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16 February
Comments Off on These Renters Were Hit Hardest by the Financial Crisis

These Renters Were Hit Hardest by the Financial Crisis

The financial crisis turned a lot of Americans into renters, because they couldn’t keep paying their mortgage, or because high unemployment and stagnant wages in the ensuing years forced them to put off home ownership. A new report from real estate website Trulia seeks to identify the groups that lost the most purchase on the dream of home ownership during the recession.

The answer, by one measure: affluent Hispanic millennial men. In 2006, 32 percent of those households were renters. By 2014, the share had nearly doubled to 63 percent.

30 September
Comments Off on Financial industry protects itself, not investors

Financial industry protects itself, not investors

In a House subcommittee meeting today, Rep. Ann Wagner, R-Mo., will discuss her bill, HR 2374, the Retail Investor Protection Act, the website ThinkAdvisor reported Wednesday. The bill was first introduced in 2013, following the Department of Labors first attempt at fiduciary rule-making, and it made a second appearance in February of this year, following the push for a fiduciary rule by President Barack Obama and the Department of Labor.

The bill essentially forbids the Department of Labor, or DOL, to move ahead on a fiduciary rule until the Securities and Exchange Commission, or SEC, goes first.

As well, HR 2374 asks the SEC to study the issues around the rule to find out whether investors would be harmed or disadvantaged by the rule.

In 2010, the Dodd-Frank Act required the SEC to investigate the necessity of a uniform fiduciary standard for investment advisers. The study found that applying a fiduciary standard could be necessary and that investors generally dont understand the distinction between the fiduciary and suitability standard.

The study did not look at the requirements of ERISA, however. ERISA is the Employee Retirement Income Security Act and it governs advisers to retirement plans, mostly employer-sponsored plans such as 401(k)s. If the DOLs new rule goes into effect, IRAs as well as health savings accounts will be subject to the strict standards of care mandated by ERISA.

Financial industry not super excited about tighter regulations

The financial services industry has come down hard against the DOLs proposed fiduciary rule. The most salient complaints contend that the costs of complying with the rule and the increased legal liability could hurt their business and thus, limit investor access to advice. The Financial Services Roundtable, an industry lobbying group, released a survey of IRA owners on Wednesday that found that a majority of IRA owners would, of course, not be in favor of losing access to advice.

The survey found that 97% of those surveyed are confident that a financial adviser would provide advice that is in the best interest of their client; 63% were very confident.

Where did they dig up these people? Previous surveys have found that most investors are not sure how to differentiate investment advice from a sales pitch.

IRA investors believe their adviser is serving their best interest. People believe they are getting advice that is in their best interest, but the evidence shows that they are not, says Micah Hauptman, financial services counsel at the Consumer Federation of America.

The DOL rule is trying to match up reality with those beliefs, he says.

The Financial Services Roundtable has advocated for simplified disclosure of conflicts of interest rather than the DOLs proposed rule. In order to make a commission-based brokerage model work under ERISA, the rule from the DOL would use a best interest contract that allows prohibited transactions, such as commissions.

The DOL solution is too onerous for most firms to comply with. Either investors will pay a fee for service or they will have to sign a best interest contract right off the bat, says Jill Hoffman, vice president of government affairs for investment management at Financial Services Roundtable. Many consumers balk at the thought of signing a contract before theyve even had a conversation with the adviser about their needs. And then there is the legal liability involved with a contract. What does it mean if the market goes down and the investor loses money? Did they not get advice in their best interest?

One reason that may be alarming to the financial services industry is that it opens brokers and their firms to lawsuits. In the past, advisers could write their own contracts requiring clients to settle contract disputes with arbitration rather than in the courts, the website explained in April.

In the end, it will all be figured out — hopefully for the benefit of investors.

What do you think?

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Follow me on Twitter: @SheynaSteiner

Senior investing reporter Sheyna Steiner is a co-author of Future Millionaires Guidebook, an e-book written by Bankrate editors and reporters. Its available at all the major e-book retailers.

23 September
Comments Off on CBOE Holdings to Launch AFX with Environmental Financial

CBOE Holdings to Launch AFX with Environmental Financial

CBOE Holdings, Inc. (CBOE – Analyst Report) recently entered into an agreement with Environmental Financial Products, LLC (EFP) to form and launch American Financial Exchange (AFX). AFX is an electronic marketplace that will allow small and mid-sized banks to borrow and lend short-term funds.

AFX was designed to draw benefits of exchange trading including transparency, standardization and rules-based process and at the same time lower transaction costs.

Based on the proprietary calculation methodology, EFP-developed Ameribor (an interest rate standard) will allow AFX to respond to the complex requirements for an interest rate measure on the basis of transactions through weekly auctions for U.S inter-bank lendings new benchmark rate. AFX will cater to 1,740 community and regional banks having assets valued in the range of $500 to $125 billion, totaling $4.7 trillion in assets. AFX is hence expected to facilitate transparent and efficient borrowing and lending of funds. This in turn, will also boost the businesses of both Environmental Financial and CBOE Holdings.

Meanwhile, CBOE Holdings is the first and largest US options exchange and creator of the listed options. The company also excels in the options and volatility trading through product innovation, investor education and improving trading technology. The latest offering adds a new dimension to CBOE Holdings business lines and lends it an opportunity to bring about price efficiency, transparency and transaction-based benchmarks in inter-bank lending, boding well for the companys core strength and values. Apart from this, CBOE Holdings will operate the secure, web-accessible, electronic trade matching engine and will support membership services and surveillance.

