Wall Street To The Rescue??

Bruce Krasting's picture


In March of 2011 I had this to say about Puerto Rico and its muni bonds:


The weather is great. The beaches are beautiful. The food is good and the drinks are better. The bonds, on the other hand, don’t get on my “buy” list.


We damn near had a significant problem with PR – there was a real possibility the Island would have been forced to default a few months ago. That’s not the case any longer. Wall Street (and some deep pocket funds) are going to do a private bailout next week.




$3 'Large' will be the largest muni deal ever. The new bonds will have a coupon that pushes 10% - and they will be priced in the hole to give the big-buck buyers a quick boost (retail investors will not see a dime of these bonds). These are tax free, so the fat cats will have a real yield pushing 16%! Thank you Uncle Sam!

The underwriters stand to make a quick $40+ million in fees. Come Tuesday night, the Champagne will be flowing….(I think the deal will be a blowout success – the whole $3B was all spoken for as of Friday)

The best part of the deal (for the Street) is that the new bonds will be Senior to most of PR’s other $70B of bonds. That’s because PR got rolled over a barrel and was forced to allow these bonds to be subject to NYS law – meaning that the new bond holders can grab collateral, and force the other creditors to the back of the bus when the SHTF.

In my estimation, the $3B deal will buy PR at least 24 months before the next credit crunch hits. I have little expectation that PR is going to turn things around in that period of time, so the crunch will happen. But that's so far away that PR, and its financial woes, will fall off the headlines. As that happens, the new bonds are going to rip up in value – a 10% pop in these bonds is a distinct possibility. That would mean that come Tuesday, those who get to play in this sand box stand to rake in an “extra” $300m.

By Christmas, the new PR bonds will have been sold at big premiums over par to yield-hungry retail investors (more Champagne). And the poor retail guys will be wondering what they bought sometime before 2017.

So Hurray for Wall Street and the moneymen. The fact that $3b can be raised for a troubled credit (that does not have a rosy future) is a measure of power. WS can do what the IMF can’t – provided it gets paid well for the effort.

My take on this? Puerto Rico bonds might be a Buy – but they most certainly are not a Hold. Three years from now I'll be reminding folks about the warning today. Wall Street can clean up junk well enough, but it can't make it go away.




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MeelionDollerBogus's picture

well! here's a fast one I almost didn't catch at all.

Just finished watching the comedy movie "the other guys". And you know what the last 10 minutes of credits are dedicated to?

Outlining in great detail the losses from banksters ponzis, TARP, everything.

In the credits. Literally the credits are wrapped around a fancy video animation of the whole thing, chart after chart, figure after figure.

hoocouldanode. I mean really, a comedy movie, and there it is at the end.

That's sneaky. Gotta get the sheeple woken up to it somehow and to manage to put it all up on a big screen where people are expecting just to see a Wayans brother and Wil Ferrel shooting at the wrong shit & being goofy... very sly.

I wonder if one day someone will slip in a detailed report on all the money Jamie Dimon moves that he shouldn't, and receives that he shouldn't, at the end of X Factor or Dancing with the Stars. Very sly.

pashley1411's picture

Castrating the seniority of $70,000,000,000 in bonds for a $40m payout.    Putting in jeopardy trillions of muncipal debt.  Can't make this stuff up.

What was that guy's name, Len-somthin, about capitalistis selling you the rope to hang them.

HoofHearted's picture

How can I get the fat cats to float some Hoofy bonds? I don't even need $3billion worth. If they will just write me $100 million worth, I'll put up the proper collateral. They can have my house, my truck, even my chickens for $100 million. And I'm off to find a nice tropical island to get away to. Good luck finding me...

Seal's picture

it's only a B-2 bomber worth of moola! not so much

kellycriterion's picture

As per usual on ZeroHero, Act I of this drama is missing. The politicians, the bureaucrats, looting the public treasury, undermining the tax base, buying votes, kickbacks, anything ring a bell?

And why do taxpayers and retail bag holders keep falling for it over and over? Well do Zeroheroes know any better? Some of them claim to. But what should be priority one barely is mentioned if at all.

whatsinaname's picture

Long time no hear BK. Nice to see a post. Wonder if you still tracking Boeing news. Latest is the Dreamliner wings trouble thanks to Mitsubishi and a few global airlines griping about constant quality issues. Boeing cant seem to catch a break with its Dreamliner.

Mountainview's picture

Tom show solidarity the FED should take some PR debt on their balance sheet.

