4. the many-headed monster

Apr 17

Apr 17 4. the many-headed monster

THE MANY HEADED MONSTER - BANKS & BONDS BEHIND PR DEBT
This section is mainly informational research, many details to be filled in and a few sections under construction. No sweeping conclusions to be made at this time. The Centro de Periodismo Investigativo in Puerto Rico and Hedge Clippers are great resources on this subject. CPIPR articles often have english and spanish versions. At the crux of PROMESA's Title 3 bankruptcy debt negotiations, is who are the priority stakeholders to be repaid, and in what order? Many questions remain unanswered about what are considered essential services to be funded to serve the Puerto Rican people, but the current outlook does not look good.

Missing sections:
General Obligation Bonds
PREPA Bonds
Pension Obligations
Cooperative Banks (Cooperativas)

Government Development Bank (GDB) or (Banco Gubernamental de Fomento BGF)
The bank, along with its subsidiaries and affiliates, serves as the principal entity through which Puerto Rico channels its issuance of bonds. It was established by the last US-appointed non-Puerto Rican governor governor Rexford Guy Tugwell in 1942. “The Bank was the brainchild of Governor Rexford Guy Tugwell, who signed Law 253 of May 13, 1942, creating the institution in charge of economic development for the Government of Puerto Rico. A subsequent law in 1945 expanded its responsibilities to include serving as the fiscal agent for, and financial advisor of, the government of Puerto Rico. The highly centralized government structure set up by Tugwell, one of President Franklin Delano Roosevelt's Brain Trusters required such a fiscal agent, contrary to the model followed by most states, in which each agency and political subdivision is responsible for issuing its own bonds.”

Historia del BGF (official history of the BGF, en español)
Puerto Rico board approves liquidation of Government Development Bank
By Nick Brown, Reuters, July 14, 2017
Puerto Rico’s Government Development Bank strikes deal on debt burden By Eric Platt, Financial Times, May 15, 2017 Puerto Rico’s once-influential Government Development Bank has won agreement from some of its creditors to cut its debt burden and restructure its obligations.
Puerto Rico Government Development Bank Opts to Liquidate By Andrew Scurria, WSJ, April 28, 2017
The territory’s industrial development bank owes about $4.5 billion to creditors
Banco Gubernamental de Fomento (BGF) Espacios Abiertos, El Diccionario de la Deuda
Banco Gubernamental De Fomento Estrangula Municipios Por Gladys Guerra Arcelay, 4 de abril de 2018
Carmen Yulín Cruz canta victoria por acuerdo entre el BGF y acreedores
Según la alcaldesa, el Municipio de San Juan lideró la lucha en los tribunales
Por Javier Colón Dávila, 28 de marzo de 2018
Ya es ley la reestructuración del Banco Gubernamental de Fomento
El gobernador Ricardo Rosselló estampó su firma hoy en el proyecto de Ley.
Por Radio Isla, 24 de agosto de 2017
“Ley para la Reestructuración de la Deuda del Banco Gubernamental de Fomento para Puerto Rico” Ley Núm. 109 de 24 de agosto de 2017
El BGF logra avanzar en su reestructuración Por Joanisabel González, El Nuevo Día, 19 de junio, 2017
Sellada la muerte del BGF Por Joanisabel González, El Nuevo Día, April 29, 2017