CBOE Holdings presently carries a Zacks Rank #2 (Buy). Some other key players in the finance sector are American Capital, Ltd. (ACAS – Analyst Report), AeroCentury Corp. (ACY – Snapshot Report) and CME Group Inc. (CME – Analyst Report). While American Capital and AeroCentury sport a Zacks Rank #1 (Strong Buy), CME Group carries the same Zacks Rank as CBOE Holdings.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report gt;gt;

19 September
Comments Off on Fosun to raise $1.5bn to fund financial services push
18 September
Comments Off on Russia’s Financial System: How Vulnerable?

Russia’s Financial System: How Vulnerable?

But Aleksashenko in no way tried to sugarcoat developments in Russia. Quite the contrary. He explained that his overall forecast for the Russian economy is “rather gloomy.” Sanctions have hurt Russia’s economy, but their impact has shifted in the last year. Financial sanctions were responsible for about 50 percent of the impact of the downturn in December 2014, when the ruble’s value fell by a third in a matter of weeks, Aleksashenko said. Another 30 percent of the downturn was due to the dip in oil prices and the remainder due to central bank mismanagement. Now, however, a level of stability has returned and the impact of sanctions has been reduced. The price of oil has become more important, he said, and is now responsible for 45 percent of economic problems, with sanctions at 40 percent–and the remainder coming from mismanagement by the government.

While the impact of financial sanctions on the Russian economy will be smaller going forward, Aleksashenko said, its impact on the Russian government’s budget is becoming more apparent. Sanctions have closed the option of Russia funding its budget through borrowing, Aleksashenko said, nor is further privatization a likely option. The remaining option is to fund deficits by drawing from its reserves–yet even this option is limited by the expectation sanctions will be long lasting and reserves should therefore be sustained as long as possible. At the exact moment public spending should be increased to offset the slack in private consumption, Russian budgets are being cut, said Aleksashenko. Moreover, the cuts hit investment hardest (immediate social spending is favored), diminishing future growth prospects. Starting next year, Russian military spending may feel a squeeze as well, with cuts focused on the country’s navy, which is dependent upon western technology.

The decline in the ruble has been, according to some, a silver lining for the Russian economy as it has allowed exports to remain stronger than they otherwise would have been without devaluation. But according to Aleksashenko, the truth is more complicated. Russian businesses, especially exporters of oil and raw materials, are “price takers” not “price makers.” Exporters are prepared to sell at whatever the international market demands–and this physical demand is far more influential in the health of Russia’s export-driven part of the economy than quarterly fluctuations. Few exporting companies in Russia would be permanently hobbled by lower profits. Russian oil companies, he points out, can produce oil at prices of $30 a barrel. “It’s not an issue of profitability. It’s an issue of getting cash,” Aleksashenko said.

Moreover, the next largest component of exports after raw materials, arms sales, is politically driven rather than profit driven. On the prospects of a stronger Eurasian economic union, or even of introducing a common currency within that union, Aleksashenko was less than sanguine. The main obstacle, he says, is that interests are at odds. For smaller countries the impetus for further integration or for a common currency is primarily economic, fed a desire for access to Russian markets and Russian largess. For Russia, however, the main reason for such a union would be political, to keep a sphere of influence; any access to new markets would be marginal, not sufficient on its own to entice Russia toward further integration.

Over a year or two, a downturn can be weathered by moderately drawing from reserves. But if oil prices remain low over five or seven years, Aleksashenko notes, he expects the Russian government to borrow directly from the central bank to finance its budget. All indications of current head of the Russian central bank, Elvira Nabiullina, are that, while maintaining some constitutional autonomy, she is also “very keen to provide money to the government one way or another” to finance any future federal budgets, Aleksashenko said. And monetary finance, “definitely leads to inflation, sooner or later,” he added.

The structural problems in the Russian economy today cannot be solved by economic policy alone, Aleksashenko said. Higher or lower interest rates, larger or smaller deficits, more or less government involvement–each of these is eclipsed by what Aleksashenko calls the biggest problem in Russia’s economy at the moment: the lack of property rights protection, and the consequential decline of investment. This, he adds, is political policy: “It’s independent courts. It’s political competition. It’s the rule of law. It’s fighting corruption.”


17 September
Comments Off on Puerto Rico Does Not Need A Financial Control Board – It Needs A Governor

Puerto Rico Does Not Need A Financial Control Board – It Needs A Governor

On September 9, 2015, Puerto Ricos Governor Padilla released a Fiscal Adjustment Plan, which purports to provide a road map for the Commonwealth to achieve fiscal balance and a return to economic growth. The plan and Governor Padillas speech to the Islands residents the same day seem to be part of a campaign strategy to deflect blame from his administrations fiscal mismanagement. He uses this platform to blame tax and rate increases on his predecessors and the Commonwealths bond investors, including fund managers whom he convinced a mere 18 months ago to purchase a $3.5 billion bond issue and whom members of his administration have referred to as vultures.

His government is quickly running out of cash, in large part as a result of his having spent 3 years leading his Administration and the Legislature down a series of blind alleys, that distracted them from the vital work of cutting costs and improving revenue collections and squandered time, resources and political capital. According to a cash flow projection prepared by an outside consultant to the government, the Commonwealths cumulative cash shortfall will reach $205 million in December of this year, then return to a positive balance and fall again to a deficit of $512 million in June 2016. The liquidity to bridge a cash shortfall of this magnitude would likely have been available from investors, had the Governor not also squandered the governments credibility by failing to provide transparency in its dealings with investors.