Mad Muppet's picture

Privatize the profits, socialize the losses. One Hell of a business model.

Moe Howard's picture

PRs have been fleeing PR since it was possible to flee PR. They fly PR flags from the rear view mirror, but don't dare go back because the other PRs will steal the shit they managed to accumulate while on the mainland.


This is nothing new Bruce.

Lumberjack's picture

Thought I would pass this along to you Bruce after doing a brief research of areas near the Ukraine, namely Romania, Bulgaria and Hungary. There have been serious energy issues in those regions which I have been following, but, this item regarding Hungary speaks volumes.

Bankers, politicians were out to topple Orbán, former Matolcsy aide claims



An international coalition of bankers and politicians – including EU Commissioner Olli Rehn, American-based foundations, the Clinton family and George Soros – teamed up to topple Prime Minister Viktor Orbán in 2011, according to a new book by Helga Wiedermann, former chief of staff to central bank governor György Matolcsy.

In her memoir, entitled Sakk és Póker (“Chess and Poker”). Wiedermann claims that a scenario had been drawn up to wreck the financial system, but Orbán successfully warded it off.



I hope that this memoir is/will be translated into English and other languages.


Lumberjack's picture

More info here on the Hungary situation until the book comes out (must read):



More Background: (Even better)


Lumberjack's picture

Meanwhile in Belarus...

Larger Belarus-France trade turnover suggested



MINSK, 7 March (BelTA) – It would be a good idea to at least double Belarus-France trade. Ambassador Extraordinary and Plenipotentiary of France to Belarus Dominique Gazuy made the statement on 7 March, BelTA has learned.

The Ambassador said: “Last year the trade turnover was close to $600 million. Ideally we would like to at least double the figure. Unfortunately, it is not always up to functionaries like me to decide, but up to companies themselves”. She added that it is impossible to predict the bilateral trade level at the end of the year. “All of us are in a difficult economic crisis. Efforts to recover from the current situation are a priority for the European Union just like they are for Belarus. In these conditions Belarusian and French partners are undoubtedly interested in cooperating, visiting each other, making investments,” stressed Dominique Gazuy.

Lumberjack's picture

Sorry to spam you Bruce but this thing is starting to look bad.


Now for Moldova...

Russian Deputy Premier promises to guarantee rights of Russians from Transnistria



Russian President’s envoy for Transnistria Dmitry Rogozin said that his country is committed to protect its citizens residing in Moldova’s separatist region.

In a posting on Twitter, Mr. Rogozin wrote that the limitation of communication in Transnistria will be regarded as a “direct threat to security” of the Russian citizens residing there.

“In conditions of a large-scale political and economic crisis in Ukraine any actions meant to hinder communications of Transnistria with the rest of the world will be a direct threat to security and to constitutional freedom of 200,000 citizens of Russia permanently living in Transnistria,” Dmitry Rogozin said on Twitter, quoted by Interfax.

He added: “Russia will never forget that it is the guarantor of constitutional laws of its citizens.”

The official also pointed out that Russia will keep its troops on the territory of Moldova.

The statements emerge amid the political crisis in Ukraine, where Russia has deployed thousands of troops without consent of government in Kiev.




lolmoa500 made this very astute comment re: above in another thread:

'If they put troops in Crimea and troops in Transnistria... Odessa will be sandwiched... and without Odessa, Ukraine has NO PORTS..."

seataka's picture

How Wall Street Got Its Name

" The red people from Manhattan Island crossed to the mainland, where a treaty was made with the Dutch, and the place was therefore called the Pipe of Peace in their language, Hoboken. But soon after that, the Dutch governor, Kieft, sent his men out there one night and massacred the entire population. Few of them escaped, but they spread the story of what had been done, and this did much to antagonize all the remaining tribes against all the white settlers. Shortly after, Nieuw Amsterdam erected a double palisade for defense against its now enraged red neighbors, and this remained for some time the northern limit of the Dutch city. The space between the former walls is now called Wall Street, and its spirit is still that of a bulwark against the people. " Chapter 7, The Tribes and the States by W. J. Sidis (on the net)

RaceToTheBottom's picture

The faster WS is eliminated the better.  It is an obsolete, corrupt concept that adds no value to humanity

MontgomeryScott's picture

"We damn near had a significant problem with PR – there was a real possibility the Island would have been forced to default a few months ago."