COFINA BONDS: Capital Appreciation Bonds backed by sales and use tax (an inherently regressive tax), financed by Goldman Sachs.
Back story on Puerto Rico's debt crisis By David R. Martin September 04, 2015
"COFINA was created in 2006 following legal challenges to appropriation bonds used in other states to evade debt limits. In addition to evading the balanced budget requirement and debt limit, COFINA took over some $7 billion in appropriation debt. In the six-year period from 2006 to 2013, the government used COFINA to borrow a total of $15.2 billion, an amount exceeding the constitutional debt owed to general obligation bondholders. Island taxpayers are footing COFINA's bill with a sales tax raised in July from 7% to 11.5 percent, reportedly the highest in the U.S.
COFINA has other problems as well. Its governing law purports to abrogate general obligation bondholders' constitutional right of first priority to "available revenues" with respect to the island's sales taxes. COFINA then funnels these sales taxes to its bondholders. Moreover, the Puerto Rico government "assures" COFINA bondholders that no future legislature may undermine their right to repayment by amending the law. It is difficult to see how this does not constitute a guarantee of indirect debt that must be counted for purposes of the debt limit. All told, COFINA is legally suspect at best."
The Bondholders who bet on Puerto Rico’s Sales and Use Tax collection
By Joel Cintrón Arbasetti and Carla Minet, CPIPR, November 2, 2017
The Truly Horrible And Ghastly Mess Of Puerto Rico's Bond Issuance
By Tim Worstall, Forbes, May 6, 2017
“Each flip back through the pages of the story has me gasping - what, they did that? Issued near 50 year capital appreciation bonds?”
“We explore the effect of a type of bond, called a Capital Appreciation Bond (CAB) developed by Goldman Sachs, and its use in Puerto Rico on an already serious debt crisis. CABs are a type of municipal bond but the similarity ends there. The CAB postpones payment of any interest until the redemption of the bond, compounding and accruing those payments with the principal at the time of redemption of the bond. In the case of Puerto Rico, the maturity is 55 years. Municipal bonds normally pay interest on a semiannual basis at the same rate over their life and are issued with maturities from 10 to 30 years with the entire bond issue redeemed at face value on the maturity date.”
Opinion: COFINA deal is huge blow to dwindling appeal of Puerto Rico’s bonds
By Iván Rivera Published May 02, 2016

