The Curious Case of Aurelius Capital vs. Puerto Rico(nytimes.com)
nytimes.com
The Curious Case of Aurelius Capital vs. Puerto Rico
https://www.nytimes.com/2019/11/26/magazine/aurelius-capital-v-puerto-rico.html
51 comments
> The original lenders, who put up money that allows Puerto Rico to pay for various things, did so within a legal regime where it knew Puerto Rico couldn’t declare bankruptcy
These same investors also knew that there was a real possibility that Congress and the President could change the law at any time — which is very much part of “the legal regime” they should have considered when investing.
These same investors also knew that there was a real possibility that Congress and the President could change the law at any time — which is very much part of “the legal regime” they should have considered when investing.
Puerto Rico is desperately poor. GDP per capita is a poor measure of income inequality. 45% of Puerto Ricans live below the poverty line. Italy's economy is literally 20x the size of Puerto Rico. If Puerto Rico was a state, it would be the poorest state in the U.S. It's unemployment rate is double the United States.
Hurricane Maria has caused $140 billion of damages to a country with a GDP of $100 million. What would the U.S. look like if it had a natural disaster that cost $20 trillion in damages?
It sounds like you need to make a visit and drive around. Some parts of the island still don't have power, even today.
Hurricane Maria has caused $140 billion of damages to a country with a GDP of $100 million. What would the U.S. look like if it had a natural disaster that cost $20 trillion in damages?
It sounds like you need to make a visit and drive around. Some parts of the island still don't have power, even today.
We’re not measuring income inequality. It’s the government that owes the money, not individual Puerto Rican’s, and GDP measures the tax base the government can tap for paying back that money. (The fact that Italy’s GDP is 20x bigger is also irrelevant. Italy also had 20x more people that the government must provide services for.)
As to the damages—a lot of the $100 billion in damages is lost income which is already reflected in lower GDP. Other parts are covered by insurance. Tens of billions more will be covered by Congressional aid.
As to the damages—a lot of the $100 billion in damages is lost income which is already reflected in lower GDP. Other parts are covered by insurance. Tens of billions more will be covered by Congressional aid.
OP’s point is the wealth is there. It’s just not being allocated to basic services or debt repayment.
The reason seems to be corruption. The debate is around the balance between intrinsic and extrinsic corruption, with good arguments on both sides.
Puerto Rico isn’t poor. But it is in a crisis. That discrepancy contains the problem and solutions.
The reason seems to be corruption. The debate is around the balance between intrinsic and extrinsic corruption, with good arguments on both sides.
Puerto Rico isn’t poor. But it is in a crisis. That discrepancy contains the problem and solutions.
the wealth is not there - that's the point I'm making. Hurricane Maria cost $140 billion. Puerto Rico's GDP is $100 billion. They need to repay $75 billion in bonds, and they have $50 billion in unfunded pension liabilities.
Using GDP per capita (which is the wealth per person) is a very poor measure for the overall size of the economy.
This is akin to saying a SV silicon valley engineer who makes $250k a year should be able to pay his $2 million mortgage when he all of a sudden gets hit with $300k in medical expenses because he got hit by a bus while riding his scooter without a helmet - fuck it, he's wealthy. He just needs to budget better.
Using GDP per capita (which is the wealth per person) is a very poor measure for the overall size of the economy.
This is akin to saying a SV silicon valley engineer who makes $250k a year should be able to pay his $2 million mortgage when he all of a sudden gets hit with $300k in medical expenses because he got hit by a bus while riding his scooter without a helmet - fuck it, he's wealthy. He just needs to budget better.
> Puerto Rico's GDP is $100 billion. They need to repay $75 billion in bonds, and they have $50 billion in unfunded pension liabilities.
This is not a great ratio. But it’s not unmanageable.
The GDP per capita implies there are tax raises and service cuts somewhere which would be feasible, alongside cutting debt and liabilities. Much of the population being in poverty is an inequality, not resource scarcity, argument.
This is not a great ratio. But it’s not unmanageable.
The GDP per capita implies there are tax raises and service cuts somewhere which would be feasible, alongside cutting debt and liabilities. Much of the population being in poverty is an inequality, not resource scarcity, argument.
