Riley: Puerto Rico Hedge Fund “Bailout” to Follow Rhode Island Law
Tuesday, January 05, 2016
A recent Projo editorial as well as a letter from Fromma Harrop referenced the second missed payment on Puerto Rico’s massive debt as something of grave concern. Citing a potential bailout or an aide bill, both authors correctly stated that it would be extremely unfair for bondholders to be bailed out of bad investments by US taxpayers. They reasoned that bondholders knew there was risk in their investment and knowingly took risk. This is exactly correct and essentially how any free market advocate would view the circumstances as they exist in Puerto Rico.
Unfortunately Ms. Harrop’s letter strayed into political commentary essentially concluding Republicans and their pals, the demon “Hedge Fund Predators”, are conspiring to use U.S. taxpayer dollars to bail out Puerto Rico and their existing bondholders. It’s unclear from the letter where she gets the idea that these bondholders are conservative lead hedge funds. It is well known that Wall Street firms like Oppenheimer have stuffed their Municipal Bond Funds with some ugly Puerto Rico paper and consequently individual investors' own bond funds across the nation that are exposed to losses on Puerto Rico desk.
It is odd that neither author connected these events in Puerto Rico debt with the potential time bomb ticking in Rhode Island. In 2011 as it became clear that Central Falls was on the verge of bankruptcy Rhode Island ffficials became concerned about the financial condition of a dozen other towns and potential bankruptcy contagion. Crisis management ruled the day once again as Rhode Island pre-emptively passed a law placing municipal bondholders in a superior “first Lien" position in the event of Chapter 9 bankruptcy filing. The following article from Bond Buyer describes the move.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTThe article does not describe what happened next. After contracts were renegotiated following years of union refusals to budge, employees then received cuts of as much as 45 cents on the dollar. This rubbed unions and many other town employees the wrong way. They said “Why should the employees take a hit for poor municipal management and bond holders be spared?” they had a good point. It’s the same point that Harrop makes in her article about Puerto Rico when ascribing the motives to evil conservatives. How does she explain that a Rhode Island law that was designed exactly as she fears that US Senate conservatives and “bond predators” plan in Puerto Rico, having existed in her state for 5 years. She seems oblivious to the fact that this bond holder bailout law had already been passed in Rhode Island and it was done so without a single conservative in State Office. Passed in 2010 by a State Government that is 100% controlled by Democrats obviously means democrats love hedge fund bondholder’s right?
Indemnifying bondholders wasn’t enough
The story of the Rhode Island Muni Bond bailout doesn’t end there and neither does the irony. RI State Assembly leaders were confronted and blasted by union leaders and by Central Falls employees causing the veto proof Democratic Representatives to make a “side deal” to take (appropriate in Budget) State Taxpayer dollars and provide “aide” to the Public workers in Central Falls. (This is otherwise known as a payback or bribe). The Assembly then set up a $2.6 million dollar fund designed to boost pay back to 75% of pre-bankruptcy levels. Insane right? Apparently Ms Harrop didn’t notice that particular unfair maneuver against taxpayers in her own State of Rhode Island. Then, still not satisfied, the Democratic dominated assembly did it again midnight on the last session in 2014. Gordon Fox (D) Nick Mattielo (D), Paiva Weed (D) et al engineered another $4.8 million in bailout funds passing legislation that was introduced in the Senate by Elizabeth Crowley (D) and Agosithino Silva (D) in the House.
While Ms. Harrop is oblivious to bad law in Rhode Island, she is right about one thing. Bailing out municipal bondholders to the detriment of public workers, retirees and taxpayers is just plain disgusting and insulting. Our General Assembly should get rid of that law and reinstate the notion of free markets and risk taking.
Why does this matter?
The precedent of the State bailing out 75% of pre-bankruptcy compensation exposes all state taxpayers to the City of Providence approaching bankruptcy, thus allowing a reduced hit on Providence citizens and instead shifts the burden to state taxpayers and leaving Municipal bond holders untouched. If that’s not “UNFAIR” I’ll eat my hat.
Michael G. Riley is vice chair at Rhode Island Center for Freedom and Prosperity, and is managing member and founder of Coastal Management Group, LLC. Riley has 35 years of experience in the financial industry, having managed divisions of PaineWebber, LETCO, and TD Securities (TD Bank). He has been quoted in Barron’s, Wall Street Transcript, NY Post, and various other print media and also appeared on NBC News, Yahoo TV, and CNBC.
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