Given the dicey state of the Puerto Rican economy you can well imagine the after-market for Puerto Rican Municipal Bonds, despite the attraction of triple tax-exempt status, was pretty much in the toilet. Who wants to buy something that has no value? Up jumped the vulture funds on Wall Street. They were in possession of a couple of arcane morsels of information the less educated investment community wasn’t aware of. Or maybe knew but didn’t have the balls to act on.
Way back in 1984 Strom Thurmond added a series of housekeeping amendments to a ho-hum bill that would allegedly clean up and clarify existing bankruptcy law. One of those minor tweaks defined the term “State.” It specified that all States and municipalities would be eligible for debt protection under Chapter 9 of the bankruptcy law except Washington D. C. and Puerto Rico. Which meant it would be henceforth illegal for Puerto Rican municipalities to declare bankruptcy.
Nobody voted against the amendments. In fact, it appears that no other Senator really took the time to analyze the language of the amendments. There’s even speculation that old Strom himself didn’t pay attention to the verbiage. He’d copied the text from an earlier House Bill that never got off the ground. That’s easy to understand. After all, it was an obscure bill, and nobody cares all that much about housekeeping. Besides, it was late in the day and dinner was on the table.
The second salient point had to do with the clause in the boilerplate of the bonds that said we promise to pay our creditors first. Before we pay our policemen, our teachers, our firemen, our retired employees or our health care professionals. Before we rebuild schools or put up shelters for the poor or fund Medicaid or fix the potholes in our highways that are in a sorry state of disrepair. We’ll pay our debts come hell or hurricane or high water. Or recession or unemployment or the mass migration of our indigenous citizens northward. That’s how serious we are about paying back our debt.
So, the vulture funds bought up the junk bonds for pennies on the dollar and called in the debt. Because there’s an issue of privacy surrounding who owes how much to whom, nobody really knows to this day exactly who these greedy bastards are. But the whole odious scheme had the stink of Wall Street avarice all over it.
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