
The Curious Case of Aurelius Capital vs. Puerto Rico - wallflower
https://www.nytimes.com/2019/11/26/magazine/aurelius-capital-v-puerto-rico.html
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rayiner
The article is based on two false premises. First, it appeals to the idea that
we should give Puerto Rico a pass because it’s poor. But _Puerto Rico is not
poor._ Its GDP per capita is above Italy, and right below Spain and New
Zealand.[1] It’s not a third world country where you can say there is a
humanitarian basis why they shouldn’t have to pay back money they borrowed.

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.

~~~
bliblah
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...](https://en.wikipedia.org/wiki/Puerto_Rican_government-
debt_crisis#Bankruptcy)

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.

~~~
darawk
> 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?

~~~
bliblah
>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](https://www.oyez.org/cases/2015/15-233)

~~~
darawk
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.

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hodgesrm
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...](http://penelope.uchicago.edu/Thayer/E/Roman/Texts/Sallust/Bellum_Jugurthinum/1*.html)

~~~
lotsofpulp
>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.

~~~
JumpCrisscross
> _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.

~~~
lotsofpulp
I typo’d that. I meant to write “there is no solution other than various
parties NOT getting all of what they were promised”.

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neonate
[http://archive.is/x5FvQ](http://archive.is/x5FvQ)

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andrepd
>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.

~~~
oh_sigh
Is any blame to be assigned to PR for issuing bonds and then not honoring
them?

~~~
bliblah
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.

~~~
oh_sigh
US states can't declare bankruptcy which seems the closest analog to what PR
is

~~~
occamrazor
However aren’t US states also obliged to run a balanced budget?

~~~
oh_sigh
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?

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seibelj
Why do governments issue debt that they do not repay? I'm glad someone is out
there keeping them honest.

~~~
downrightmike
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.

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me_me_me
you hedged your bets and you lose... except not because rules don't apply to
use and if they do we will change them.

~~~
lotsofpulp
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

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whb07
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.

~~~
gok
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.

~~~
jshaqaw
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.

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ptah
these firms are disgusting

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ausbah
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.

~~~
downrightmike
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.

