt. When the bonds expire decades from now, Puerto Rico will have to pay back $33.5 billion in interest—a staggering 785 percent interest rate. In some cases, the interest rate will top 1,000 percent. It’s a scandal that received almost no attention during the recent congressional debate over the so-called PROMESA bill, which will establish a federally appointed control board with sweeping powers to run Puerto Rico’s economy.
While the legislation’s supporters say the bill will help the island cope with its debt crisis by allowing an orderly restructuring of its $72 billion in bond debt, critics say it’s a reversion to old-style colonialism that removes democratic control from the people of Puerto Rico. Meanwhile, even before President Obama has named members of the new control board, we’re beginning to learn just how bondholders are being protected and the people of Puerto Rico made to suffer. On June 29th, the government-owned Puerto Rico electric company announced its plan to raise by 28 percent the island’s electricity rates, which are already higher than any state but Hawaii. The extra money will be earmarked to pay debt service on up to $9.3 billion in new bonds the company, known as PREPA, plans to issue to replace its old debt. As part of the restructuring, the utility’s new directors will come largely from the U.S., and the new bonds will pay an astounding interest of 10 percent.
Saqib Bhatti talking:
what we found was that, you know, basically, a very large portion of Puerto Rico’s debt is actually not debt at all, it’s actually interest on a payday loan, on a series of payday loans, in fact, where the island will be paying four-point—the island borrowed $4.3 billion and will pay back $33.5 billion in interest. That’s an effective interest rate of 785 percent.
And what we’re finding is that this is actually just the tip of the iceberg. There’s actually a lot of the debt that Puerto Rico has entered into that is either legally or morally illegitimate. And so, my organization, the ReFund America Project, we’re actually going to be releasing a series of reports over the next couple of months that will look at the different ways in which Wall Street banks really targeted Puerto Rico with predatory deals, and really calling on the PROMESA control board to be putting the interests of the people of Puerto Rico first, to cancel the illegitimate debt so that we can properly fund services.
there were a series of banks, including Citigroup, Merrill Lynch—now under Bank of America—Goldman Sachs, UBS, Banco Santander. They were the lead underwriters on these deals that really targeted Puerto Rico for these immense interest rates. So, the way—so these payday loans are called capital appreciation bonds. And the way these bonds work is very much like a payday loan, where, because you’re not allowed to pay back the principal or the interest for many years, and over time the interest keeps compounding, you end up with these astronomical interest rates.
And so, what happened over there was, because you had the situation where, you know, Puerto Rico is a colonial economy and not in charge of its own finances at the end of the day, there’s so much pressure that’s coming from the outside, because those issues couldn’t be resolved. In the same way that a cash-strapped family trying to put food on the table might go to a payday lender because they have to, to make ends meet, you had, you know, Puerto Rico trying to put food on the table, run—provide basic services, needing to find ways to make ends meet. And banks swooped in—banks like Citigroup, Goldman Sachs—and said, “Hey, here’s a deal,” even though they knew that these deals would be really bad and Puerto Rico would never be able to pay them in the long run.
– there was no way that Puerto Rico would be able to pay these loans back. these are some of the names of the companies that you see there: Goldman Sachs, AG Edwards, Bear Stearns, JPMorgan, Morgan Stanley, UBS Investment, Lehman Brothers, Santander Securities, Popular Securities. But I want to show also the chart of one of the bonds that were issued. This is a 2007—sales tax bonds, where it shows, for instance, that in—Puerto Rico borrowed several tranches of bonds, but one was for $98 million, that was supposed to be paid back—I’m sorry, $97 million, that was supposed to be paid back in 2054. That means for 47 years, the banks agreed, you don’t pay us any principal, and you don’t pay us any interest for 47 years. And at the end of the 47 years, that $97 million becomes $1 billion that Puerto Rico has to pay back. That’s a thousand times what the original loan was. So, the banks had to know that there was no way that Puerto Rico could pay this back, but yet they continued to issue these bonds.
It’s a complete outrage. And what you said is exactly right, that banks knew that there’s—I mean, there’s no way that Puerto Rico can pay all this back. Puerto Rico’s debt per capita burden is 10 times higher than the average of U.S. states. It’s a tiny island of three-and-a-half million people. Banks knew that they couldn’t do this. Banks—you know, banks like Citigroup, Goldman Sachs, still targeted Puerto Rico for these deals, because they got to make money on the front end. For just these capital appreciation bonds, these payday loans, just for a slice of them, banks got to make $221 million in fees. And they get to offload the risk.