Wow, an ISLAND might default. What happens then? Do we cut the tow rope and let it drift around in the ocean? If too many people move over to one side of it, will it tip over, and capsize? Is there a secret scuttling charge down on the bottom of the Island that is going to explode, causing the Island to sink? 'WE' should really consider these possibilities! Frankly, I think it will capsize!


Guam, Puerto Rico, whatever...

Municipal Bonds, huh? 'WHO RUN BARTER-TOWN?' The ones who own the infrastructure, dummies!

Put the Streeters in some cowboy duds, and let'em go to town!


Pasty-faced girly-men, driven mad by the dreams of avarice... There is a special part of Hell reserved for those who trade in the souls of men (and all that other stuff). Metrosexuals who think that the bigger the numbers, the more 'betterer' they are, driving around town in their Corvettes and Priuses, getting their nails manicured, and raping the people by forced conscription to pay INTEREST on a LOAN that is backed by FIAT CURRENCIES...I suppose the PEOPLE who LIVE in Puerto Rico had a chance to VOTE on whether this was the best course of action...in their best interests, of course...colonialist bastards...

Kreditanstalt's picture

The costs are being shoved off on taxpayers AGAIN - and on future generations via inflation.  Nothing ever changes.

Just make sure you keep your wealth in PHYSICAL GOLD.

kaiserhoff's picture

These are tax free, so the fat cats will have a real yield pushing 16%!

Good grief, Bruce, taxable equivalent yield, not real.  Real yield is minus taxes and inflation.  So they might, if fact, see five percent IF PR can pay it's bills in the future.  Tee Hee.

Can't anyone do maff round heah?

MeelionDollerBogus's picture

If they could they wouldn't be using bitcoin.

Bruce Krasting's picture

Correct. This is a tax equivalent yield. My thinking on the economics of this deal:

- The vast majority of this paper will go to "Pro" hands who have access to the Repo market.

- The haircut on the Repo will be 20% (buy $100 for $20 in cash)

- The repo cost is near zero thanks to ZIRP.

- The leveraged yield on this is 40+%.

- The bonds will trade to a premium in the secondary market (my guess=10%).

- The cap gains + leveraged carry will result in a return on equity north of 50%.


This deal will be a huge win for the 'players'.





kaiserhoff's picture

Thanks Bruce.  I know bonds are your thang.

As long as the Boyz get their vig, who cares if it blows up later?

Won't this set the rate for refi on the rest of the seventy billion???

OpenThePodBayDoorHAL's picture

It's like the priests in Galileo's day, basing everything on a false core premise. Debt just brings demand from the future to today. But then tomorrow arrives (as it always seems to do) and guess what: no demand.

RaceToTheBottom's picture

Debt is the same as "cash for clunkers"

Steal sales from the future but make the future pay for present purchases.

kaiserhoff's picture

My favorite type of arb is betting that time will pass;)

SAT 800's picture

Mine too. It's the single most overlooked consideration. It's almost never priced in. The idea that the stock market, for instance, predicts the future; is hilarious. It never does any such thing, but empty phrase rings on and on.

Ban KKiller's picture

Can kicked. No sense in looking long term...

Whores and cocaine for everyone!

Remington IV's picture

we're in better shape tomorrow if we pretend it's noy going on today

AustrianJim's picture

More debt monkey business.

ebworthen's picture

Wall Street does absolutely nothing constructive - it is a destructive force only.

Re-packaging and bundling debt that has already been sold is like a tumor producing cancer cells.

We have seen this movie before (2008); and it only took $11 Trillion of more debt on the taxpayer's backs to keep the game going.

Wall Street isn't saving anyone; they are blowing another bubble.

Normal people lose, parasites win.

the grateful unemployed's picture

how much of this stuff ends up on the feds balance sheet, (backstopped by the taxpayers and UST) and how much of the profits remains in the speculators pockets?

Bangin7GramRocks's picture

You are impressed that Wall Street can take $3 billion in fake, gifted dollars and make a risk-free $300 million in less than a year? You sir, are part of the problem. These assholes are stealing from us and you respect the theft! Fuck the welfare queen with the Escalade, you douches know how to do welfare on a grand scale.

sangell's picture

I've been curious about that too. Not so much Puerto Rico's or any state bond issues because those, AFAIK, are not part of QE but those MBS. How are they doing? OTOH they are 'guaranteed' by the GSE's but the FED claims to turnover to the treasury these vast interest payments to the Treasury so, OTOH do those interest payments just circle back over to the GSE's of FHA to pay off the mortgage losses.