...and this is where Puerto Rico's status comes into picture. PR's tax rate at the highest level is 33%. If you want to go higher, wealthy Puerto Ricans just decamp to Florida (no state income taxes!) and fly in as needed. The corporate tax base has also dwindled. Still, PR has raised taxes - across the board, but due to the wealthy's ability to decamp, these tax increases are disproportionately felt by the middle and lower classes.
Additionally, the costs of goods and services is much higher than in the states. GDP per capita doesn't measure purchase power parity, and your dollars in PR don't go nearly as far as they do in the USA. Energy costs, water costs, shipping costs, are all much higher in other countries, and legislation (such as the Jones Act) that helps mainland USA hurts PR.
PR is trapped, and has a perpetual brain drain of people escaping. It has a negative population growth of -2% a year (in a heavily Catholic country), and GDP growth has been negative for 13 years in a row. More austerity measures are not going to help the situation.
Additionally, the costs of goods and services is much higher than in the states. GDP per capita doesn't measure purchase power parity, and your dollars in PR don't go nearly as far as they do in the USA. Energy costs, water costs, shipping costs, are all much higher in other countries, and legislation (such as the Jones Act) that helps mainland USA hurts PR.
PR is trapped, and has a perpetual brain drain of people escaping. It has a negative population growth of -2% a year (in a heavily Catholic country), and GDP growth has been negative for 13 years in a row. More austerity measures are not going to help the situation.
Puerto Rico’s GDP per capita, adjusted for purchasing power parity, is comparable to Spain, Italy, New Zealand, and South Korea: https://data.worldbank.org/indicator/NY.GDP.PCAP.PP.CD?most_...
Puerto Rico’s PPP GDP per capita has been stagnant since 2006 or so, but that’s true of Italy and Spain as well. (Italy has done worse over the last 15 years than Puerto Rico.) Its not a great situation, but doesn’t justify treating it like some developing nation.
Puerto Rico’s PPP GDP per capita has been stagnant since 2006 or so, but that’s true of Italy and Spain as well. (Italy has done worse over the last 15 years than Puerto Rico.) Its not a great situation, but doesn’t justify treating it like some developing nation.
Based on an NPR/Frontline report [0], it sounds like the debt Puerto Rico took on was a total financial market scam. The financial institutions schemed up some pretty crazy debt packages specifically for Puerto Rico that depended on PR's non-state status and specific rules/laws that it has applied to it.
After learning about the scheming that occurred, I'm not so sure I'm not in favor of just wiping out that debt and making the financial institutions eat it.
[0]https://www.npr.org/2018/05/02/607032585/how-puerto-ricos-de... edit: forgot the link
After learning about the scheming that occurred, I'm not so sure I'm not in favor of just wiping out that debt and making the financial institutions eat it.
[0]https://www.npr.org/2018/05/02/607032585/how-puerto-ricos-de... edit: forgot the link
> Based on an NPR/Frontline report [0], it sounds like the debt Puerto Rico took on was a total financial market scam. The financial institutions schemed up some pretty crazy debt packages specifically for Puerto Rico that depended on PR's non-state status and specific rules/laws that it has applied to it.
a) I don't see anything in the article that implies the debt packages were particularly complex or manipulative.
b) Even if they were, are you saying that the state of Puerto Rico was not competent to evaluate it's own financial decisions?
a) I don't see anything in the article that implies the debt packages were particularly complex or manipulative.
b) Even if they were, are you saying that the state of Puerto Rico was not competent to evaluate it's own financial decisions?
To be honest, I originally heard the report on the radio, and did a cursory search for a linkable article. This might not have been the exact article I was thinking it was.
The question then becomes: what did they do with the money?
Your take completely ignores income disparity, and that the social services being cut deeply impact the poor
I mentioned this in another comment but i'll repeat it.
Due to the complexities of Puerto Rico's status as a commonwealth (i.e. not a State) the island is unable to declare bankruptcy. If they could then this issue could easily be solved and would give the government some leverage as is the case in most cases involving financial institutions taking advantage of these loans like was the case in Detroit and NYC.
