Commentary
Richard Lawless
I can no longer sit quietly and watch this country implode from all of the Wa-
shington corruption.
Today I watched Hillary Clinton's speech, and I was appalled. I watched her
tell the audience how she would bring Wall Street to heel and hold them acc-
ountable. I listen to her say how she would use Dodd Frank legislation to ma-
nage that process. It is all complete BS.
Hillary is fully aware of the large scale bond fraud uncovered in Puerto Rico.
A criminal conspiracy so large that it calls into question all $70 billion dollars
of Puerto Rico debt. Hillary is calling for a complete bailout and supports cu-
rrent legislation to do just that. She does not support prosecution.
The Puerto Rico Senate held investigative hearings in early 2015 to explore the
financial failure of one of its largest municipal agencies. One government exe-
cutive after another testified under oath that they knew they were technically ba-
nkrupt when they issued these bonds and could not pay they back. The witness-
es then went on to say that although the credit agencies (Moody’s, Fitch and S&
P) knew they were insolvent, they could secure good credit ratings for the bonds
for the “right fee”. According to the same testimony, Wall Street’s biggest banks
knew all this but for the “right sales fees” they would sell these junk bonds as sa-
fe retirement income to their retired investors.
The SEC has already performed four full audits on four bond issues and found
the audits to be consistent with the Senate testimony. These agencies were insol-
vent and it could not have been accidently overlooked by the Rating Agencies and
the Banks.
We have seen this before with the 2007-2008 CMBS (mortgage bonds) crisis. The
Rating Agencies and the Banks almost prefer to support these failing agencies be-
cause it forces them to refinance debt they can’t pay off as agreed before they have
to admit it to their bond holders. This “Ponzi Scheme” forces frequent and costly
refinancing on a regular basis, generating huge fees for the Rating Agencies and
Banks. All good, if you can continue to refinance fast enough and bring in new in-
vestors quick enough to pay off the old investors. As in the case with Puerto Rico
and other States and Cities, even a small hiccup causes the hold house of cards to
collapse.
It is pretty clear that the Agencies issuing the bonds, the Rating Agencies issuing
fraudulent ratings and the Banks selling junk bonds all broke the law and violated
almost all of the provisions of Dodd-Frank.
All Congressman and Senators were issued this information. Most did nothing
but those that did, quickly stepped up to protect their Wall Street contributors. You
see, if this got out, the Rating Agencies and Banks would be held accountable for
the tens of billions in bond losses. Politian’s and government employees may be
charged criminally.
To date, there has been over $30 billion dollars in bond losses from this scam. The
average bond holder owns less than $10,000 in bonds and that represents over 20%
of their total savings. Not hedge funds as the Press and our Political leaders would
have you believe. When these bonds collapsed, after the senior citizens lost half
their money, then the hedge funds came in to buy these bonds at 33-50 cents on the
dollar with the hope of making money in the future. The hedge funds are being us-
ed as a distraction to take the discussion away from the original crimes. Most Pu-
erto Rico Bonds are still held by individuals like you and I.
New York residences owned the single biggest piece of this debt at about $4 billion
dollars, followed closely by Florida, New Jersey, Pennsylvania and Illinois. I don’t
think any State has loss less than a few hundred million dollars. It is not a Puerto
Rico Fraud. it is a National Fraud.
This entire thing sickens me and makes me glad that I am no longer part of the Wa-
shington two step. The two step is a Political Dance that requires most politicians
to add a political calculation to every vote they make. There are three simple ques-
tions, how will this vote increase my power base, will it add to my reelection war
chest and will it improve my personal financial statement. There is no considerati-
on given to the masses they represent. It is all about trading American Treasure
and Tax Payer money for personal gain.
In this case it gets even better. The Politicians were not happy stealing tens of bi-
llions from America’s middle class senior citizens when there is more to be taken.
Enter the PROMESA legislation. Legislation that removes all existing legal rights
from the innocent bond holders. The legislation actually prevents the bond holders
from suing. All supported by politicians that know all about this.
Being around Washington for so long I know what most of these government offi-
cials did before securing their government jobs.
Treasury Secretary Lew and his legal counsels Weiss and Campbell worked for
Citibank and Lazard, respectfully. In the period that this fraud started Citibank
and Lazard were among the first firms to sell these fraudulent bonds. Now, using
their position in government, all three of these gentlemen marketed congress for
a full bailout of Puerto Rico with Tax Payer Dollars and the innocent bond hold-
er’s money. Not once in all the committee meetings they participated in did they
site this conflict of interest while purposing solutions that benefit all their former
employers.
Paul Ryan a professed conservative, was not supportive of any bailout or the PRO
MESA legislation. That is until he met with Secretary Lew. After the meeting,
Ryan supported the legislation that violates every core principal that the Republi-
can party stands for. What happened? I suspect two things. Lew reminded him
that he had a bright career and Wall Street would not forget this (contributions for
his continued career advancement) and immediate funds for his current reelection
campaign. I as guessing about the former, but if you look at the contributions that
flowed into him from Wall Street firms after the meeting, well it was impressive.
Not surprisingly, most of the contributions came from firms directly involved with
Puerto Rico.
It is clear that the Democrats has a strategy in place to redirect what’s left of the
bond holders money to fund the unfunded government (union pensions). How
will they do this? It is simple and the Press is going along with it. Claim that the
bonds were issued fraudulently and claim they shouldn’t be paid back to the bond
holders. Float stories that the bond holders are just greedy hedge funds and not peo-
ple like you and I. Who likes hedge funds? Float stories that Puerto Rico is cance-
lling services from lack of money. Kids are dying in the streets. You have heard
all this before.
As a debt expert, I should point out that when a family does not make its mortgage
payment (bond payment example) that family has more cash at the end of the mon-
th, not less. Puerto Rico has withheld hundreds of millions in payments and has mo-
re cash than you would imagine. Any cancelling of services is just another strategy
being employed by less than honorable people.
I should mention in closing that Elizabeth Warren (claims to be anti-Wall Street)
knew all about this but was the first to propose an amendment to an energy bill
preventing innocent bond holders from suing. Just follow the money for Elizabeth.
This is not just a $70 billion-dollar scam (Puerto Rico). It includes Chicago, Conn-
ecticut and many other States. This is a Political Strategy to make up for years of
over spending. When legal taxes are no longer enough, steal the bond holder’s mo-
ney. Individually the bond holders are not very powerful and they will not underst-
and what their leaders are doing to them.
Richard Lawless is a former senior banker who has specialized in evaluating and granting debt for
over 25 years. He has a Master’s Degree in Finance from the University of San Diego and Bachelor’s
Degree from Pepperdine University. He sits on a number of Corporate Boards and actively writes for
a number of finance publications. The opinions expressed in the preceding article are solely those of
Mr. Lawless and do not necessarily reflect those of The Puerto Rico Monitor, its editors, contributors
or advertisers.
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