Thursday, July 2, 2015



Thursday, July 2, 2015

Why The Puerto Rico Debt Crisis Is Such A Huge Threat To The U.S. Financial System

By Michael Snyder

The debt crisis in Puerto Rico could potentially cost financial institutions in the United States tens of billions of dollars in losses.  This week, Puerto Rico Governor Alejandro Garcia Padilla publicly announced that Puerto Rico’s  73 billion dollar debt is “not payable,” and a special adviser that was recently appointed to help straighten out the island’s finances said that it is “insolvent” and will totally run out of cash very shortly.

At this point, Puerto Rico’s debt is approximately 15 times larger than the per capita median debt of the 50 U.S. states.  Yes, the Greek debt crisis is larger, as Greece currently owes about $350 billion to the rest of the planet.  But only about $14 billion of that total is owed to U.S. financial institutions.  But with Puerto Rico, things are very different.  Just about the entire 73 billion dollar debt is owed to U.S. financial institutions, and this could potentially cause massive problems for some extremely leveraged Wall Street firms.

There is a reason why Puerto Rico is called “America’s Greece”.  In Puerto Rico today, more than 40 percent of the population is living in poverty, the unemployment rate is over 12 percent, and the economy of the small island nation has continually been in recession since 2006.

Yet all this time Puerto Rico has continued to pile up even more debt.  Finally, it has gotten to the point where all of this debt is simply unpayable
Steven Rhodes, the retired U.S. bankruptcy judge who oversaw Detroit’s historic bankruptcy and has now been retained by Puerto Rico to help solve its problems, gave a blunt assessment on Monday.

Puerto Rico “urgently needs our help,” Rhodes said. “It can no longer pay its debts, it will soon run out of cash to operate, its residents and businesses will suffer,” he added.

This is why I hammer on the danger of U.S. government debt so often.  As we see with the examples of Greece and Puerto Rico, eventually a day of reckoning always arrives.  And when the day of reckoning arrives, power shifts into the hands of those that you owe the money too.

It would be hard to understate just how severe the debt crisis in Puerto Rico has become.  Former IMF economist Anne Krueger has gone so far as to say that it is “really dire”
The situation is dire, and I mean really dire,” said former IMF economist Anne Krueger, co-author of the report commissioned by the U.S. territory, which recommended debt restructuring, tax hikes and spending cuts. “The needed measures may face political resistance but failure to address the issues would affect even more the people of Puerto Rico.”
So who is going to get left holding the bag?

As I mentioned at the top of this article, major U.S. financial institutions are very heavily exposed.  Income from Puerto Rican bonds is exempt from state and federal taxation, and so that made them very attractive to many U.S. investors.  According to USA Today, there are 180 mutual funds that have “at least 5% of their portfolios in Puerto Rican bonds”…

The inability of the U.S. territory to repay its debt, combined with the financial crisis in Greece, would have far-reaching implications for financial markets and unsuspecting American investors. Morningstar, an investment research firm based in Chicago, estimated in 2013 that 180 mutual funds in the United States and elsewhere have at least 5% of their portfolios in Puerto Rican bonds.
It is important to keep in mind that many of these financial institutions are very highly leveraged.  So just a “couple of percentage points” could mean the different between life and death for some of these firms.

And unlike what is happening with Greece, the private financial institutions that hold Puerto Rican bonds are not likely to be very eager to “negotiate”. In fact, the largest holder of Puerto Rican debt has already stated that it is very much against any kind of restructuring

U.S. fund manager OppenheimerFunds, the largest holder of Puerto Rico debt among U.S. municipal bond funds, warned the island it stands ready to defend the terms of bonds it holds, a day after the governor said he wanted to restructure debt and postpone bond payments.
What Oppenheimer is essentially saying is that it does not plan to give Puerto Rico any slack at all.  Here is more from the article that I just quoted above

OppenheimerFunds, with about $4.5 billion exposure to Puerto Rico according to Morningstar, said it believed the island could repay bondholders while providing essential services to citizens and growing the economy. It said it stood ready “to defend the previously agreed to terms in each and every bond indenture.”

“We are disheartened that Governor Padilla, in a public forum, has called for negotiations with other creditors, representing and including the millions of individual Americans that hold Puerto Rico municipal bonds,” a spokesman for Oppenheimer said in a statement.
But Puerto Rico simply does not have the money to meet all of their debt obligations.

So somebody is not going to get paid at some point.

When that happens, those that insure Puerto Rican bonds are also going to take tremendous losses.  The following comes from a recent piece by Stephen Flood

Now, bondholders are at risk as are the funds which hold Puerto Rican bonds and, more importantly, those who insure them in the derivatives market.

Dave Kranzler, from Investment Research Dynamics has warned that there are signs that the Puerto Rico situation may not remain a local crisis for much longer.