To quote the wikipedia article on the topic [1]:
"Puerto Rico or any of its political subdivisions and agencies cannot file for debt relief under Chapter 9, Title 11, United States Code because it applies only to municipalities on the mainland.[55"]
[1]https://en.wikipedia.org/wiki/Puerto_Rican_government-debt_c...
Having lived in PR my most of life and most of my family being lawyers in both the Federal and the local Supreme Court the insight I get from the situation is that unless the White House gets involved or Congress simply amends that single line in the bankruptcy law then the government has really no leverage and these financial institutions (not lenders, but banks who bought the debt from lenders) will get mostly what they want and cripple the island.
Due to the complexities of Puerto Rico's status as a commonwealth (i.e. not a State) the island is unable to declare bankruptcy. If they could then this issue could easily be solved and would give the government some leverage as is the case in most cases involving financial institutions taking advantage of these loans like was the case in Detroit and NYC.
To quote the wikipedia article on the topic [1]:
"Puerto Rico or any of its political subdivisions and agencies cannot file for debt relief under Chapter 9, Title 11, United States Code because it applies only to municipalities on the mainland.[55"]
[1]https://en.wikipedia.org/wiki/Puerto_Rican_government-debt_c...
Having lived in PR my most of life and most of my family being lawyers in both the Federal and the local Supreme Court the insight I get from the situation is that unless the White House gets involved or Congress simply amends that single line in the bankruptcy law then the government has really no leverage and these financial institutions (not lenders, but banks who bought the debt from lenders) will get mostly what they want and cripple the island.
> Due to the complexities of Puerto Rico's status as a commonwealth (i.e. not a State) the island is unable to declare bankruptcy. If they could then this issue could easily be solved and would give the government some leverage as is the case in most cases involving financial institutions taking advantage of these loans like was the case in Detroit and NYC.
Was Puerto Rico unaware of this when they took out the loans? Was the law changed out from under them after they had made these deals?
If not, why should we care?
Was Puerto Rico unaware of this when they took out the loans? Was the law changed out from under them after they had made these deals?
If not, why should we care?
>Was Puerto Rico unaware of this when they took out the loans?
The fact that it went to the Supreme Court of the US [1] means that it is unprecedented and required the highest court in the land to interpret the law means that no parties were fully aware of how Bankruptcy would hold.
[1]https://www.oyez.org/cases/2015/15-233
The fact that it went to the Supreme Court of the US [1] means that it is unprecedented and required the highest court in the land to interpret the law means that no parties were fully aware of how Bankruptcy would hold.
[1]https://www.oyez.org/cases/2015/15-233
I mean, sure, they tried to wriggle out of it any way they could, but the law was clear. And they had every reason to believe that this was a very likely outcome.
Yes. Anyone who was involved with these bonds did or should have known. People loved that triple tax exemption too much.
US States are unable to declare bankruptcy.
They have no need to. They can simply repudiate their debts, as numerous states have done in the 1840s, 1868, and 1870s.
Puerto Rico's problem is that it is neither fish nor fowl, neither a city which has a legal escape route through bankruptcy nor a state which has a sovereign escape route.
Puerto Rico's problem is that it is neither fish nor fowl, neither a city which has a legal escape route through bankruptcy nor a state which has a sovereign escape route.
>I might buy the debt at $50,000 in return for the hassle of collecting it. Is there something wrong with that?
Many would argue there is something inherently wrong (evil) with any interest bearing debt. Moving past that...yes, there is something wrong with reselling bad debt (maybe even reselling good debt).
The only reason people buy bad debt is they have bad intentions, either they are trying to resell it themselves to a less savvy buyer (usually employing various means of fraud and misrepresentation) - even the biggest banks in the world engaged in this with their toxic loans - or they plan to employ unlawful collection methods.
If you are an original creditor and you are going to resell a debt for pennies on the dollar, the at a minimum the debtor should have an option to buy out their own debt for the same price as a 3rd party.
I know the original creditors would object, but as someone who seems to support the current system of buying/selling bad debt to 3rd party collection agencies would you object to the creditor having to give the original debtor an option to buyout their own debt at the same price offered by a 3rd party collection agency?
Many would argue there is something inherently wrong (evil) with any interest bearing debt. Moving past that...yes, there is something wrong with reselling bad debt (maybe even reselling good debt).