– these bonds are so worthless that they are now being traded on the secondary market at 14 cents on the dollar, you know, 15 cents on the dollar, and that the—now hedge funds are buying them up, hoping that even if they get 50 cents on the dollar, they still make a killing, because at the low rate that they bought them.
what we’re having is—you know, there’s a secondary market for bonds, just like there’s a secondary market for mortgages, where the lender that sells you your mortgage, they package it up into a security, they sell it off, and it gets treated. Same thing with bonds, they get sold off and traded. A lot of these bonds now, because the investors originally made—they originally lent the money, didn’t believe they would be paid back, they actually absorbed the losses and sold the bonds for 15 cents on the dollar, as low as 5 cents on the dollar. And so, a lot of the investors that are now buying it, which are these vulture hedge funds that are buying at dirt-low prices and trying to make a huge profit, profits up to near—up to 2,000 percent, if you’re buying at 5 percent and planning on trying to collect all 100. I mean, just to put that into perspective, the idea is that there’s something that theoretically on its face is worth $1, and I’m going to pay you 5 cents to buy it up. And so, even if I get back a small portion of—even if I get back 10 cents, I’ve doubled my profit. And what they’re trying to do is collect not just the full dollar, but then 800 percent interest on that dollar.
there’s a devastating humanitarian crisis. I believe about 40 percent of the children live in poverty. We’ve seen mass closings of schools. You know, there’s a health—there is severe cuts to healthcare at the same time there’s a Zika outbreak. We need to make sure, if there’s a PROMESA control board, that they’re not cutting services further. They need to challenge the illegitimate debt.
– Puerto Rico electric authority board meeting where they voted that they’re going to increase electric rates by 28 percent in the coming year.
Carlos Gallisá talking:
that’s one of the outcomes of this problem of the debt. The power company of Puerto Rico, which is the most important public corporation in the [inaudible], is going through a restructuring of its debt. The debt of the power company is close to $9 billion, out of the $70 billion that the government of Puerto Rico owes. The debt service is $700 million a year. And in order for the power company to meet its obligations, the Energy Commission of Puerto Rico, which is [inaudible] the electricity bill, 10 percent starting next month. Then, on the first—sometime during the first three months of next year, there will be an additional increase of 18 percent. So, altogether, it means 28 percent in the electricity bill. And I think there will be more increases during the year. To pay this debt, then the people of Puerto Rico will have to pay all these increases in its electricity bill.
The Legislature of Puerto Rico approved a bill—it’s law number four in [inaudible] that the government of Puerto Rico has to appoint a new board of directors, in which six of the members of the board are going to be [inaudible] private company in the United States and will be referred these 10 people to the consideration of the governor of Puerto Rico, and the governor will have to appoint [inaudible] of 10. And that’s another imposition of the bondholders, which they want to have a seat in the board of directors. So we’re going to have a governing board now of [inaudible] residents of Puerto Rico.
– the interest rate on the new bonds, because supposedly the bondholders for PREPA, who are owed these $9 billion, have agreed to take what Wall Street calls a haircut—they’re going to accept 85 cents for every dollar that they’re owed, but then they’re—in new bonds. But the new bonds have a much higher interest rate. in US are like 3 percent, 4 percent. Puerto Rico is going to have to pay 10 percent for the electric company bonds
Now we are exchanging bonds that are at 5, 6, 10 percent—5, 6 percent interest for new bonds that are going [inaudible] interest. So, every time there is a refinancing, there is an increase in the interest of the bonds. And we are paying 10, 11 percent interest now on the new bonds that are going to be issued.
Juan González talking:
it’s amazing to me that this continues to occur, for the protection of the bondholders, is what’s actually going on. Whether it’s in, as your report says, these payday loans that are going to, somehow or other—someone is going to make a whole lot of money off the restructuring of these payday loans, and now, with the electric company, these much higher interest rates that will be required of Puerto Rico. And I understand today Congress is supposed to name—there’s a congressional task force established by the PROMESA bill that’s supposed to make recommendations on the future of Puerto Rico. And today, the House leaders and the Senate leaders will announce who the members are. It’s supposed to be four Democrats and four Republicans, eight people in total, that will be on this new congressional task force. But President Obama has yet to name the members of the PROMESA board itself that will be running Puerto Rico’s economy. He’s expected to do that in the next few weeks.
Carlos Gallisá talking:
we are expecting the control board to take some decisions on the crisis. And then the [inaudible] demanding to end this situation, because, basically, the problem of Puerto Rico is colonialism. The people of Puerto Rico do not have the freedom to do the things [inaudible] have to do to look for a solution to this crisis. So, this is a political problem, besides being an economic problem.
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Saqib Bhatti
director of the ReFund America Project and a fellow at the Roosevelt Institute. He is co-author of the new report, “Puerto Rico’s Payday Loans.”
Carlos Gallisá
Puerto Rican attorney, politician and independence movement leader. He is a former member of the Puerto Rican House of Representatives. He now serves on the board of directors of the Puerto Rico Electric Power Authority.
— source democracynow.org