Angry Bond Insurers Sue Puerto Rico Over "Clawback" Boondoggle
On December 1, Puerto Rico governor Alejandro Garcia Padilla was staring down a $354 million debt payment he couldn’t make.
If the commonwealth defaulted on the GO portion, a cascade of messy litigation would follow and the island’s reputation with creditors would suffer irreparable harm.
That afternoon, on the heels of a visit to Capitol Hill where the governor attempted to explain to Congress why Puerto Rico should be allowed to take advantage of bankruptcy laws, the island made the payment, avoiding default.
Padilla “found” the money by using what we called an “absurd” revenue clawback mechanism.
Essentially, Puerto Rico diverted money earmarked for non-GO creditors and used it to pay the island’s GO bonds. As you can imagine, the bond insurers for the debt involved in the clawback were not happy. Ambac, for instance, called the clawback “illegal” and claimed that Padilla actually began siphoning funds well before the December 1 payment, a charge the governor denied.
On January 1, Puerto Rico defaulted on some $36 million in Prifa bonds.
Now, Ambac, along with Assured Guaranty, are suing. “Insurance companies that guarantee Puerto Rico municipal debt filed a lawsuit challenging the commonwealth’s decision to divert revenue designated for some bonds to pay other creditors,” Bloomberg reports, adding that the monolines “said the clawback of revenue pledged to bond issues violates the U.S. Constitution by interfering with debt-holders’ contractual rights.” Here’s more:
The suit filed in U.S. District Court in Puerto Rico seeks to have the clawback declared unlawful and asks the court to issue an injunction against implementation, according to a statement.
“The commonwealth has committed itself to a ‘scorched earth’ strategy of blaming its fiscal and structural problems on lenders, Congress and others, in an effort to deflect responsibility and obtain retroactive application of bankruptcy laws,” Nader Tavakoli, chief executive officer of Ambac, said in the statement late Thursday.
The insurers are the first to sue over the diversion. They claim a clawback can only be implemented if the commonwealth’s funds are insufficient to cover general-obligation debt service. Puerto Rico estimates approximately $9 billion of available resources in the fiscal year ending June 30, 2016, which vastly exceeds debt service on the public debt of approximately $1.85 billion, according to Ambac.
So, while bondholders may have little in the way of recourse, the monolines are taking this lying down and that means a protracted battle among stakeholders for limited cash is about to ensue. "The lawsuit is an opening salvo in what could be a long and expensive court fight over Puerto Rico's efforts to restructure its debt," Reuters wrote on Friday. "They also said Puerto Rico is wrongfully using clawbacks to fund government services, and is diverting bondholders' collateral in violation of the Takings and Due Process clauses of the U.S. constitution."
In other words, the insurers don't think Padilla should have the option of choosing to provide public services over paying creditors. We predicted as much back in Novermber when we said the following:
Ultimately, the decision will be between paying bondholders and ensuring that the government can continue to provide public services, and just as Greece prioritized pensions over IMF payments last summer, Padilla isn’t likely to sacrifice the public interest at the altar of the island’s creditors.
The lawsuit comes just weeks after MBIA and Assured Guaranty struck a deal with the commonwealth to restructure $8.2 billion in PREPA debt.
That agreement marked the largest ever muni restructuring and raised questions as to Padilla's contention that bankruptcy is the only way for the island to efficiently get out of trouble. Padilla contends that restructuring the rest of Puerto Rico's debt will be far more difficult. "The vast number of creditors with differing interests across all issuing entities would result in negotiations that are lengthy, costly and chaotic. Access to legal, broad restructuring authority would allow us to undertake these in an orderly manner," he said last month.
PREPA isn't subject to the clawback, but the Prifa default has Assured Guaranty on edge. “These actions stand in contrast to the consensual agreement that we and other creditors recently reached with Puerto Rico’s electric utility, Prepa," Dominic Frederico, Assured Guaranty’s president and chief executive officer, said in a statement Thursday.
As you can see, this is about to get very messy, very quickly and the angrier the monolines get, the more difficult it will be for the island to restructure its obligations (recall that it was the insurers who held up the PREPA deal).