BANCO SANTANDER & SANTANDER SECURITIES
La trama del Santander para quebrar Puerto Rico
"El Santander suscribió acuerdos de elevado riesgo financiero con las pensiones de Puerto Rico, dejando una deuda total de 43.200 millones de dólares mientras que los activos del Sistema de Pensiones boricua apenas valen 1.800 millones, lo que significa un déficit del 96%"
Por J. Carlos Deus Iglesias, Diario 16, 18 de abril, 2018
Santander Becomes Target of Puerto Rican Anger Over Bond Losses By Rebecca Spalding and Michelle Kaske, Bloomberg, May 17, 2017
“McCann points to the absence in Puerto Rico of what investors in the 50 states take for granted: a conflict-of-interest prohibition for banks.”
“(M)any locals bought government debt through closed-end funds -- products similar to mutual funds which were purchased by locals who wanted to own government debt. Santander and UBS Group AG’s Puerto Rico unit, among the island’s biggest brokerages, sold closed-end funds. Unlike most mutual funds, however, the funds used as much as 50 percent borrowed money, meaning a downturn would cause amplified losses.”
PARTNER PAPER NO. 5: THE LOOTING OF PUERTO RICO’S INFRASTRUCTURE FUND: CARLOS M. GARCIA’S DESTRUCTIVE FISCAL POLICIES HURT PUERTO RICO ONCE, COULD IT HAPPEN AGAIN? By Hedge Clippers, May 16, 2017
“Carlos M. Garcia is profoundly conflicted as a former Santander banking executive in his current role on the PROMESA control board, or the “Junta.” In the years preceding Governor Luis Fortuño’s election in 2008, Garcia built Santander Securities—the bank’s municipal bond business—while Jose Ramón González, another Junta member, was at the head of the bank.[ii] With Fortuño’s election, Garcia was given vast powers over fiscal policy as President of the Government Development Bank (“GDB”), Chair of the local control board (a special board comprised of five cabinet-level officials with ministerial responsibility for Puerto Rico’s fiscal matters and restructuring powers conferred by the Puerto Rico Legislature), and head of Puerto Rico’s new Public Private Partnerships Authority (PPPA).…. On November 4, 2008, Luis Fortuño was elected governor of Puerto Rico as the New Progressive Party (NPP) was swept into power. Nine days later Fortuño tapped Carlos M. Garcia, the President and COO of Banco Santander de Puerto Rico, to run the island’s GDB.”
LAS POLÍTICAS FISCALES DESTRUCTIVAS DE CARLOS M. GARCÍA YA HAN DAÑADO A PUERTO RICO. ¿PODRÍA VOLVER A OCURRIR? AFLCIO with Hedge Clippers, May 16, 2017 (versión en español)
Estudiantes desencapuchan a Carlos García y Santander por su rol en el saqueo de Puerto Rico @ Banco Santander Plaza las Américas. (Students unmask Carlos García for his role in the sacking of Puerto Rico @ Santander Bank, Plaza Las Americas Mall) (May 16, 2017)
Santander Bank owes reparations to the Puerto Rican people
By Berta Joubert-Ceci, March 28, 2017
UPDATE: Pirates of the Caribbean: How Santander’s Revolving Door with Puerto Rico’s Development Bank Exacerbated a Fiscal Catastrophe for the Puerto Rican People & Carlos García’s Business Makes Small Loans to Desperate Puerto Ricans at Extremely High Interest Rates By Hedge Clippers, Dec 13, 2016
Two Of Puerto Rico’s New Overlords Are Accused Of Helping Create Its Debt Crisis By Daniel Marans, Huffington Post, 12/17/2016
“A new report, titled “Pirates of the Caribbean,” argues that control board members José Ramon Gonzalez and Carlos Garcia should be held accountable for their part in plunging the island into debt.”
“This report provides more evidence that the people who created the crisis also profited from the crisis.”
“Before they were appointed to the control board, Gonzalez and Garcia moved between top positions in Puerto Rico’s Government Development Bank (GDB), which issues the island’s government bonds, and Banco Santander, the Spanish-owned mega-bank that was buying and structuring the vast majority of those same obligations.”
Report: Former Santander Bank Execs Now on Puerto Rico Control Board Profited From Island Debt By Latino Rebels, December 17, 2016
Finra Fines Santander Unit Over Puerto Rico Bond Sales — Regulator said Santander didn’t accurately reflect dangers associated with Puerto Rican securities By Anna Prior And Ezequiel Minaya, Oct. 13, 2015
Santander to Pay $6.4 Million in Puerto Rico Bond Settlement By Mary Williams Walsh, Oct. 13, 2015
Conflict of Interest Shadows Members of the FOB By Edwin Meléndez, Víctor R. Martínez, April 15, 2017
“In an article by Centro de Periodismo Investigativo, concerns are raised about the conflict of interest that board members Carlos M. García and José R. González could have in the debt restructuring. Specifically, as noted in the appendix to this brief, both worked for Santander Bank, which played an important role in the issuing of the debt. During the Fortuño administration, Santander Securities played the role of an underwriter in the issuing of bonds, mostly the ones from COFINA. This means that the government of Puerto Rico paid millions of dollars in fees and commissions to Santander Securities, who helped to issue millions of dollars in bonds. According to reports, there could be a link between the role that García and González played in Santander Bank and in the GDB.”
Santander Deceptive Sale of Puerto Rican Securities Class Action
FINRA Fines Santander Securities $2 Million for Deficiencies in Its Structured Product Business and Unsuitable Reverse Convertible Sales, April 12, 2011

UBS
Lawmaker calls for House hearing on UBS bonds sold in Puerto Rico, following CNBC investigation By Dawn Giel, Leslie Picker, Scott Zamost, CNBC, 21 Dec 2017
"Due to a loophole in a 77-year-old piece of U.S. legislation, none of the funds was regulated by the Securities and Exchange Commission. The Investment Company Act of 1940 allowed funds offered outside of the mainland — in this case, the U.S. territory of Puerto Rico — to avoid restrictions, such as leverage standards and certain affiliated party transactions."
Broken bonds: The role Wall Street played in wiping out Puerto Ricans' savings
By Dawn Giel, Leslie Picker, Scott Zamost, CNBC, 18 Dec 2017
How UBS PR exploited territories’ exemption from the Investment Company Act of 1940
By Dawn Giel, CNBC, 18 Dec 2017
The 77-year-old loophole that created Puerto Rico's unique market and led to its ultimate meltdown
By Dawn Giel, CNBC, 18 Dec 2017
Puerto Rico's Broken Bonds | CNBC (video)
By Leslie Picker, CNBC, Dec 18, 2017
Puerto Rico Debt Crisis: Lawsuit Claims UBS Scammed Island Residents
By Walter Pavlo, Nov 2, 2017