Kayman's picture

"the FED claims to turnover.... these vast interest payments to the Treasury "

These guys have invented perpetual motion. If the interest payments become large enough then they ought to cover the deficit eventually... no ?

kaiserhoff's picture

Much more likely, is that the cash flow goes sharply negative with an inverted yield curve.  They would lie and try to cover it up, but the inevitable printing would lead to serious inflation, mondo pronto.

max2205's picture

Nice to know the business cycle has been fixed

kaiserhoff's picture

I see your point, but many things other than a recovery could cause short rates to spike, like the need to defend the currency, such as it is, or a flight to quality, in this case gold and silver;)

Disintermediation could do it.  Who in the hell likes getting a negative return on your savings?

Muppet Pimp's picture

This is the most important part of your piece Bruce:

The best part of the deal (for the Street) is that the new bonds will be Senior to most of PR’s other $70B of bonds. That’s because PR got rolled over a barrel and was forced to allow these bonds to be subject to NYS law – meaning that the new bond holders can grab collateral, and force the other creditors to the back of the bus when the SHTF.

Puerto Rico is such a squandered piece of real estate.  We are getting massive immigration in Florida from PR presently because the people there need good governance and all they get is moar corruption. So they are shoiwing up in droves down here, for those unfamiliar, they can immigrate legally andy time they like. You need only look at tourism to PR versus other places in the Carribean. They have beautiful coastline, they have a lot of elevation including a small rainforest, the opportunies for puerto rico are endless.  The problem they have is it is run by Puerto Ricans.  If some qualified parties could ever get a hold of the place and turn it around which is a tall order, it would not only become a great vacation destination, the waves of immigration would turn around.  Many PR folks pine to return to their country, but it is not safe, their cars are subject to break in and theft, and it is a hostilve environment for them to raise their children.  Sot htye come to Florida, presently at the fastest clip in some time I am told.  The best thing that could happen to them is get forced reform.

The spyware/tech problems experience at ZH since Ukraine kicked off are so thick I don't have the patience to keep typing. It is like a couple second delay per keystrok sorry.

Bruce Flea's picture

If you are having issues typing something, that is usually indicative a very busy CPU on your machine, not on ZH.

I've had no trouble typing anything here since the Ukraine deal.


MeelionDollerBogus's picture

It isn't, I've tested it. The easy test: open a text editor locally & type your message. No lag. Type in the zh comment window. Lots of lag.

To post with ease & avoid dups save a message that's short & go back to edit it. No matter how many times save/submit goes through on an edit (not a new post) you don't get a duplicate.

Copy the notepad / text editor contents to the message and submit.

fonzannoon's picture

One of my buddies was at a dinner a few years ago with a co fund manager with a firm that rhymes with floppenhimer funds. the guy was on one of the fixed income teams and was explaining the benefits of muni bonds. my friend asked him about the risks involved. this guy told my friend that general obligation bonds were guaranteed because they were backed by the tax base of the community. my buddy sent me a text and asked if that was true. i said "ask him what happens if the tax base starts getting depleted because people leave". He asked him and wrote back "The guy LOL'd and said they would just raise the taxes". I said "ask him what happens if they raise taxes and more people decide to leave". He wrote back "He LOL'd even harder and said that would never happen".

These are the people who manage everyone's retirement money.


MeelionDollerBogus's picture

I was running a teleconference in regards to such bonds and it is the one time I heard honestly the truth: you could lose 50% of your value, cost in, by having a default and suing for it to come back. If you didn't sue you lose everything.

That is shockingly different than what most people will say on a teleconference, in a public PR statement, on a prospectus, etc.

But it is the truth. If you lose all your money to a down market you can't sue because you can't pay the lawyers. If you can't sue, you lose it all.

Once those words were uttered half the people on the call hung up. Tey'd heard enough. Naturally the person giving the conference had no idea who hung up because all lines are silent at that part except his.

I run the conference, however, so I can see it visually.

medium giraffe's picture

US citizens pay some of the lowest tax rates in the developed world, tax rates sure as hell aren't going to stay where they are.

SAT 800's picture

Remember that guy that used to post on here all the time that wanted everybody to buy Chinese Solar panel stocks? He was a pension fund employee. Calpers is the biggest pension fund in the world, or something; I read about twenty pages of their holdings once; it's incredible; they own pieces of every business on the planet. This is some kind of simple-minded idea of "diversification"; I guess they never heard of 1930.

kaiserhoff's picture

Leo, poor Leo.

You're right about diversification.  Zirp has killed it, and made most financials worthless.

All cats are gray in the dark.