As discussed at the end of this article, the Administration has crafted its response to the crisis to deflect blame for any bond default on a combination of the acts of previous administrations and the investors in the Commonwealths bonds. This populist appeal to blame the financial chaos on greedy investors has some chance of succeeding, but it will likely impose a significant cost on the Commonwealths taxpayers for many years.

A history of 11 key policy decisions and initiatives the Padilla Administration has pursued in response to Puerto Ricos fiscal challenges is presented below to help explain how the Commonwealth reached this point and why his Fiscal Adjustment Plan is likely to fail.

1. No Layoffs

One of the Governors few reliable promises has been not to lay off a single government worker. According to the Bureau of Labor Statistics, about 15% of US workers are employed by Federal, state and local governments (21.9 million workers out of 145.4 million total employed). By comparison, in July of this year, 24% of Puerto Ricos workers were employed by the government (233,800 workers out of 992,000 total employed). This is a significant voting block that reliably turns out in Puerto Ricos elections.

The sheer number of Puerto Ricos public sector employees has been recognized for years as an obstacle to serious fiscal reform. Most governments have tried to address the problem by limiting new hires and hoping to reduce the numbers by attrition over time, so as not to alienate this voting block.

In 2010, Padillas predecessor, Luis Fortuno, made the courageous decision to lay off 30,000 government workers. Padilla beat Fortuna by 11,285 votes (896,060 to 884,775). Presumably, some of Fortunos laid-off workers were in Padillas column.

To get Puerto Ricos government workforce in line with the US average would require laying off 100,000 public employees. Having learned from Governor Fortunos experience, Governor Padilla has steadfastly avoided any risk of alienating this base of voters. Instead, the Governor proposes offering government employees the opportunity to retire early and receive 60% of their current compensation every year until they retire and then begin collecting their pensions. It is not clear if the cost of this program is to be shifted to the pension system to keep it off the current budget, only to aggravate the severity of the unfunded pension liability.

It might be easier to sympathize with the Governors lack of courage on this issue, were it not for his rhetorical appeals to opponents for selflessness, setting aside political considerations and keeping our sons and daughters in mind as the Commonwealth faces its fiscal challenges.

This issue highlights why some students of the fiscal crisis have called for a Federally-appointed emergency manager or control board that can act without fear of re-election. Of course, one can also hope for elected officials who really can set aside political considerations.

2. A $3.5 Billion Refinancing to Bridge the Funding Gap

In March of 2014, a year and three months into his term, the Padilla Administration offered $3.5 billion of general obligation (GO) bonds (2014 Bonds) to institutional investors, since the Commonwealth and its underwriters determined the bonds were too risky to offer to individuals. The 2014 Bonds were issued to refinance maturing short-term obligations and to provide the government with additional liquidity to continue operating. Because of market concerns regarding the Commonwealths fiscal condition, the bonds were sold with a stated interest rate of 8% and a price of 93% of their par value. The 2014 Bonds have recently been changing hands at prices ranging from about 72% to 75%, which represents a loss of over 20% to the original investors.

Many of the buyers were hedge funds, who had not previously purchased Commonwealth bonds, but other buyers were long-time investors in Puerto Rico bonds who believed, based in part on statements made by the Administration, that the government would address its fiscal imbalances. This was the last time investors demonstrated a meaningful level of trust in the Commonwealths ability and intention to treat them fairly. This was also the last time the market received audited financial statements from the Commonwealth.

3. A New Bankruptcy Bill

While the Administration was marketing the 2014 Bonds, and the Governor was claiming that paying Puerto Ricos debt was both a legal and (to him) a moral obligation, he was assembling a team of bankruptcy lawyers and consultants who have since played a central role in this drama.

The Administration hired Cleary Gottlieb Stein and Hamilton LLP (Cleary), represented by Lee Buchheit and Richard Cooper, whose experience includes negotiating bankruptcies and debt restructurings for corporations and sovereigns including Greece, Iceland and Argentina. These lawyers do not seem to have any experience with the US municipal bond market or US state and local government finance. Clearys first assignment was to write a new bankruptcy law (PRBK Law), that was apparently designed to deal with fiscal stress at the Puerto Rico Electric Power Authority (PREPA), the Highway and Transportation Authority (NYSE:HTA) and the Puerto Rico Aqueduct and Sewer Authority (PRASA); although PRASA was quick to announce publicly that it had no intention of using this avenue to restructure its debt.

The Legislature, controlled by the Governors party, dutifully passed the PRBK Law. The rating agencies and other members of the municipal bond investment community predictably recoiled. The Commonwealth suffered credit rating downgrades, and its bonds traded to new lows.

The Administration tried to explain that the PRBK Law was necessary because Puerto Rico is explicitly excluded from Chapter 9 of the US Bankruptcy Code, which allows subdivisions of states to file for reorganization. However, given the timing of the legislation, many investors felt duped by the Administration. In addition, the law contained a number of provisions that were perceived as far more draconian than anything in Chapter 9 or Chapter 11 of the US Federal Bankruptcy Code. The passage of this law marked a major shift in the attitude of Puerto Ricos creditors toward the Padilla Administration.

The PRBK Law only applied to certain public agencies, most notably PREPA, HTA and PRASA. PRASA publicly stated that it did not need the law. As discussed below, the laws benefits in lowering PREPAs rates would have been extremely limited, and it was arguably superfluous for a restructuring HTA, because HTAs revenues are explicitly subordinated to GO bonds under the Commonwealths constitution. It therefore struck many investors as odd that the Administration has spent so much time, money, political capital and investor goodwill to pursue this avenue.