He points out that share prices of MBIA, the bond insurers, have been plummeting.

MBIA are valued at $3.9 billion whereas their exposure to Puerto Rican debt is around $4.5 billion. Kranzler reckons their exposure could even be multiples of that figure. A default could wipe them out.

He also points out that the firm’s largest shareholders are Warburg Pincus, the firm to which Timothy Geithner went after his stint as Treasury Secretary, when he helped paper over the chasms opening up in the financial system.
Did you notice the word “derivatives” in that quote?

Hmmm – who has been writing endless articles warning about the danger of derivatives for years?

Who has been warning that "this gigantic time bomb is going to go off and absolutely cripple the entire global financial system"?

When Puerto Rico defaults, bond insurers are going to be expected to step up and make huge debt service payments to investors.

But this just might bankrupt some of these big bond insurers.  In fact, we have already started to see the stock prices of some of these bond insurers begin to plummet.  The following comes from the Wall Street Journal

Bond insurers MBIA Inc. and Ambac Financial Group Inc. are down again Tuesday as concerns over Puerto Rico’s ability to repay its debt multiply.

Investors fear that both firms face the potential for steep losses on their promises to backstop billions of Puerto Rico’s $72 billion of debt.

MBIA’s stock closed down 23% Monday, and fell more than 10% before rebounding Tuesday. By late afternoon, the stock was down 6%. Ambac’s stock fell 12% Monday and was off 14% Tuesday.
Of course Puerto Rico is just the tip of the iceberg of the coming debt crisis in the western hemisphere, just like Greece is just the tip of the iceberg of the coming debt crisis in Europe.

So stay tuned, because the second half of 2015 has now begun, and the remainder of this calendar year promises to be extremely “interesting”.

Wednesday, July 1, 2015


Puerto Rico's present economic situation is the end result of  bad government   administrations, rampant corruption, and outrageous corporate and individual greed!. 
It would never had reached this level had somebody in Washington listened.  Is it too late now? MJ

Will Puerto Rico Cause An Inadvertent “Black Swan” Derivatives Melt-Down?
IRD (Investment Research Dynamics)
June 30, 2015

I really had not been paying much attention to the Puerto Rico debt situation.  After all, $72 billion in debt that might go bad – big deal.  The Fed can print up $72 billion in credit lines with the push of a button.But a friend of mine happened to mention to me that MBIA’s stock was down over 23% and Assured Guaranty’s stock was down over 13%.  That woke me up.
MBI guarantees $4.5 billion in par amount of Puerto Rico muni paper.  As of it’s latest 10-Q (March 31, 2015), MBI showed a book value of $3.9 billion. Puerto Rico alone could more than wipe out MBI’s net worth.  
But this story isn’t just about MBI.  It’s about the companies that, along with MBIA, provide “insurance” for bonds and derivatives.  These firms have assumed potential liabilities that dwarf their ability to cover them.  Not just in the worst case scenario.  I believe Puerto Rico’s financial demise could trigger the dreaded financial nuclear daisy chain of counterparty defaults.
I believe it is highly probable that the crashing stocks of MBIA, AMBAC and AGO are the alarm bells of a black swan landing.  And, of course, no one has been talking about them until today.  Although these firms are somewhat obscure and small compared to the size of the majority of financial companies, they are highly leveraged with massive off-balance-sheet liabilities for which they have zero hope of covering in the event of even relatively small bond defaults.   In other words, these firms are the ones most likely to set off the next financial collapse triggered by their counterparty defaults.

Thursday, June 25, 2015

"Examining procedures regarding Puerto Rico’s political status and economic outlook"

US House Subcommittee Hearings on Puerto Rico's Political Status
June 24, 2015

Held in Washington DC, June 24, 2015

(Miriam J Ramirez's Testimony starts at 1:34 min)

MJR Complete Testimony Included For The Record 

Witness List: Witnesses and Testimony:
Panel I
The Honorable Pedro R. Pierluisi
Resident Commissioner of Puerto Rico
President of New Progressive Party (PNP)
Washington, D.C.

The Honorable César A. Miranda Rodríguez
Attorney General of Puerto Rico
Popular Democratic Party (PPD)
San Juan, PR

The Honorable Rubén Berríos
Former Senator in the Puerto Rican Senate
President of the Puerto Rico Independence Party (PIP)
San Juan, PR

Panel II
The Honorable Luis G. Fortuño
Former Governor of Puerto Rico, 2009-2011 (PNP)
Washington, D.C.