The only reason people buy bad debt is they have bad intentions, either they are trying to resell it themselves to a less savvy buyer (usually employing various means of fraud and misrepresentation) - even the biggest banks in the world engaged in this with their toxic loans - or they plan to employ unlawful collection methods.
If you are an original creditor and you are going to resell a debt for pennies on the dollar, the at a minimum the debtor should have an option to buy out their own debt for the same price as a 3rd party.
I know the original creditors would object, but as someone who seems to support the current system of buying/selling bad debt to 3rd party collection agencies would you object to the creditor having to give the original debtor an option to buyout their own debt at the same price offered by a 3rd party collection agency?
This article with its tale of moneyed interests perverting the courts and democratic processes reads like Sallust's accounts of the decline of republican Rome. [1] The sad part is that America seems to have lost the ability to fix problems like this. For that we have no one to blame but ourselves.
[1] http://penelope.uchicago.edu/Thayer/E/Roman/Texts/Sallust/Be...
[1] http://penelope.uchicago.edu/Thayer/E/Roman/Texts/Sallust/Be...
>The sad part is that America seems to have lost the ability to fix problems like this.
The problem is deferring payment far into the future where the people deferring the payment won't have to deal with it, and the people in the future have to now sort out how to allocate the limited resources which were already promised years and decades in the past. There is no solution other than various parties getting all of what they were "promised", so everyone has to fight to get what they can.
The problem is deferring payment far into the future where the people deferring the payment won't have to deal with it, and the people in the future have to now sort out how to allocate the limited resources which were already promised years and decades in the past. There is no solution other than various parties getting all of what they were "promised", so everyone has to fight to get what they can.
> There is no solution other than various parties getting all of what they were "promised"
Yes there is. It’s bankruptcy. What Puerto Rico is doing.
Bankruptcy means poofing promises. Whose promises get poofed in what quantity is the question. Broadly speaking, the constituents are taxpayers, creditors (mostly lenders and pensioners) and service recipients. Austerity puts the bulk of the pain on taxes and services. Going Argentina puts it mostly on external creditors. In between are reasonable paths.
Yes there is. It’s bankruptcy. What Puerto Rico is doing.
Bankruptcy means poofing promises. Whose promises get poofed in what quantity is the question. Broadly speaking, the constituents are taxpayers, creditors (mostly lenders and pensioners) and service recipients. Austerity puts the bulk of the pain on taxes and services. Going Argentina puts it mostly on external creditors. In between are reasonable paths.
I typo’d that. I meant to write “there is no solution other than various parties NOT getting all of what they were promised”.
There was a similar problem in the 1980s with the S&L crisis. In that case Congress passed legislation to clean things up.
>He made a fortune in distressed sovereign debt, purchasing bonds from countries that appeared to be in financial trouble, watching as they defaulted, then suing in court for full repayment.
Amazing. I want to bet in shit games like roulette, inevitably lose my money, then sue the casino and get it back.
Fucking parasites. A we know the only way to deal with these people. It's clear that "peaceful protests" can simply be ignored.
Amazing. I want to bet in shit games like roulette, inevitably lose my money, then sue the casino and get it back.
Fucking parasites. A we know the only way to deal with these people. It's clear that "peaceful protests" can simply be ignored.
A peaceful protest that is non-cooperative in nature will eventually be noticed. If they leave when the authorities tell them to leave (Occupy Wall Street) then yes you are correct.
Is any blame to be assigned to PR for issuing bonds and then not honoring them?
The problem lies in the fact that Puerto Rico (unlike States and other municipalities in the United States) is unable to declare bankruptcy due to being a commonwealth.
If they could then these financial institutions would be unable to raid the island's coffers.
If they could then these financial institutions would be unable to raid the island's coffers.
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US states can't declare bankruptcy which seems the closest analog to what PR is
However aren’t US states also obliged to run a balanced budget?
Okay, so PR isn't obliged to run a balanced budget, and they sold bonds that were beyond their ability to repay, and so the people asking for the bonds to be repaid are the bad guys here?
Why do governments issue debt that they do not repay? I'm glad someone is out there keeping them honest.
