This article was published by The McAlvany Intelligence Advisor on Monday, August 29, 2016:
George W. Plunkitt was not the world’s first dishonest politician, but he might have been one of the first ones to be honest about his dishonesty. Plunkitt was a Tammany Hall pol who served in the New York State Assembly and then in the New York State Senate around the turn of the 20th century. He called what he did – and what made him wealthy – “honest graft.” He defined “dishonest graft” as efforts to work solely for his own interests. “Honest graft,” on the other hand, was graft that worked for the interests of his own party.
He made his money by buying land that he knew would be needed for public projects, and then waiting. When the project came along, he would sell the land at a vastly inflated price. This was different, he said, from “dishonest graft” which would have involved him working to get the project built. It was a distinction without a difference. Said Plunkitt:
I could get nothin’ but a big piece of swamp, but I took it fast enough and held onto it. What turned out was just what I counted on. They couldn’t make the park complete without Plunkitt’s swamp, and they had to pay a good price for it. Anything dishonest in that?
Added Plunkitt: “I seen my opportunities and I took ‘em.”
Count John Paulsen among those who “seen” his opportunities, and “took ‘em.” Also count David Tepper. And the other owners of “vulture” funds that bought up millions of Puerto Rico’s bonds just days after they were downgraded to junk by Standard & Poor’s, Fitch and Moody’s in February 2014.
That was the month when the decades-long credit party ended for the pols running Puerto Rico. The downgrades triggered “acceleration” clauses, forcing the territory’s government finally to face reality. It took just over a year for that reality to become headline news. The governor said in June 2015 that he didn’t have the money to service the bonds, and that unless something was done, Puerto Rico was in a “death spiral.”
It took another year for Congress finally to do something about it. Instead of doing the logical, consistent, and intelligent thing – allowing the territory to declare bankruptcy – Congress instead created an “oversight” board to figure out what to do. The day after Obama signed PROMESA (“promise” in Spanish) into law, the island governor defaulted on a payment due on $2 billion of debt. Since then he has defaulted on billions more.
On September 1, Obama will finish naming the members of the oversight board. Press leakage has revealed a number of possibilities: raising taxes, collecting some $900 million of taxes that haven’t been collected, firing high-paid but worthless government employees, and forcing Paulsen and his friends to the bargaining table to “negotiate” their haircuts.
What the board should do, of course, is to let the island itself declare bankruptcy, punishing the bond holders who took advantage of the triple-tax-exemption on Puerto Rican bonds granted by Congress. They were the willing enablers of the island’s profligacy, which, in its final stages, involved borrowing to pay for the government’s ongoing daily expenses, borrowing to repay older debt that was maturing, and borrowing to build expensive government monuments to government stupidity: convention centers, golf courses, hotels, and the like.
The board should abolish the minimum wage that keeps shopkeepers from hiring low-skilled employees. They should install a “meritocracy” program to rid the government (many of them making $75,000 a year while teachers were making just $24,000) of incompetents. The board should demand that the government create a budget and then stick to it. It should demand that the government cut back on its spending and make full contributions to the pension and health plans that are woefully underfunded.
But, no. Instead the board is likely instead to listen to the pleadings of Treasury Secretary Jack Lew and HHS Secretary Sylvia Burwell, who wrote the board a letter last week asking it to increase the amount of money American taxpayers are already paying to the island’s residents for Medicaid. And allow low-income taxpayers (the island is overrun with them: almost half already live in poverty) to apply for the “earned income tax credit” – the grossly miss-named welfare program that gives checks to people who don’t make much.
What about those “negotiations”? John Paulsen’s vulture fund, Paulson & Co., saw his opportunity in March 2014, and he took it, buying millions of freshly deeply discounted Puerto Rican bonds, and waiting for the right time to sell.
That time is almost here. With Puerto Rico owing more than 110 percent of the island’s total annual economic output, the chances of the oversight committee doing anything more than resetting the chairs on the Titanic are slim indeed. When the board finally runs out of effective solutions, there will but one option left: pass the bill on to the American taxpayer. The full face value of Paulsen’s (and friends’) bonds will be restored, making Paulson (whose net worth is estimated at $10 billion) even richer.
Paulsen (and friends) “seen” their opportunity, and they took it.
Financial Times: Puerto Rico: An island’s exodus