The Honorable Carlos Romero Barceló
Former Governor of Puerto Rico, 1977-1985 (PNP)
San Juan, PR

The Honorable Aníbal Acevedo Vilá
Former Governor of Puerto Rico, 2005-2009 (PPD)
San Juan, PR

The Honorable Carmen Yulín Cruz Soto
Mayor of San Juan, 2013-Present (PPD)
San Juan, PR

Ms. Miriam J. Ramirez MD
Former Puerto Rico State Senator, 2001-2005 (PNP)
Founder, Puerto Ricans in Civic Action
Orlando, FL

Wednesday, June 24, 2015

ORAL Statement for the June 24, 2015 Hearings On Puerto Rico Subcommittee On Indian, Insular, And Alaskan Native Affairs

Miriam J. Ramirez MD
Former Puerto Rico State Senator

C: 787-567-1333

ORAL Statement for the June 24, 2015 Hearings On Puerto Rico
Subcommittee On Indian, Insular, And Alaskan Native Affairs

Honorable Chairman Young and members of the Committee: My name is Miriam Ramirez, I am a medical doctor, former Senator of the New Progressive Party in Puerto Rico, and founder of a non-partisan grassroots movement, called Puerto Ricans in Civic Action, which gathered more than 350,000 individually signed petitions for statehood and delivered them to Congress in the 1980s.

Mr. Chairman, it is has been a privilege to know you and count on your solid and courageous support to advance our struggle to achieve equal rights for the almost 4 million disenfranchised US citizens in Puerto Rico.  Decades ago you responded with your full support when more than 350,000 Puerto Ricans petitioned Congress for Statehood. Today you are again giving us an opportunity to obtain our equal rights and obligations as U.S. citizens of this great Nation.

In my testimony on May 22, 1986, when Congressman Morris Udall was the Chairman, I identified our lack of full rights as US citizens as the fundamental reason for the poor economic performance of Puerto Rico, compared to other states. Today I want to focus my testimony on the negative consequences of the federal tax regime that has kept Puerto Rico labeled as a “foreign” jurisdiction for almost a century.

In1996 after Section 936 was eliminated, the former Section 936 firms used Puerto Rico´s “foreign” tax status and converted to Controlled Foreign Corporations (CFCs).  However, the CFCs in Puerto Rico are not obligated to create local jobs or to generate any real investments in order to benefit from the federal tax deferral. Using transfer pricing abuses, the CFCs in the Island are causing the US Treasury to lose billions in federal tax revenue without creating jobs and investment in the Island. The Senate Permanent Subcommittee on Investigations identified one company in Puerto Rico that benefitted from a tax savings of $22 million per employee, but yet only generated 177 jobs. 

Also, to exploit this special federal tax status,  the supposed pro-statehood administration of former Governor Fortuño adopted two laws in 2012. Act 20 and Act 22 entice millionaires who reside in the 50 states to locate to Puerto Rico by taxing their corporate profits from exported services at a flat 4% rate and allowing those profits to be paid out to these owners free of Puerto Rico income tax.

Thus, the CFC regime in Puerto Rico has become a significant drain of tax revenue and a formidable opponent of statehood for Puerto Rico. Keeping Puerto Rico as a ¨foreign” country inside the United States undermines the U.S. federal tax base and creates unfair competition against local communities in the 50 states.  But the truth is that Puerto Rio is governed by the CFC REGIME and the economic power of super billionaires who since Law 22 of  2012 can relocate to Puerto Rico without paying state or federal taxes.
But that is not the only damage they do..... they have the most powerful Public Relations army in the World, ready to lobby and fight  against anything that endangers this outrageous tax evasion scam to the US and the US Taxpayer. Their worst concern is that Puerto Rico may become a state of the Union. They are ruthless in their attacks when they feel threatened with that possibility and will destroy or attempt to destroy anything or anyone that even remotely attempts to help the US citizens of Puerto Rico gain full citizen rights.

The CFCs are effectively in control of our major political parties and their governing agenda. Whenever the people put pressure for a process of self determination, millions of dollars appear out of nowhere to campaign against statehood, since it will be the death knoll for the CFC scam. 

It is for this reason I that it is impossible to fight against the CFCs if we want to achieve statehood in Puerto Rico. We have to make the CFCs part of the political status solution.

Mr. Chairman, I propose that a statehood bill, with the defined terms of admission and a 20 year transition period for maintaining the CFC's in Puerto Rico, come out of your Committee. There is a precedent for previous statehood bills to include temporary tax benefits,  and a transition period was included in the Senate Bill 712 in 1990.   (I have submitted for the record a draft of said bill.)

I am submitting a draft admission act prepared by my constitutional  counsel, Attorney Roberto Santana, which also includes what I call the Costas amendment, in honor of Attorney Luis Costas who first educated me on these issues. To get the CFC's on our side, (or rather off our backs ) award the Corporations special tax incentives for a period of 20 years in the transition process. 
This is the way we designed it in the original Young bill.
Thank you very much..