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Puerto Rico files for biggest ever U.S. local government bankruptcy

reuters.com

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Re: Puerto Rico files for biggest ever U.S. local government bankruptcy

#191

Post by grandalf »

dragonwriter wrote: post #184
grandalf wrote: post #181

When issues of local government financial problems come up, I think it's important to remember that local governments are typically not able to undertake deficit spending the way the Federal government is. If the US Federal government were prevented from running a budget deficit, we'd likely see a lot more solvency issues and financial failures of many sub-organizations within government due to bad budgeting. It woul…

> If the US Federal government were prevented from running a budget deficit, we'd likely see a lot more solvency issues and financial failures of many sub-organizations within government. No, there's just be a lot more pressure to monetize government finances. We have some safeguards against that (e.g., the Fed being separated from Congress and outside of it's direct control), but the biggest constraint on that is th…

I completely agree that our leaders would exploit loopholes. My point was meant mainly to describe the scenario if the Federal government were effectively constrained.

Would the public have supported a tax increase in 2004 when the cost of the Iraq war began to drastically exceed estimates? Likely not, we'd have brought everyone back home and saved Trillions and prevented a significant amount of loss of life.

Re: Puerto Rico files for biggest ever U.S. local government bankruptcy

#192

Post by Steko »

chamakits wrote: post #125
SEJeff wrote: post #65

Earlier quoted context omitted.

What are your thoughts on Puerto Rico becoming the 51st State of the USA? I ask this as a native (mainland) born American who always thought this would be an interesting approach to solve the problem of finances in PR. Is it even well supported or is it a crazy idea?

I was born and raised in PR, but have since moved. 100% of our politics surround this very question. The 3 mayor political parties are one pro statehood, one pro staying with the current status, one pro independence. The first two have always dominated, and only these past elections we had a candidate without a party make a dent in elections. I'm saying all this to say, that the statehood (or lack of) is a very compl…

> So far, past votes, the results are no.

Technically the 2012 vote was 'yes' but all of the votes so far have been framed poorly. And that includes the upcoming one, which is likely going to make it a waste of time; Puerto Rico needs a simple and clear referedum on 'Statehood Yes or No'.

Re: Puerto Rico files for biggest ever U.S. local government bankruptcy

#193

Post by ericd »

whatnotests wrote: post #99
ericd wrote: post #85

Earlier quoted context omitted.

A little bit, yeah. The leaders of those businesses made promises to people, and they failed to uphold them.

Define "promise" in this context though. VCs invest in opportunity, not promises.

The person I replied to specifically mentioned owing money, so I took it to mean that he wasn't talking about the investors. I do think that a business owner who is unable to pay people he owes should feel bad about it, and should make every effort to pay them back. Just because he's legally off the hook doesn't take him off the hook ethically, in my opinion.

But regardless, you should try to make your investors whole, if at all possible. I view that as your ethical responsibility as someone who receives investment.

Re: Puerto Rico files for biggest ever U.S. local government bankruptcy

#194

Post by njovin »

enraged_camel wrote: post #179
ryandrake wrote: post #108

Earlier quoted context omitted.

> But if we make it our social norm that bankruptcy is nothing to be ashamed of and to be taken lightly I don't know about "taken lightly" but bankruptcy and defaulting on a debt should not be something to be "ashamed" of, for an individual, a company, or a government. Default is an option specifically written into every debt contract out there. There should be no more shame in choosing to default as there would be f…

>>I don't know about "taken lightly" but bankruptcy and defaulting on a debt should not be something to be "ashamed" of, for an individual, a company, or a government. It totally depends. There is nothing shameful about declaring bankruptcy because you got into an accident and your insurance company refused to pay your six-figure hospital bill. But if you take out a big loan to build a new hotel and blow it all on ho…

That sounds more like fraud.

What if I take out a loan, am perfectly capable of paying it off, but the asset backing the loan has lost sufficient value so as not to be worth the continued investment? Is there any shame in defaulting and letting the lender suffer some of the consequences?

In my personal opinion, no. Especially with secured or collateral-backed loans, the lender knew there was risk going in and there's no reason they shouldn't also suffer some losses in the case the plan doesn't work out.

This is the situation many Americans found themselves in after the last housing bubble and it still makes me sad that some people still feel a sense of obligation to corporations that would screw them in a heartbeat if it would make them a legal dollar.

Re: Puerto Rico files for biggest ever U.S. local government bankruptcy

#195

Post by ericd »

ceejayoz wrote: post #158
ericd wrote: post #85

Earlier quoted context omitted.

A little bit, yeah. The leaders of those businesses made promises to people, and they failed to uphold them.

If I promise to meet you for coffee, it's understood that there's a silent "but not if my wife winds up in the ER". If I promise to pay you back a loan, it's understood that the interest rate you'll charge me is related to the risk of my defaulting and that the option exists.