Several PREPA bondholders immediately challenged the new law. A Federal district court ruled the law unconstitutional and an appeals court upheld this ruling. The Administration is seeking to appeal the appeals court ruling to the US Supreme Court.

The Governor is also now also asking for the US Congress to amend the bankruptcy code to allow Puerto Ricos subdivisions to file under Chapter 9. That might have been a political possibility had the Governor initially worked with the Territorys representative in Congress, Pedro Pierliusi, but Pierliusi is in the other party, and well, you know.

This would seem to have been an expensive and unproductive gambit that yielded virtually no benefit to the Commonwealth and succeeded only in alienating its investor base. Despite having their work product declared unconstitutional by two Federal courts, the Governor gave Cleary new responsibilities including negotiating a debt restructuring on behalf of the PREPA and participating in the drafting of the Fiscal Adjustment Plan.

4. PREPA Restructuring

Ostensibly, a principal objective of passing the PRBK Law and subsequently seeking Chapter 9 was to restructure PREPAs debt to lower the Islands electric bills. What the Administration and its advisors apparently failed to recognize is that PREPAs debts are not the reason it has high electric bills. At 15% of it annual budget, PREPAs debt service is actually quite low, and even a severe restructuring of these obligations would not result in significantly lower rates. PREPAs high rates are the result of high fuel and operating costs related to it being on an island, along with a certain amount of mismanagement.

In this light, the Administrations relentless pursuit of a sacrifice from PREPAs bondholders seemed to many market participants as if the Administration had an irrational desire to punish creditors. As discussed here, the sustainable reduction in electric rates that would result from the Administrations recently announced tentative settlement with about a third of PREPAs creditors is about 6/10ths of a cent per kwh from an average rate of 27 cents and an estimated funding gap of 8 cents to achieve financial viability.

Given this tiny benefit to ratepayers of a PREPA debt restructuring, creditors and even some legislators began to suspect that this process was either being driven by political considerations or a blind reliance on consultants whose advice might be influenced by their interest in participating in a long, expensive, high-profile restructuring. None of the members of the Administrations restructuring team seems to be well-positioned to weigh the long-term cost of alienating municipal market investors against the benefits of restructuring. Clearys experience with sovereign borrowers who have access to the IMF, may not have given them much perspective on the impact of these decisions on the municipal market.

The tentative settlement was reached after over a year of negotiations and millions of dollars in fees to its lawyers and consultants. Given the very small sustainable decrease in debt, the principal motivation seems to have been to defer payments for 5 years, and this seems to be a common theme of the Administrations debt negotiations. However, these payment deferrals are not free, as they merely cause future administrations to deal with higher payments principal and interest. See here, here and here for other articles that discuss PREPAs restructuring.

For some market participants, PREPAs effort to restructure its debt had the appearance of gratuitously punishing PREPAs bondholders for a problem, which they had no role in creating and which the restructuring could not solve. As a result, this initiative further alienated investors, many of whom have come to view the Commonwealth as extremely unpredictable.

5. The Petroleum Tax Bonds

Puerto Rico has an unusual institution known as the Government Development Bank (GDB), which is not a real bank but a state agency that is the governments financial advisor and sometimes lender. The conflict of interest in these two roles is becoming more apparent as the financial crisis unfolds and is illustrated by another of the Padilla Administrations failed initiatives.

In 2014, GDB announced that in order to provide liquidity it needed to refinance certain loans on its books from the Highway and Transportation Authority. By way of background, HTAs debt is supported by certain taxes and fees that are subject to a constitutional provision that they must be clawed back to pay the Commonwealths GO bonds, if there is a budgetary shortfall that would result in a GO default. Thus, HTA bonds are effectively subordinated to Commonwealth GOs.

To accomplish this refinancing, the Administration asked the Legislature to increase the tax on petroleum imports from $9.25 per barrel to $15.50 per barrel, and to allow it to pledge the tax to new bonds (Petroleum Tax Bonds) which would be issued to refinance GDBs loans to HTA. In response to the Administrations representations that this initiative would solve the Commonwealths fiscal challenges, the Legislature again complied with Padillas request. However, this time, the Legislature put some limits on the debt issuance (eg, limiting the interest rate), likely because its members had begun to lose some confidence in the Administration. Because bond investors had begun to share the misgivings exhibited by some of the Commonwealths lawmakers; they also put some conditions on the sale–specifically, the delivery of a balanced budget and a delivery of a credible plan to resolve the fiscal imbalances.

The Administration developed a narrative that the bondholders demands were unacceptable, but it is not clear which bondholders demands were unreasonable, since the issue was never formally offered to investors. The failure to access the market for this deal has been billed as a major cause of the Commonwealths current liquidity crunch. However, there is a somewhat more interesting back story to all of this that has received little or no attention.

If the purpose of the Petroleum Tax Bonds was to provide the Commonwealth with additional liquidity, why the complication of refinancing HTA loans to GDB? Why not simply refund Commonwealth debt payments coming due in the current fiscal year. The answer seems to be that at least part of the motivation for this financing was for GDB to get out of the way of an imminent restructuring of HTA debt to preserve its own finances.

During the passage of the PRBK law, HTA was openly discussed as the most likely candidate for a restructuring after PREPA. Since GDB was a major lender to HTA, it would have suffered along with other creditors if such a restructuring were to occur, especially in a Chapter 9 proceeding that would not give GDB the control it had in the PRBK Law. If the Petroleum Tax Bonds had been issued and HTA were to subsequently default, GDB would have gotten out in the nick of time.

