Newspaper article Charleston Gazette Mail

Puerto Rican Bonds and the Small Investor

Newspaper article Charleston Gazette Mail

Puerto Rican Bonds and the Small Investor

Article excerpt

The TV ads flash the noble faces of American retirees and urge Washington to help protect their savings. The back story is kept rather vague. It's that many older people invested in Puerto Rican bonds. The U.S. territory's economy is in deep crisis, and it has begun defaulting on this debt. The question here: What prompted ordinary investors to put their savings into Puerto Rican bonds? But first let's look at who is running the ads.

No, the retirees haven't pooled their Social Security checks to make their case. These ads are being run by hedge funds and other big Wall Street players who made their own bad bets on Puerto Rico's debt. They are now hiding behind the average Joes to press Washington for a bailout.

The obvious solution to this crisis is to let the island restructure its debt under U.S. bankruptcy rules - alongside a federal oversight board that would keep a close eye. Municipalities are allowed to declare bankruptcy, but as a U.S. territory, Puerto Rico needs congressional approval first. A bankruptcy would not cost the U.S. taxpayer anything.

This approach would also be the most humane. The setbacks for investors pale next to the trauma being suffered by Puerto Ricans. The island's government has already raised taxes and cut spending on social services to the bone. Thousands, meanwhile, are fleeing to the U.S. mainland.

Turning the language around, the big financial interests are now calling the bankruptcy route a "bailout." It's not the first time they've forgotten the clause in capitalism saying that when an investment goes sour, the investors are expected to lose money.

Many average buyers of Puerto Rican bonds didn't quite know what they were getting into. The bonds may have been rated as fairly safe at the time, but they were not something to put in a drawer and forget about. …

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