That interest rate doesn't in any way relieve you of your moral responsibility to pay back that loan, in my opinion, just because you run into financial trouble. People defaulting just because it's legal causes interest rates to rise on others, and imposes costs on the rest of society. Of course, it's important for social reasons for there to be legal ways to get out of inescapable debt, but you're not off the hook morally, in my opinion, if you bit off more than you could chew. It's both your fault and that of the lender if you borrow more than you can handle.

This isn't usually some freak unforeseeable accident. The 2007 crisis was caused as much by people overlevering themselves to take advantage of a situation as it was by predatory lending practices and greed/fraud at the I Bank level. But people love to put all the blame on the banks, and none on themselves for not being prudent.

Re: Puerto Rico files for biggest ever U.S. local government bankruptcy

#196

Post by thaumasiotes »

anigbrowl wrote: post #186
thaumasiotes wrote: post #167

Earlier quoted context omitted.

OK, but a shell company in Delaware sounds pretty useless as a means of sourcing your income from Puerto Rico.

How about I have three shell companies, and you guess which one has the real source of my income underneath it? $5 to to win $10.

At least offer $15, geez. $5 to win $10 is a money loser even when you have income under one of the shell companies. :p

Re: Puerto Rico files for biggest ever U.S. local government bankruptcy

#197

Post by vkreso »

Pxtl wrote: post #93
savanaly wrote: post #23

Earlier quoted context omitted.

That's true in any individual case. But if we make it our social norm that bankruptcy is nothing to be ashamed of and to be taken lightly, won't it change the equilibrium for future generations of lenders and borrowers such that an inefficiently low amount of lending goes on? If everyone has the expectation that the lenders and borrowers will try their best to live up to the contract they made in good faith, wouldn't…

Bankruptcy is perfectly normal for business institutions. Limited liability is the foundation of the entire stock market. It's a basic economic tool used for navigating choppy waters. We only attach a moral value to it when individuals and governments use the tool.

Apples and oranges. The effect of a government bankruptcy on the economy and the society (present and future) is not really comparable to the effect of a bankruptcy amongst individual economic agents. Those are completely different scales.

Also, morality is always attached to anything which involves society and its institutions. For example, good faith in contracts (bona fides) which has evolved all the way from the roman republic is an example of codified morality which proved to be quite useful in societal transactions (i.e. it solidifies expectations of behavior and hastens transactions). Explicit moral value perhaps may not be visible ("basic economic tool") but it is certainly built into foundations of every and any contract.

Re: Puerto Rico files for biggest ever U.S. local government bankruptcy

#198

Post by dustinmr »

zeroer wrote: post #183
kchoudhu wrote: post #76

Earlier quoted context omitted.

I know a very wealthy hedge fund manager who just moved to PR in order to minimize (read: eliminate) his Federal tax burden. Of course, as the current situation demonstrates, not being under the Federal taxation umbrella has certain disadvantages.

Wait. I though Puerto Ricans were only exempt from federal income tax on Pueto Rican-sourced income.

Here's a local law where if you meet all the criteria (income made off the island, spend > 180 days per year here, various other criteria), you're exempt from income taxes here. And since you're a resident, all your income is here. Effectively exempting you from federal income taxes.

The idea was to attract high net worth individuals to spend money here.

Every analysis I've seen says it has worked quite well.

Re: Puerto Rico files for biggest ever U.S. local government bankruptcy

#199

Post by pedasmith »

lf275 wrote: post #123
CJefferson wrote: post #32

Earlier quoted context omitted.

Limited companies go bankrupt all the time. Do we consider it an "ethical failure" when some VC funded company folds, leaving a whole bunch of people they owe money to with nothing?

It's not an ethical failure because most of the participants understand that it is high risk/reward. That is why most start-up firms offer equity to their employees, and it is almost impossible for a new startup to borrow debt from banks (unless its personally guaranteed, or extremely expensive) before it has gained traction with its business model. On the other hand, governments are perceived to be reliable borrower…

Puerto Rico bonds were paying 8.7% when US Treasuries paid about 2%. I'd say that any competent investor knows perfectly well that Puerto Rico might well not honor the bonds.

Re: Puerto Rico files for biggest ever U.S. local government bankruptcy

#200

Post by [deleted] »

zeroer wrote: post #183
kchoudhu wrote: post #76

Earlier quoted context omitted.

I know a very wealthy hedge fund manager who just moved to PR in order to minimize (read: eliminate) his Federal tax burden. Of course, as the current situation demonstrates, not being under the Federal taxation umbrella has certain disadvantages.

Wait. I though Puerto Ricans were only exempt from federal income tax on Pueto Rican-sourced income.

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