But don't worry, the holiday bonuses aren't in jeopardy - yet.
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Full Ambac statement
Ambac Financial Group, Inc. (Nasdaq:AMBC) ("Ambac"), a holding company whose subsidiaries, including Ambac Assurance Corporation ("Ambac Assurance"), provide financial guarantees and other financial services, today announced that Ambac Assurance has filed a lawsuit to protect its rights against the illegal clawback of certain revenue by the Commonwealth of Puerto Rico. The Complaint for Declaratory and Injunctive Relief was filed in U.S. District Court, District of Puerto Rico, with co-plaintiffs Assured Guaranty Corp. and Assured Guaranty Municipal Corp.
In December 2015, the Commonwealth of Puerto Rico announced that it would clawback revenues pledged to other bonds to fund obligations to its general obligation ("GO") bonds. Although the Commonwealth of Puerto Rico, under its constitution, has the right to clawback certain revenues to service its GO bond payments, that right is subject to important preconditions. One key precondition is that the revenues can only be clawed back if no other revenues or moneys are available to pay the GO bond payments. For fiscal year 2016, the Commonwealth forecasts approximately $9.0 billion of available resources, which vastly exceeds debt service on the public debt of approximately $1.85 billion.
The targeted clawback revenues include those of Puerto Rico Highways and Transportation Authority ("HTA"), the Puerto Rico Convention Center District Authority ("PRCCDA") and the Puerto Rico Infrastructure Financing Authority ("PRIFA"). The implementation of the clawback contributed to the government's default on January 1, 2016 on $36 million of interest on PRIFA bonds, and will eventually cause a default on HTA and PRCCDA bonds. Ambac Assurance satisfied its obligation to make timely payment on approximately $10 million of claims related to PRIFA bonds it insures.
Commenting on today's announcement, Nader Tavakoli, President and Chief Executive Officer of Ambac said, "Over the last several months, we have attempted to engage the Commonwealth in consensual conversations toward finding amicable solutions for their asserted liquidity issues, only to be rebuffed. Instead the Commonwealth has committed itself to a ‘scorched earth' strategy of blaming its fiscal and structural problems on lenders, Congressand others, in an effort to deflect responsibility and obtain retroactive application of bankruptcy laws. Serious issues have been raised by the Governor himself as to whether the Commonwealth historically misrepresented its financial condition to fool the very lenders it now seeks to punish."
Mr. Tavakoli continued, "Most recently, the Commonwealth unlawfully diverted tax revenues collected by the U.S. government, which are collected for the specific purpose of supporting PRIFA bonds, in order to finance the government's general accounts. We remain hopeful that the Commonwealth will abandon these illegal tactics, and turn instead toward good faith negotiations aimed at solutions instead of confrontation. While we are optimistic that the government of Puerto Rico will begin to act responsibly, at this time we have no choice but to protect our stakeholders through judicial recourse."
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It's rule of law or tyranny. Puerto Rico's govrnment will always choose the latter rather than the former, as all governments will as well.
Nothing would make me happier than for Puerto Rico to screw their bankster lenders. Unfortunately, municipal bond holders, mom and pops, are getting screwed. This is the price you pay for trusting governments.
This is the price you pay for thinking your governemnt can continue to doll out public benefits ad infinitum. Time to auction off date nights with Jennifer Lopez. Latina lover are you interested?
Rules? What rules?
The IMF has retrospectively changed its rules so it can continue 'loaning' money to Ukraine. It is known that these 'loans' disappear straight into the offshore bank accounts of the oligarchs, but that's OK as the Ukraine taxpayer will make it all good (pffffft!)
Russia has started legal proceedings in the UK to recover the Inter-state debt made to Ukraine. Such loans are (or were) not subject to the same get-out-of-jail-free loopholes as normal loans. What are the bets the UK courts will support Russia in this? I bet the NSA/CIA are digging into their archives to discover the peccadiloes of the relevant judges at this very moment.
This game is going to end badly for everybody.
Synthetic CDO's, anybody, anyone, Bueller?
Got Counter-party?
Scooby's got some Puerto Rican girls that's just dying to meat you!
Ha, hey now, Scooby time!