Since the Petroleum Tax Bonds were to be guaranteed by the Commonwealth, the effect would also have been to refinance HTA debt, which is effectively subordinated to GOs, with new debt that had both a GO and special tax pledge. GDB would have been bailed out of a bad loan at the expense of Commonwealth taxpayers and GO bondholders; while holders of HTA bonds would be left behind to fend for themselves.

GDBs holdings of bonds that are legally subordinated to GOs may have influenced its advice to the Commonwealth in other ways. The Fiscal Adjustment Plan seems to focus on restructuring GOs, which are constitutionally protected and senior to most tax-backed bonds. Since GOs provide the most credible security under Puerto Ricos Constitution, this financing vehicle would likely be the most viable borrowing vehicle as the Territory emerges from financial distress. Presumably any long-term view of the Commonwealths interests would regard defaulting on GOs as a last resort. This logic has led many legislators and others to question the wisdom of members of the Administration talking openly about defaulting on GOs.

In contrast, the Fiscal Adjustment Plan contains no explicit discussion of a restructuring or payment moratorium for HTA bonds or other tax-backed bonds. GDB and other Administration officials do not seem to be publicly discussing this possibility; even though the subordination of these obligations to GOs would seem to make them a more likely candidate for restructuring.

GDBs institutional interests would seem to have at least the potential to be in conflict with the Commonwealths interests, and its seems that GDBs role as financial advisor to the Commonwealth and its agencies should be re-evaluated. GDB is itself clearly a candidate for restructuring. As the Commonwealth evaluates the impact of various restructuring alternatives on its long-term financial interests, GDBs institutional interests could color its advice on this issue.

Another little twist to all of this is that GDBs budget is much less constrained by appropriations than the Commonwealths general fund. The hiring spree on consultants and lawyers has been greatly facilitated by the fact that GDB does not need to go to the Legislature for appropriations to pay these bills, but can pull the funds from cash flows being paid on its portfolio of loans to the Commonwealth and its agencies. To some extent, this payment reality also raises the question as to whether the consultants and lawyers represent the Commonwealths interests or GDBs.

6. Reorganization of Public Schools

Because its student population has been in decline and school teachers have not been laid off, Puerto Rico has one of the highest ratios of teachers to students in the developed world. The Commonwealth also has too many schools to serve the current student population. Of course, Governor Padillas pledge not to lay anyone off precluded doing anything to adjust the number of teachers, but he did have the courage to propose closing some schools. However, rather than calling the leadership of the school system in and telling them they needed to identify savings, he reportedly paid the Boston Consulting Group $15 million to recommend which schools to close.

7. No Cuts to the University of Puerto Rico

The University of Puerto Rico is one of the most heavily subsidized public higher education systems in the US, receiving approximately $900 billion in annual appropriations from the Commonwealth. It offers all students extremely low tuition, regardless of financial need. The Padilla Administration has considered cuts to the Universitys annual appropriation, but in the face of student protests has reduced those proposed cuts to zero. The Krueger Report, discussed below, which the Governor commissioned to tell him that he needed to achieve fiscal balance, recommended cutting as much as $500 million from the Universitys annual appropriation, in part by needs testing student subsidies. In response, the Fiscal Adjustment Plan proposes to reduce appropriations to the University by $200 million – five years from now.

8. A New Value-Added Tax

Governor Padilla commissioned a study from KPMG to evaluate the introduction of a new value-added tax to replace the Commonwealths reliance on income and sales taxes. The principal motivation appears to be to achieve higher rates of compliance, as one of Puerto Ricos most significant challenges is a very high rate of tax evasion. This initiative was highly controversial and was opposed by a large percentage of the population, including many business owners. Several economists warned that shifting to a new tax regime during an economic downturn was extremely risky, and KPMG even cited this risk in its report. This time members of the Governors party balked and refused to pass the bill. The Governor eventually assembled a slim majority to pass a 4 cent increase in the sales tax from 7 to 11 cents to be replaced by the value-added tax in April of 2016. The legislature apparently had the wisdom to note that the Governors people have been unable to accurately project revenues from taxes that the Commonwealth has been collecting for many years. They were right to be skeptical that Padillas Treasury department could estimate and collect this new tax. This remains a major risk on the revenue side of the Commonwealths budget.

9. The Krueger Report.

Ann O. Krueger, a former official with the IMF, was hired by Cleary to develop a plan for Puerto Rico to resolve its fiscal imbalances. The timing of the reports release was odd.

The Legislature struggled to meet a June 30, 2015, deadline to pass a balanced budget (based on the Administrations revenue estimates) that was essentially in line with the Governors submission to them. Within days of the Legislative leadership announcing the first balanced budget in many years, the Governor released the Krueger Report and announced that three years into his Administration he was shocked to learn how difficult the Commonwealths financial challenges really were and that fiscal balance had not been achieved after all.

Ms. Krueger and her team did a credible job of delineating the financial challenges facing the government and providing concrete, actionable responses to these challenges. There is a somewhat limited reference to renegotiating the Commonwealths GO debt, and Ms. Krueger does not purport to be an expert on the Commonwealths financing structures or municipal bond law in general. Yet, from the Padilla Administrations use of the Krueger Report, one might conclude that debt restructuring is its central recommendation. The Administration has chosen to ignore many of the Krueger Reports most important and politically difficult recommendations to focus instead on debt restructuring.

Ostensibly to implement the Krueger Reports recommendations, the Governor convened a committee to develop the Fiscal Adjustment Plan. However, as discussed in 11 below, this plan appears to be more of a cover for a default on Commonwealth debt than a serious set of reforms.

