Trump Says Puerto Rico Debt Needs to be Wiped Out

October 4, 2017

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Mind you, not only is Trump capable of saying five contradictory things before breakfast, but he very rarely says the same thing over time (save declaring things he says he’s done to be “great”).

Nevertheless, having Trump go off the Wall Street/neoliberal script, likely by virtue of his own experience with bankruptcy, and say that debts that can’t be won’t be, is one of his occasional displays of speaking inconvenient truths. Does anyone want to place a bet as to how long it takes one of Trump’s Goldman operatives to walk his remarks back?

And speaking of Goldman, notice that Trump takes an explicit swipe at the investment bank turned Beltway heavyweight. He must be chafing at have been leashed and collared by the generals and the Goldmanites.

CNBC picked up on the Reuters story quickly and highlighted the bleak fundamentals:

Even before the storm brought Puerto Rico to a near standstill, the government there already struggled with an economy in shambles and a default on billions of dollars of public debt.

Today, the U.S. territory has nearly $70 billion in debt, an unemployment rate 2.5 times the U.S. average, a 45 percent poverty rate, nearly insolvent pension systems and a chronically underfunded Medicaid insurance program for the poor.

Puerto Rico’s job base continues to shrink, taking its economy along with it. Since the recession ended, a lack of job prospects has sent many Puerto Ricans fleeing to the mainland, where the job market is much stronger.

However, it is unlikely that Goldman would suffer much, if at all, in a Puerto Rico bankruptcy. It might hold some bonds in its trading inventory, but its big exposure would come via funds it manages. On those, under the Volcker Rule, Goldman is limited to owning a small percentage of the equity investment in the fund (3% is the nominal amount, although there may be some tricks of the trade for increasing the exposure).

But David Dayen has found one of the big owners of Puerto Rico debt, as reported in a new story at the Intercept. If you read the article in full, tracking down the who was behind the shell company used to hide the ultimate owners is very reminiscent of the sort of gumshoe work that Richard Smith does chasing international scammers:

For years, the identity of the owner of one of the largest holdings of Puerto Rican debts has been a mystery.

That mystery has finally been solved, with the help of the The Baupost Group, who unmasked themselves to The Intercept. The Baupost Group, a Boston-based hedge fund managed by billionaire Seth Klarman, owns nearly a billion dollars of Puerto Rican debt, purchased under a shell company subsidiary and hidden from public scrutiny. Baupost acquired the debt through an on-paper Delaware-based corporation named Decagon Holdings LLC, whose beneficial owner had been unknown until now.

“The Baupost Group is a holder of COFINA bonds through the Decagon entities,” said Baupost spokeswoman Diana DeSocio. “Baupost regularly makes investments through subsidiary holding entities.” She added that Klarman, one of the richest hedge fund managers in the world, did not hold any Puerto Rican debt individually….

Using shell companies to buy Puerto Rican bonds, then, can shield wealthy investors from public knowledge of their complicity in the misery of millions of U.S. citizens.

Julio Lopez, state director of Make the Road Connecticut and a member of the HedgeClippers coalition, which is organized to challenge the concentrated power of hedge funds, said the revelation of Klarman’s involvement will have political ramifications.

“What’s incredible about this is these people were actually hiding,” said Lopez. “In the case of this person, he’s in Boston which has a large Puerto Rican community … Our work right now will be about activating our community in Boston, letting them know this person has been hiding and making sure we go to his houses and his companies to hold them accountable.”

In July, as part of a court order to comply with bankruptcy procedures, a coalition of holders of “COFINA” bonds, backed by the island’s sales taxes, were required to supply the names of its members. The largest member in terms of bond value was Decagon Holdings, which had ten separate purchasing subsidiaries (Decagon 1-10) holding $911.6 million in COFINA bonds.

But there was no information about Decagon in the court filing, other than a Boston address of 800 Boylston Street…

Klarman, who has been described as the Oracle of Boston, has a history of buying unpopular or distressed assets on the cheap in hopes of a payday. Baupost manages over $30 billion in assets. He is known as the top campaign contributor in New England, and has been a major donor in Republican politics in Massachusetts, including largely secret support for 2016’s Question 2, an ultimately unsuccessful effort to lift a state cap on charter schools. Klarman supported Hillary Clinton in 2016, calling Trump “completely unqualified for the highest office in the land.”

Klarman’s involvement in Puerto Rican debt will surely come as a surprise to activists in Massachusetts and Puerto Rico, who have never mentioned him among the “vultures” who are causing undue pain for the island’s U.S. citizens.

COFINA bondholders have been sparring with holders of Puerto Rico’s general obligation debt over who has the right to be repaid first from a pool of sales tax revenue. Judge Laura Taylor Swain, currently presiding over the bankruptcy-like process in Puerto Rico, suspended COFINA payments in May.

The COFINA group has spent $610,000 lobbying Congress over the past two years. Last week, after an Intercept report about creditor responses — or the utter lack of them — to the disaster in Puerto Rico, COFINA bondholders offered “our heartfelt thoughts and prayers” to those living on the island, and promised that “members of the Coalition will be contributing to the Puerto Rico Chapter of the American Red Cross.”

The amount was not disclosed, nor whether Seth Klarman and the Baupost Group would be contributing.

As regular readers may know, ProPublica did an in-depth investigation of the American Red Cross in the wake of Hurricane Sandy, showing how the organization was great at fundraising and compensating top executives, as well as being non-transparent and terrible at disaster relief. So even the efforts at virtue-signaling need to be taken with a fistful of salt. And even if they were bona fide, they’d be a teeny fraction of the lucre Klarman’s fund hoped to reap on the back of the island’s misery.

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