And who is going to get in line to buy Puerto Rico's next new debt offering when you change promised covenants from the past?....
" Such loans are (or were) not subject to the same get-out-of-jail-free loopholes as normal loans. What are the bets the UK courts will support Russia in this? I bet the NSA/CIA are digging into their archives to discover the peccadiloes of the relevant judges at this very moment."
The Russians wont win in these kangaroo courts, but they will show the world more of the hypocrisy of the western financial system and more of the world will turn away from it. Not to mention London will drive another nail into its financial coffin.
PR has just slipped down the slope. Without insurers, there will be no bond investors. Welcome to cash and carry government services. Watch the tax rates go up, pensions get plundered, and benefits to the people get slashed. No one in government will hurt or be imprisoned. Deer, meet headlights.
Hmm, Tavakoli. Where have I seen that name before?
Something structured ... junior?
The Puerto Rico debt bubble was built on the synergy of (1) the New York financial bank underwriters and (2) the triple income tax free exemption. Not unlike the 2008 housing crisis, the underwriting banks continued to write business, fudging the ultimate numbers regarding efficacy of repayment in order to make their payday. The only bond holders still hlding these bonds are either very high net worth individuals in NY and Florida, or mutual funds of the same, who should know by now with their brokers caveat emptor or hedge funds attempting to squeeze out every single nickel from the financially inept Puerto Ricans who actually spent some of their bond money on an ice rink. The PR should be allowed to declare bankruptcy, but the real culprits the underwriting parasitic banks will get away with their debt explosion again, unless some real action is every taken. It wasn't in 2008.
Fuck Ambac.
Indeed.
Ambac gladly pocketed the premiums and insured the bonds. Now that they're in default, Ambac needs to STFU and pay-up.
I can't remember the name of the ex-IMF agent that wrote about how they deliberately lended to countries that they knew would later not be able to make payments and make a neoliberal attack demanding pennies on the dollar for the assets of the country. Like Greece, like Ukraine is being set up, like in Latin America, etc.
Confessions of an Economic Hit Man by John Perkins
economic imperialism has been around since before the days of Bretton Woods. every european country did it to its colonies. the problem, of course, is when the colonies get hip to the game, nationalize those assets, and give their former colonial masters the ol' F U.
"the colonies get hip to the game, nationalize those assets, and give their former colonial masters the ol' F U."
Then mercenaries and arms flow into the country and next thing you know there is a "rebellion" in a "break-away province".
Complete with unofficial reports of of white-skinned, blue-eyed "natives"
Yes, predatory lending.
It is all of them
Some day they will all spill or be euthanized
I thought PR was the new tax dodge place for anti US tax players? Has that changed?
Peter Shiff was pushing this.
Is everything in order?
Time to haircut the big-spender politicians: With a complete scalping.
It's all about that debt. Much of will never be paid back. Except perhaps when the Wall Street welfare queen free shitters come begging to their revolving door crony politicians for some of that taxpayer handout honey.
If 'money' is based on debt, how can debt be paid off?
Giving a small number of psychopaths the right to conjour up 'money' out of thin air is the problem.
Until that changes, nothing else will.
Mathematically speaking, the debt can't be paid off. Who is to say some money does not mysteriously just appear from time to time. It is not like there is any auditing.
The Monolines have pulled an AIG.
They SOLD the insurance coverage but DO NOT have the funds to cover.
Fraudster Bailout 2.0 is on deck.
The politicans, bureaucrats and other 'regulators', the 'insurers': ALL cashed checks drawn one way or another from the .GOV till and looked the other way as the only other option was to shrink .GOV -I.E. put many of themselves out of work; -the last thing any bureaucracy ever dreams of doing..
The banksters and phony insurance hucksters and the corrupt politicians and bureaucrats: ALL already took 'their' 'profits' out of the system.
Now guess what: the whole scheme was nothing but a very complex neo-fascist /inter-governmental fraud used to fleece taxpayers and captured 401k/annuity investors.
Notice that no one EVER asks:
1. WHY should it be necessary for private corporations to insure the debt of their host nations?
2. WHY 'insurance' companies that rake in and distribute Billions of dollars in 'profits' to their management and shareholders can't cover the contractural obligations that are the stated purpose of their existence?