10. Defaulting on Public Finance Corporation Bonds

As part of the 2016 budget, the Administration requested an appropriation for certain bonds of the Public Finance Corporation (PFC), as they are required to do under the PFC bond contract. The Legislature first included the appropriation in a draft budget, then set the funds aside in an account that required GDB to come back and request further legislative action–an apparent reaction to a history of disappointment and distrust over the Administrations handling of the fiscal crisis. To the Legislatures apparent surprise, GDB and the Administration decided to use the ambiguity of the Legislatures appropriation to default on the PFC bonds. They announced that since the appropriation was not made explicitly to pay the PFC bonds, they could not pay them. When individual legislators objected that the funds were appropriated, but that GDB just needed to identify the purpose, the Administration changed its rationale for the default to the Commonwealths lack of liquidity. This was after rolling out a talking point likely prepared by the Administrations litigation team that the nonpayment of principal and interest on these bonds was not a default under the bond contracts.

The PFC bonds were sold primarily to residents of the Island, and it is estimated that over 60% are still held by Puerto Rico residents. This points to a larger issue. Estimates of the amount of Puerto Rico debt held by citizens of the Commonwealth range from 20% to one third of all bonds of the Commonwealth and its agencies. There is, in any case, little doubt that Puerto Rican citizens hold a large amount of this debt. The Administration does not seem to have given much consideration to the impact (economic or moral) of impoverishing its own citizenry by impairing investments they previously considered to be the safest of their holdings.

11. The Fiscal Adjustment Plan: Defaulting on Commonwealth Bonds.

In response to the new crisis suddenly revealed by the Krueger Report 3 years into his administration, the Governor resorted to a familiar pattern: he appointed a committee of government officials and an army of very high priced consultants to develop the Fiscal Adjustment Plan. After a one week delay (attributed to a tropical storm) and strategic leaks to gauge public reaction to the plans details, it was released on September 9.

Most of the details of this plan are irrelevant, as they include proposals that are beyond the Administrations or the Legislatures control.

Possibly the most egregious example is the proposal to extend a 4% excise tax on corporations which represents 20% of the Commonwealths general fund revenues. The corporations paying this tax have been treating it as a direct offset to their Federal tax liability and have therefore been indifferent to paying it. The IRS is temporarily allowing corporations to continue this practice while it promises to study the issue and provide a ruling. Few tax experts seriously believe the IRS will ultimately rule in favor of the current practice and many believe the IRS is simply looking the other way because the tax is set to expire in 2017. The Fiscal Adjustment Plan assumes an extension of the tax, but states it will only be extended if the current practice of offsetting it against Federal tax payments is approved the IRS–a highly uncertain, if not unlikely, event.

The Fiscal Adjustment Plan also proposes a fiscal control board to be appointed by the Governor. Apparently, this new committee is intended to assuage the fears of bondholders whose trust in the Commonwealth has been shattered by the various gambits described above. This board would be empowered to enforce the financial reforms outlined in the report. In addition to not fooling anyone, this silly contrivance has a major constitutional flaw: a constitutional officeholder cannot delegate powers it does not hold, nor can an entity be created which violates the delegation of powers among executive, legislative and judicial branches. So this board cannot have any powers other than those the Governor already holds. A member of the Legislature recently commented that the Commonwealth does not need a fiscal control board, it needs a governor.

As discussed in 1, above, a true emergency manager or fiscal control board like the ones used in New York, Detroit and DC might ultimately be necessary in Puerto Rico. However, most of Puerto Ricos creditors are likely to see this proposal as another attempt to dupe them.

Other than the many other silly assumptions, impossible-to-execute proposals, and weak reforms dressed up as austerity measures, two things stand out about this report:

A. Most of the revenue and expense initiatives are significantly back-loaded, with little or no impact until after the 2016 election and most of the projected benefits occurring five years out, at the end of the next administrations term. Essentially, the Administration is not requiring itself to deliver much, if any, results until after the 2016 election, and even then to produce only gradual financial improvement. Immediately below are examples of some of the initiatives proposed in the plan.

(click to enlarge)

The Governor cannot be held accountable by voters in the next election for the success or failure of these initiatives. Moreover, bondholders who are being asked to sit at the table of sacrifice before December of 2015, would have no apparent mechanism to ensure any of the these initiatives are implemented. Below is a summary of the projected impact of revenue and expense initiatives contained in the plan.

(click to enlarge)

B. Virtually all of the proposed pain in the next 1-3 years is imposed on bondholders. Aside from the fact that most of the initiatives underlying the table above cannot be achieved in the timeframe described, the Administration is using these projected budget enhancements to justify requiring bondholders to commit in 2015 to forgo $14 billion of principal and interest payments over the next five years. Here things get a little sketchy. Is he asking them to give this amount up forever or to merely defer most some or all of this amount? Either way, this does not seem like good public policy. The bondholders are unlikely to allow this amount of their capital to be wiped out without a protracted, expensive and extremely disruptive legal battle. To the extent it is merely a deferral of debt service, it will eventually be repaid with interest. This merely shifts the burden to a future administration and increases it by the interest that would accrue.

One contribution to the size of this $14 billion funding gap is an Administration proposal to spend several billion dollars to promote economic growth. Why anyone would trust this government to choose the right set of expenditures to finally promote real private sector economic growth is not explained.

