Wednesday, March 18, 2015

[DONDEQUIERA] Puerto Rico's Debt Crisis: An allegory of stupidity and greed

Puerto Rico Bonds: Perfect for Everyone!
Have you ever purchased a home or a car?  In these transactions there are three key principals:  the buyer, the salesperson, and the seller.  During such transactions, there is an agreement between the seller and the salesperson, that for each sale, the salesperson receives a commission for said sale.  While agreements vary, usually the commission is based on a percentage of the final sale price.

I think that's fairly well understood by most people, but let's up the ante.  What if  we are talking about municipal bonds?  As a thought experiment, let's say the principal actors in this "hypothetical" situation are Oppenheimer Funds Investment Management (buyer), UBS Investment Banking (the salesperson), and the Autoridad de Energía Eléctrica (the seller).  In this "hypothetical" transaction, the Autoridad contracts UBS to help them sell $3.5 billion in municipal bonds.  Now for simplicity purposes, let's imagine that Oppenheimer Funds purchases all $3.5 billion of the bonds.

So the burning question for this "hypothetical" sale, is: "How much did UBS earn in this transaction?"  Now, I'm not an economist or even a financial advisor, but math tells us that even a small percentage of $3.5 billion is still a shit load of money.

The Moral of This Story

Trying to unravel in the ins and outs of our debt crisis is a mess, so, as my first Spanish teacher used to tell me: "Don't make a trouble for you're head."

After all of my investigation into this debt crisis, all I can conclude is that the commission on $70 billion is an even larger shit load of money.  Over the last twenty years, our sales of municipal debt has exploded.

There are probably very sophisticated economic theories involved in why this has happened, but if we use a hybrid of philosophical razors, I think the moral becomes clear.

First, let's use Hanlon's razor (which I mentioned recently).  Hanlon's Razor states: "Never attribute to malice that which is adequately explained by stupidity."  I don't think current and past Puerto Rico administrations intended to do anything evil in selling so many bonds.  I think they sold so many bonds because they could.

And finally, let's use Ockham's razor.  Okham's razor states that among competing hypotheses that predict equally well, the one with the fewest assumptions should be selected.  All things being equal, the motivation for selling so many municipal bonds is greed.

Let's face it, it's pretty common within our commonwealth to exchange lucrative government deals for favors.  Whether these deals are in exchange for prior financial support during a politician's campaign or simply the action of a politician showering contracts on friends and families, one thing is painfully clear:

The sales of Puerto Rico municipal bonds over the last twenty years have generated a lot of profits in the form of takedowns, management fees, and underwriting expenses.   Because in the end, isn't it always about the benjamins?

Publicado por Blogger en DONDEQUIERA el 3/18/2015 09:35:00 a. m.


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