For almost a decade it appears that the island of Puerto Rico has been
issuing municipal bond debt that it knew it could never repay. Municipal
entities in Puerto Rico like the government owned electric utility have
been technically bankrupt for many years. This utility and almost every
other municipal entity on the island have been paying the credit ratings
agencies and banks tens of millions of dollars a year to secure unjusti-
fied credit ratings The utility by itself spends $40-$60 million dollars
a year with the ratings agencies and banks to keep the money flowing.
A simple review of the bond offering memorandums, easily available to
anyone, shows almost all these entities to be in dire financial condition,
many, if not most, technically bankrupt. Unbelievably, the credit agencies
were lining up to offer A & BBB ratings for the right fees. Wall Street’s
biggest banks did the same thing and then sold these very troubled bonds
to their unsuspecting investors.
There has been over $5 billion dollars in losses so far to the bond holders
who bought the utilities bonds, mostly retired Americans of modest means.
No one has been questioned, no one has gone to jail.
When you look closely at these bond offering memorandums you will not
only see that the entities never had the money to make the payments on the
bonds but bond offering after bond offering, the entities claim to be raising
money for improvements. The improvements never get done, the money
disappears and the following year another request for money for the same
project appears in a new memorandum and once again the money disappears
and on and on.
The bonds rating agencies never mention the improvements never get done
but the money disappeared. The Agencies claim that the bond payments will
be made in whole or in part from accounts receivable that have not been co-
llected in a decade and in small print say they are unlikely to be collected in
the future. Again not important I guess.
The Puerto Rico Legislature held committee meetings where executives from
the utility and the lead auditor from Ernst and Young claim the ratings agencies
and banks were fully aware the utility was bankrupt when they issued the A &
BBB ratings. Umm, everyone wants to seem to ignore this fact.
Everywhere I looked in Puerto Rico I saw the same thing. Junk bonds with a
very high likelihood of default sold to everyday Americans as low risk retire-
ment income. While this concerns me greatly, it is not why I am so concerned.
You see, after I looked at Puerto Rico, I looked at Chicago, Compton, Oakland,
California and New York. You guessed it, much of the same. Until these issues
are addressed, throwing more dollars at Puerto Rico will only postpone the
When Bernie Madoff started out many people saw the same thing. Reports
were made to the SEC and ignored, the FBI and ignored the DOJ and ignored.
He could have been stopped at $100,000,000 dollars, instead he stole $40 bi-
llion dollars before it all collapsed. There were whispers and they were igno-
red. I am screaming from the mountain top and I hope you are listening.
Everyone acknowledges that Madoff ran a Ponzi scheme. The early investors
were promised things he could not deliver and new investors were sought out
to pay off the early investors and so on. Over time its gets bigger and bigger
and finally the last investors lose everything.
Today there are approximately 60,000 entities that issue municipal bonds. Four
trillion dollars in bonds are in the market today, owned entirely by Americans,
mostly retired Americans. These retired Americans might get $900 a month
from Social Security, $500 a month from savings and another $600 a month
from their bonds. They are barely making it on the $2,000 a month. Take away
the $500 in bonds and they lose their home, can’t pay for medicine or simply
If the municipal market activity was to slow down or temporarily stop, it is
possible that the American people would see $2-$2.2 trillion dollars in losses.
The house of cards built on fraud and deceit would collapse.
How could this happen? It is easy, in the 2007-2008 CMBS/CDO crash that
brought America to its knees, 6 million jobs were lost, millions more lost their
home and trillions in wealth was wiped out. That too was a Ponzi scheme built
on false credit ratings.
One person was charged with a crime, a crime that almost ruined our country.
If no one is held accountable, why not do it again. So they did!
Our congressmen and Senators go to plush lunches with these folks, they go
on wonderful fact findings trips to exotic locations, paid for by these folks,
they get political contributions and for special favors, they get outlandish sp-
eaking fees. It’s a great deal and they will protect it regardless of how many
Americans they have to throw under the bus.
Other politicians want to buy votes. It is an election cycle. Have you listened
to the speeches? Free community college, no four years of free college, free
this, free that. Why not? Just because we have 19 trillion dollars in debt do-
esn’t mean we can’t have 25 trillion in debt. What debt, you guessed it, bond
debt. You see when you can’t raise taxes anymore and still keep you job, you
have to take the money from someone. Why not issue bonds and default on
them later! No one is paying attention, who reads those pesky bond offering
memorandums anyway. If they are rated AAA or A or BBB, they must be
Most Americans don’t know that Municipal Bonds are not reviewed or moni-
tored by any agency. Our tough talking politicians responded to the American
people by passing a law that requires the agencies issuing these bonds, self-re-
port. I am not kidding, they wrote into law that the issuing agencies, credit a-
gencies and banks will not be monitored unless they write to the SEC and admit
to doing something wrong themselves. No really, this is true. $4 trillion dollars
and accountable to no one. Our leaders even passed laws that make it very di-
fficult to sue if someone like me uncovers it all. I am sure it had nothing to do
with those lunches, free vacations, political contributions and paid speeches.
That would be cynical.
How about the press. Well you see how they uncovered the CMBS/CDO cri-
sis. No wait a minute, it was American’s like me. They did report on it when
it could no longer be ignored. The financial papers get their business from the-
se very same firms, they wine and dine them, vacation with them and count on
them to advertise in their papers. When is the last time you can remember that
the Wall Street Journal, The Financial Times or Bloomberg broke a meaningful
story? Investigative journalism is dead unless it fits the political bias of a specific
This house of cards is starting to collapse. First Puerto Rico with Chicago next.
At first the papers will print what their told to, it’s the economy, lack of jobs, the
weather. Anything but the truth. When it becomes more than one or two cities,
when the numbers are too big to ignore, someone will tell the truth and everyone
will ask how this could have happened? How could it have gone on for so many
Richard Lawless is CEO of Commercial Solar Power in Temecula, CA. The opinions expressed in the
preceding commentary are solely his own and do not necessarily reflect the views of The Puerto Rico
Monitor or its advertisers.