The 72 Billion Dollar Payday Loan Racket in Puerto Rico – With Taxpayer Backing

With a debt bill totaling around $72 billion, Puerto Rico is a U.S. territory that is clearly in financial trouble. Did Wall Street play a role in creating the island’s debt crisis? It certainly seems so. The ReFund America Project reports that the financial sector is responsible for setting up a $72 billion payday loan racket in Puerto Rico, one with taxpayer backing.

Wall Street Payday Loans in Puerto Rico

Saqib Bhatti, the director of the ReFund America Project, decided to look into Puerto Rico’s debt crisis. When he saw how the interest was accumulating on the debt, he compared it to a payday loan. Puerto Rico did not borrow $72 billion. Instead, the island owes interest on bonds underwritten by Wall Street. Alternet reports that firms like Citigroup, Morgan Stanley, Merrill Lynch and others are involved in trapping Puerto Rico in an unmanageable debt cycle.

Wall Street’s payday loan racket against Puerto Rico is set to deliver massive profits to bondholders. Because these lending practices are generally considered reprehensible, the ReFund America Project believes that the island shouldn’t have to pay back much of what it will eventually owe.

How Did Puerto Rico Become so Indebted to Wall Street?

The product behind Puerto Rico’s costly form of debt is called a capital appreciation bond. The commonwealth borrowed $4.3 billion in principal, and according to the loan’s terms, it must repay the debt at a 785 percent interest rate. Some of the bonds feature interest rates that are more than 1,000 percent. In addition, because of how the deal is set up, Puerto Rico hasn’t even accrued most of the debt yet. This is future interest that will accumulate over the next few decades.

Adding insult to injury is the fact that the island’s bond debt is currently being traded on the secondary market for around 5 cents on the dollar. This means that some of the territory’s bondholders purchased the debt for just 5 percent of its face value, but they still expect to receive the full repayment amount. Many of these bondholders are vulture hedge funds, and they are attempting to make profits of up to 2,000 percent on this debt.

In These Times reports that the financial institutions that wrote up the terms of these bonds never expected Puerto Rico to be able to repay the funds. The original bondholders just wrote the bonds off as bad debt.

Can a U.S. Territory File for Bankruptcy?

Puerto Rico’s debt per capita is much higher than it is in any of the U.S. States. In fact, with the bond deal in place, the territory’s debt per capita is as much as 10 times higher than it is anywhere else in the U.S. Banks targeted the island for these bond deals because they were able to cash in on the front end. In fact, just for making a few of these payday type loans to Puerto Rico, financial institutions banked $221 million in fees. Not only did these banks make this astounding profit on the front end, but they also unloaded their financial risk.

Because of the debt and other economic disasters, Puerto Rico is facing a humanitarian crisis. About 40 percent of the territory’s children live in poverty, and according to The American Prospect, more than 150 schools have been closed. The territory is withholding payments from special needs providers and cutting off electricity to its hospitals. Puerto Rico is doing all of this to enrich the pockets of those who are already rich.

Congress to the Rescue?

Congress just passed the Puerto Rico Oversight, Management and Economic Stability Act, or PROMESA, which allows the government to appoint a control board to restructure the territory’s debt and manage its finances. This board will have extensive power over the island’s economy. Supporters of the bill say that it will help Puerto Rico out of this crisis while critics argue that the PROMESA bill returns the island to colonial era regulation by snatching democratic control from Puerto Ricans.

Putting the Kibosh on Wall Street Greed

It’s past time for the government to get involved and relieve Puerto Rico of its $72 billion payday loan. The island should not be forcing its citizens to live in poverty just so investors can earn triple digit interest rates and bring home downright gluttonous profits. Time will tell whether the PROMESA bill is the right course of action. To read more about Wall Street and its unscrupulous business practices, visit the Personal Money Store.