Debt is the mechanism that fiat currencies use to create money. If there is no debt, there is no currency. And since we need debt to pay off debt, then you get where we get now with the FED injecting QE and pumping the Repo markets up. The main difference between now and 2008, is that the repo market helps the traders more than the banks. The traders are too big to fail, because if they don't trade and there is no liquidity because Repo fails, there is no stock market. Which destorys the full faith and credit of the USA. Which is what gives money its value. If the Government is not credit worthy, everything falls, look at Japan and their zombie banks and markets. They are no where near their boom.
you hedged your bets and you lose... except not because rules don't apply to use and if they do we will change them.
Are you referring to changing the rules so that Puerto rico can declare bankruptcy?
>In June 2016, President Obama signed the law that allowed Puerto Rico to declare bankruptcy: The Puerto Rico Oversight, Management and Economic Stability Act
>In June 2016, President Obama signed the law that allowed Puerto Rico to declare bankruptcy: The Puerto Rico Oversight, Management and Economic Stability Act
I’m all for proper saving and loaning of money. I’m not exactly eager on profligate government spending. On the one side, Puerto Rico’s government officials shouldn’t be borrowing money and spending lavishly when they know they can’t pay back. On the other hand, Wall Street got into bed with them knowing they’d get bailed out + charge fees for issuance.
So while I can’t blame both sides, I am getting tired of the government being in bed with Wall Street, this isn’t “capitalism”. This is called crony capitalism.
So... loan money to a terrible customer knowing the risks? Take it on the chin and call it a day.
So while I can’t blame both sides, I am getting tired of the government being in bed with Wall Street, this isn’t “capitalism”. This is called crony capitalism.
So... loan money to a terrible customer knowing the risks? Take it on the chin and call it a day.
The people who loaned the money are long gone. The article is about people who bought the debt knowing they would go bankrupt, but expecting to recover some of it through legal maneuvering.
True. But lets take the alternative. If an asset like a loan or bond was non-transferable meaning once made you had to hold it to term no matter what then the price of that loan would be higher to compensate for the illiquidity. And from the perspective of the borrower whether you pay to the originator of the loan or to a subsequent buyer makes no functional difference.
But the people who voted for those officials and were the beneficiaries of the money are still there. So people learn by paying a price and sometimes hard lessons are the best kind.
Kinda hard for anyone to argue that racking up a credit card bill makes you a massive victim. Or perhaps in this case, your best buddy racks up a credit card bill while you hang out with him partying. Maybe you should help him pay back some of the spending you pushed him to take on.
Kinda hard for anyone to argue that racking up a credit card bill makes you a massive victim. Or perhaps in this case, your best buddy racks up a credit card bill while you hang out with him partying. Maybe you should help him pay back some of the spending you pushed him to take on.
If the original buyers of the bonds were still holding them, would that then make the lawsuit legit?
capitalism is crony capitalism, it doesn't work any other way, you can see this going back since the beginning
these firms are disgusting
Leeches, everyone of these people are fucking leeches. They don't create value for the greater economy, they only provide profit for themselves at the expense of citizens and governments.
Well PR loans are derivatives in a lot of other other loans, and there is too much spread around that if it failed, all the other investments would too.
Every one? Including the co-plaintiffs who are fighting to keep the pensions they were promised?
The other point in the article is simply that these funds are not the original debt holders. But what difference does that make? If your neighbor owes you $100,000, and refuses to pay, I might buy the debt at $50,000 in return for the hassle of collecting it. Is there something wrong with that? Should the debt be forgiven merely because of that?
The article overlooks that legal rules alter primary behavior. People alter their decisions about lending based on what might happen, legally, if the investment goes sideways. The original lenders, who put up money that allows Puerto Rico to pay for various things, did so within a legal regime where it knew Puerto Rico couldn’t declare bankruptcy. They might not have lent the money at all otherwise. Moreover, in general lenders make lending decisions knowing that they can sell bad debt to collection firms or third parties. Eliminating the legal rights of those third parties alters the lending decisions of the primary actors going forward.
[1] I’d go so far as to say that it’s doubtful the author would appeal to Puerto Rico’s poverty if this was a debt owed by Italy, because the reader wouldn’t be as sympathetic. Which frankly is not a very nice thing, viewing Puerto Rican differently than Europeans who are identically situated economically.