The Proposed Default

The mechanics of the sacrifice by bondholders would apparently involve current bondholders exchanging their various securities for a new security similar to the Governors other recent settlement with some of PREPAs bondholders (discussed here). The Governor darkly proclaims that if bondholders do not come willingly to this exchange, his government will have to do something bad–presumably default. The Governor:

If creditors are not willing to partake in this, Puerto Rico will have no alternative but to proceed without them. That path doesnt suit us nor them and will result in years of litigation and defaults and a major humanitarian crisis, forcing us to choose between paying a creditor, a teacher, a policeman or a nurse. A decision Id prefer not to make, but that Ill make if I have to, always looking out for the best interests of our country.

After acknowledging the years of litigation, uncertainty and economic turmoil a default would impose on the Islands citizens, the Governor insists he is willing to impose this hardship on his fellow citizens if necessary. It brings to mind Cleavon Little in Blazing Saddles holding himself hostage by pointing a gun to his own head. Some of the Administrations maneuvers would indeed be comical, were it not for the costs they are imposing on Puerto Ricos 3.5 million citizens over the next decade. After New York City defaulted in the 1970s, it took about 8 years for the City to return to the capital markets and many more years before it could borrow money at pre-crisis interest rate levels. This administration has embarked on a path that is likely to impose much greater hardship on its citizens.

In a rhetorical flourish presumably designed to foreclose opposition to his plan the Governor goes on to warn

We will be publicly attacked by outside interests who will want to force us to pay without thinking about the consequences that will have on the wellbeing of our people. Theyll attack us because theyll want to see us on our knees. To avoid these consequences in Puerto Rico, unity of purpose and will is needed. This must not become another battleground ahead of next years elections. This crossroads requires seriousness, commitment and selflessness.

The last line is a bit ironic in that it seems likely that at least some amount of attention to next years elections and selfishness by the private sector authors of the Plan played a role here. The Governors advisors must know the plan is highly unlikely to achieve the stated objective of financial stability. Perhaps the advisors have understated the risks to their client in an effort to perpetuate an income stream. Alternatively, the Governor may have been fully apprised of the risks and has accepted them on behalf of the people of Puerto Rico in an effort to preserve his candidacy for re-election in the face of dismal approval ratings.

Alternatively, the Administration and its advisors may have collectively decided that a default will buy them the time it takes for bondholder responses to wind their way through the courts? If so, this is an extraordinarily expensive approach to achieve short term liquidity, as the higher cost of capital will be born by Puerto Ricos citizens for most of a generation at least a decade.

Perhaps the most cogent explanation of the Administrations actions can be found in the words of Lee Buchheit, their lead counsel at Cleary:

The principle skill of a sovereign debt restructurer is the ability to persuade perfectly sensible people to do something – reduce or stretch out their claims – that no sensible person would ever think of doing. The required talents? An ability when speaking to creditors to slip effortlessly between an imperious tone and a cooing, let the little children come to me intonation. A sense of theater. And, when dealing with large creditor committees, a familiarity with the basic principles of animal husbandry.

–Lee Buchheit and Rosa Lastra, Sovereign Debt Management

This kind of cynicism and gamesmanship may suit Padillas near term political objectives. It may even be acceptable practice for a borrower like Ecuador or Argentina that periodically defaults and is unlikely to become top tier credit any time soon. However, Puerto Rico has, for many decades, enjoyed ready access to capital at extremely low interest rates. To squander that for these short term political considerations seems reckless in the extreme.

The Fiscal Adjustment Plan is unlikely to achieve its stated objectives because the Administration has squandered its credibility with investors, the purpose of the proposed restructuring seems to be to allow the Administration to go on spending in an election year, and the Administrations legal position is extremely weak.

Clearys maneuvering might be well-suited to jurisdictions deficient in the rule of law, but its benefits seem less clear as it encounters a court room. The Commonwealths Constitution is clear on the priority of GO debt service over any other government expenditure. Holders of other government credits like COFINA and bonds secured by various other Commonwealth revenue streams are likely to vigorously contest the governments assertion that it cannot afford to pay them.

The Commonwealths litigation experience with the PRBK Law that Cleary drafted and defended in court should provide some note of caution. Though the current strategy may serve Cleary and Buchheit well, the cost to the people of Puerto Rico could be exponentially higher than Clearys fees.

The Austerity Narrative

In his speech unveiling the Fiscal Adjustment Plan, Governor Padilla lists the history of austerity imposed on Puerto Ricos citizens:

Our people have been asked to make many sacrifices.

In 2005, toll rates and the University of Puerto Ricos [UPR] tuition were increased. In 2006, water and sewer rates were increased. In 2007, a legislative proposal was introduced to establish a sales tax for the first time.

In 2009, excise taxes on alcohol, cigarettes and some motor vehicles were increased. Also, a 5% income surtax was imposed to individuals, corporations and cooperatives. At that time, a surtax was imposed on real property taxes that doubled the contribution for our homes and businesses. And youll remember that an additional tuition fee of $800 was imposed on UPR students. In 2010, 30,000 government employees were laid off, and the employer contribution to the retirement system was increased. In 2011, a new contribution of 4% was imposed on foreign corporations with manufacturing operations in Puerto Rico. [emphasis added]

In the current term, we injected capital into the Highway Authority and the Water and Sewer Authority, we reduced by 75 percent the hiring of professional services, adjusted government spending with the passage of Act 66, we restructured the Metropolitan Bus Authority, consolidated public schools, and we extended Act 154 for foreign corporations that continue in Puerto Rico. We imposed a tax on transfers of foreign stores and are now in full transition to a VAT [value-added tax]. At the same time, we have reduced the amount of loans to finance operating expenses.