3. WHY are the 'insurance' companies investing the very funds that will eventually be contracturally required to pay for Bond Defaults in the very Bond Markets that they are supposed to be 'insuring'?
ambac NEVER pays. nor do they have any intention of EVER paying. nor do they have the ability to pay. mortgage insurance and bond insurance is a RIPOFF. they keep the profits in the good years, the taxpayers pay for the bad years.
http://www.reuters.com/article/ambac-idUSN0815774720101109
Laugh Track Deafening!!
You so fuked
Great points
Not to argue, but; in this case I think the lawsuit is more than justified given that PR just paid gov't employees $120,000,000 (one-hundred-twenty million) in BONUSES with this 'clawback'. So, they said 'screw-you' to their lenders, 'let the insurance pay for it' and played Santa Claus to themselves with the money instead.
Damn lucky they are a US territory, or there'd be bank mercenaries there already instead of a lawsuit subpeona.
I will Try to Suggest a few Possible answers to Some of your questions though.
1. I have no answer except to say Why should it be necessary for citizens to conduct all transactions in the currency of their host, well... parasite nation? (Legal tender laws. If they are obligated to insure gov't bonds, then the gov't likely wrote it into law someplace themselves -making it part of the 'cost of doing business' there; IDK.)
2. Very good question; I think AIG proved that what we have should really be called a "Fractional Reserve Insurance Industry" which makes sense since several of them now also run Fractional Reserve Banks in addition to their 'insurance'. Also, money seeks a profit; they didn't stick all that cash with Wells Fargo at .00015% -a substantial portion of what these insurance companies take is invested in the other big Casino on Wall (part of their systemic risk to the house of cards.) Why does FEMA have to step in during disasters with Big Gov't Money, when every mortgaged structure is 'insured'? A run on the banks keeps them up at night; an 'insurance run' makes them wet the bed from across the room.
3. WHY are the 'insurance' companies investing the very funds that will eventually be contracturally required to pay for Bond Defaults in the very Bond Markets that they are supposed to be 'insuring'?
I'd say it is a hedge; part of the problem with calling debt an 'asset' -anyway; if you own the 'asset' that you also insure, then payment is only accounting -and you still hold some kind of a legal obligation over the mortgager.
Insurance is just a casino anyway; 'life insurance' = a bet that you will die so soon that your family will profit more from the insurance payout than if you had simply saved or invested the same monthly principal. Actuary tables are simply a chart of bookie's odds. Want to give your family a million and a half when you die, don't spend money on a 'financial planner', just call an insurance agent and find out what a million dollar policy costs per month, and tuck that much away.
And yes, another 'bailout' looks to be on the horizon. Certainly PR (thanks, US taxpayer! More bonuses Next year!) and at some point, probably a portion of the banking/insurance sector (thanks, US taxpayer! More bonuses Next year!).
Sic semper aww to hell with it...
funny coincidence. Wait What looked up the definition of 'boondoggle' just yesterday... because he's seeing more and more of it as authorities reshuffle chairs on this Titanic. and it's becoming obvious to everyone that they're doing it.
Everyone but the parties involved are better off if it blows up and they declare bankruptcy so the rest of the states can follow and eliminate the pensions - Illinois / nj/ pen. /etc.
She looks better as a thumbnail, but I still stand by the requirement to include a full size photo of the thumbnail from the summary on the main page.
That orange jumpsuit isn't very flattering. Looks like she just got out of the county jail.
The " fixed asset management" commercials are running long and hard this weekend.
Caugh* caugh* negative rates...
Some guys out here in the Great State of Plan B Madness and Methane Clouds are still advertising 10% returns like Warren Buffet makes with "something or other risk that sound s like it's all peachy keen neat-o free". Hows about Negative Return of Your Money, like in no gets it back, Jack?
Let the carnage begin... ;-)
They have left for Paraguay
Of course, left the ads running
I hope weasels rip their flesh
... 2's streaming in that direction
Looks like insurance is a great business when collecting premiums. Not so great when paying out claims. Fuck the Smartest guys in the room.
No shortage of tyrants and despots.