DORAL BANK
Global Lenders Accused in Suit of Helping Sink Doral Bank By Erik Larson and Chris Dolmetsch, Bloomberg, February 21, 2018
"The U.S. agency responsible for insuring bank deposits sued more than a dozen of the world’s biggest lenders, accusing them of contributing to the collapse of Puerto Rico’s Doral Bank by manipulating the benchmark Libor interest rate.
The collapse of San Juan-based Doral was the biggest U.S. bank failure of 2015. The Federal Deposit Insurance Corp., its receiver in bankruptcy court, is seeking unspecified economic and punitive damages from 16 lenders, including Bank of America Corp., Barclays Plc and Credit Suisse Group AG."
US FDIC sues 16 banks alleging Libor manipulation in Doral collapse Reuters, February 20, 2018
Pagarán $14 millones por el colapso de Doral — Exoficiales transan para evitar cargos en corte, mientras la FDIC demanda a bancos de inversiones por contribuir al fracaso de la institución
Por Joanisabel González, 5 de marzo de 2018, El Nuevo Día
Doral Financial Corporation (Doral Financial) was a Puerto Rico based diversified financial services company founded in 1972.
Failed Bank Information Information for Doral Bank, San Juan, PR
FDIC sues 16 banks for actions harming Puerto Rico-based Doral bank
By Caribbean Business on February 21, 2018
"The Federal Deposit Insurance Corp. (FDIC) has sued 16 banks connected to a rigging scandal involving the interest rate at which banks make short-term loans to one another, or LIBOR, as part of its effort to recover funds related to Doral Bank, a Puerto Rico-based institution that collapsed in 2015, several stateside media outlets reported Wednesday."
The Strange Story of a Murdered Banker in Puerto Rico
Maurice Spagnoletti was hired to clean up Doral Bank. Did he uncover something that got him killed?
By Zeke Faux, July 6, 2016
Se aplaza el pleito Doral vs Hacienda por falta de pruebas-VIDEO
Telemundo PR, 22 de julio de 2015
FDIC closes Doral Bank; Banco Popular to pick up $3.25B of its assets By Nina Lincoff – Reporter, South Florida Business Journal Feb 27, 2015
Manifestación frente a Hacienda por caso de Doral
Primerahora.com, 11/10/2014
(Protests in from of Hacienda (PR equivalent to IRS or State Board of Equalization) against Doral Bank restructuring) Califican como “asunto criminal” la negociación entre Doral Bank y los funcionarios de la pasada administración de Luis Fortuño. (Protesters call the negotiations between Doral and members of ex-governor Luis Fortuño’s administration a criminal matter.)
PPD vincula al PNP con campaña de Doral Bank Noticentro TV, 7 de noviembre de 2014
Links between PNP (pro-statehood) party and Koch Brothers’ American Future Fund campaign to discredit then-governor Alejandro García Padilla regarding Doral Bank
El Gobierno puertorriqueño carga contra jueza tras sentencia a favor de Doral
San Diego Tribune, October 14. 2014 (PR government reacts negatively to judge’s ruling validating PR Hacienda payments to Doral Bank)
Puerto Rican Governor Attacks 'Far-Right' US Campaign TeleSur, 16 September 2014
Cuestionan interés de organización conservadora en pleito legal de Doral
By: NotiCel Posted: Sep 15, 2014
American Future Fund Goes to the Islands
by Viveca Novak on September 12, 2014
Las razones detrás del millonario reintegro de Doral - En 2012, el Departamento de Hacienda negoció el polémico acuerdo bancario ante la preocupación de que otra institución financiera fuera a cerrar en Puerto Rico, 17 de junio de 2014, El Nuevo Día
(restructuring of Doral Bank pushed after 3 banks failed in Puerto Rico: Western Bank, R-G Premier Bank, Eurobank)