Taking charge at the right moment.
They don't like guns though.
The cheapest and smartest thing to do is walk away and give the place back to Spain. Let them worry about it.
LOL....I'm pretty sure Spain won't take it back. They were desperate to hand it over to the US in 1899!
The island, along with the USVI (another mess in the making) had strategic value when we controlled the Panama Canal and we controlled the bauxite, minerals, spice/sugar and oil route from Venezuela to our Southern ports. However, sll thst trade is gobe and we gave the Panama Canal Zone back. There is no strategic value for Puerto Rico and the Virgin Islands anymore.
The answer I'm afraid is to give the island its independence and write off its debt.
Spain could not finance a Happy Meal right now.
DONE!!!!
That's because they have oatmeal in their heads.
Total bullshit on your part.
http://militarybases.com/puerto-rico/
Al Gore's father was the governor there for a few years and helped craft the "future American socialist state experiment" for President Franklin Delano Roosevelt. Truman kept the charade going with "Operation Bootstrap" along with Eisenhower and Kennedy. The bond default and insular government bankruptcy could ironically create the initial hole in the dike that will finally bring the whole house of cards of American socialism down the tubes along with the banks. I understand that the 2015 emigration numbers of Puerto Ricans (who are natural born US citizens) leaving the island for Florida and other states to avoid the mess has increased now to a 150K annualized rate.
"I understand that the 2015 emigration numbers of Puerto Ricans (who are natural born US citizens) leaving the island for Florida and other states to avoid the mess has increased now to a 150K annualized rate. "
^^^ Wildly inaccurate and little more than a purposefully generated bureaucratic obsfucation of the reality.^^^
I know many Puerto Ricans that have purchased a cheap property in P.R. with which to claim residency while working all year in NYC where the money is.
P.R. has NO income tax.
The tax savings actually more than offset the cost of the cheap hut in P.R.
The real winners in this kind of scam weasel their way into subsidized apartments in NYC and send their kids to school in NYC.
Freelancers write off much of the travel and lodging expenses for 'working out of state' in NYC.
It is my understanding that most Puerto Ricans DO NOT change their residency staus for taxation purposes so as to maintain the inherent subsidies no matter where they work/reside.
PR has been a leach to the US and it's citizens. They should not even be a US terrortory, kick the leaches out and all of the leaches that reside and steel from US citizens.
So let me see if I get this very small part of global ponzi scheme correct. Even this small part is complex. But you'll see much more exposed as we move further into this year.
1. Insurance Corporation X issues fraudulent uncovered coverage
2. To a Corporation called The Commonwealth of Puerto Rico fraudulently acting as a Commonwealth Nation called Puerto Rico a U.S. unincorporated territory that is issuing Bonds.
3. And that Nation (Puerto Rico Corporation) is a subsidiary Corporation of another Corporation fraudulent misrepresenting itself as a Nation called the "United States" a "Federal Corporation" (28 US Code § 3002 section 15). Which also fraudulently misrepresents that the original Constitution and Bill of Rights is still in effect.
4. Which will in turn not only defraud its investors out of their investments but also its "citizens" out of the infrastructure the Bonds were funding. Citizens that have been fraudulently deceived into being Corporate slaves.
5. And said slaves will in turn then not only lose their investments and related infrastructure but also be liable for the resulting fraudulent judgement, additional payments, plus interest and attorney fees etc.
Is the picture getting any more clear now for anyone?
I hope more of you will stop wasting time with useless efforts like politics, voting, "Constitutional" legality debates etc. You need to accept that it is all 1 giant massive global layered ponzi fraud. With a seemingly endless number of complicit or unknowing participants. And until the criminals are stopped they will steal 100%. Once they have it all or enough and get scared they will then do everything they can to permanently prevent you from causing them future problems by trying to recover it and hold them accountable.
And why does everyone keep using cutesy words like "haircut" or "clawback"? It is an organized conspiratorial fraud (RICO), grand larceny and theft and many other actual unlawful acts. It is even unlawful under the fraudulent corporate codes and statutes that fraudulently pretend to be laws that are were put in place inside fraudulent Corporations presenting themselves as Sovereign Nations.