Interestingly these hardships consist almost entirely of tax increases, aside from the italicized reference to Governor Fortunos layoff and some obscure references to restructuring and consolidation of various operations during his administration, which we already know did not result in a single reduction in the public workforce.

The litany of tax increases might lead to the conclusion that the Commonwealths citizens bear an excessive tax burden. However, the reality is that Puerto Ricos tax collections as a percentage of the Islands economy is significantly lower than for the mainland US.

Puerto Ricos total tax collections are about $10.2 billion per year, and Puerto Rico residents pay another $3.7 billion to the US Treasury. This total of $14 billion is 13.6% of GDP or 20% of GNP. By comparison, on the mainland, US tax revenues as a percentage of GDP are 33% (38% of GNP). In high-tax states these numbers for the mainland are even higher.

Compared to the rest of the United States, Puerto Rico is a low tax jurisdiction in aggregate. However, many of Puerto Ricos residents may well be over-taxed, specifically, those who comply with tax laws. Puerto Rico has a large underground economy, estimated to be as high as $20 billion. Various studies have estimated that the size of Puerto Ricos legal underground economy (excluding illegal activities like drug trafficking) is between 23% and 30% of the total economy compared to 6% to 8% for the US mainland. Moreover, this underground economy grew significantly from 2000 to 2009. The amount of tax revenue lost to the government as a result of this informal economy is estimated to have grown from under $600 million in 2000 to over $700 million in 2009.

See here for more on this issue and other misconceptions about the Commonwealths fiscal crisis.

In this light and with the lack of any near term concrete actions proposed in the Fiscal Adjustment Plan, the Administrations calls for creditors to sit at the table of sacrifice seems a bit disingenuous. Creditors might be excused for worrying that they could be sitting alone at the table.


The Puerto Rico Aqueduct and Sewer Authority (PRASA), which is trying to manage a severe drought, provides a stark reminder of the adverse consequences of the Padilla Administrations policies. PRASA is trying to access the capital markets to refinance short term notes and fund its capital program. Lack of access to capital has shut down PRASAs capital improvement program, leaving contractors unpaid, idling workers and threatening to cause the Authority to raise water rates. The Commonwealth is in the surreal position of asking investors to put up money for one agency, while informing them the money they have already invested in other Commonwealth bonds will not be returned to them.

Press reports suggest the Padilla Administration has (mis)spent close to $100 million on the consultants and legal advisors who have led these hapless public officials down this road to nowhere. This late in an election cycle, it is likely too late for Padilla to admit his mistake and take a more responsible path. The creditors (and the citizens of Puerto Rico) will likely need to wait for a new governor to lead the Commonwealth out of this morass.

17 September
Comments Off on Hellgate High preparing to offer classes on financial literacy

Hellgate High preparing to offer classes on financial literacy


After two years of meeting with local financial institutions and finalizing the curriculum, Hellgate High School has announced the launch of its Finance Academy.

Organizers say this new program will have an emphasis on financial literacy through accounting, banking, and financial planning courses.

Introduction classes like foundations of personal finance to advanced courses like Financial Algebra will be offered starting next school year.

Organizers say they hope to have 90 students taking these classes by Year 5, and hope these classes will make students more prepared for life after high school.

We really wanna make sure that we can give students the skills that theyre gonna need when they leave the schools, but we also need to make sure that were finding ways to make education relevant to each and every one of these students, Governor Steve Bullock said.

Being financially independenthas been an important thing to me since my grandparents and parentstaught me the importance of helping others. And being trapped by debt, its impossible to help others, Student Ambassador Ari Jaffe said.

Hellgate principal Lisa Hendrix says they hope to eventually make these classes required for all Hellgate Students.

15 September
Comments Off on NDSU publication provides 10-year summary of state farm financial performance

NDSU publication provides 10-year summary of state farm financial performance

The Financial Characteristics of North Dakota Farms, 2005-2014 publication summarizes the performance of more than 500 farms enrolled in the North Dakota Farm Business Management Education program.

15 September
Comments Off on Pope Francis Will Visit U.S. Catholic Church Facing Grave Financial Trouble

Pope Francis Will Visit U.S. Catholic Church Facing Grave Financial Trouble

Since the popes election in March, 2013, the Vatican has enacted major reforms to clean up its often muddled finances and adhere to international financial standards. In June the Vatican appointed its first auditor-general, and each departments financial statements are now reviewed by an international auditing firm.

13 September
Comments Off on Fulton Financial Corporation (Nasdaq: FULT) to Ring The Nasdaq Stock Market …

Fulton Financial Corporation (Nasdaq: FULT) to Ring The Nasdaq Stock Market …

Fulton Financial Corporation (Nasdaq:FULT) to Ring The Nasdaq Stock Market Closing Bell



Fulton Financial Corporation (Nasdaq:FULT), a $17.4 billion financial holding company based in Lancaster, Pennsylvania providing a wide range of financial products and personalized services, will visit the Nasdaq MarketSite in Times Square.

In honor of the occasion, E. Philip Wenger, Chairman, President and Chief Executive Officer will ring the Closing Bell. 


Nasdaq MarketSite – 4 Times Square – 43rd amp; Broadway – Broadcast Studio


Monday, September 14, 2015 – 3:45 pm to 4:00 pm ET          

Fulton Financial Corporation Media Contact:

Laura J. Wakeley

(717) 291-2616

Nasdaq MarketSite:

Angela Tu

(646) 225-0316  

Feed Information:

Fiber Line (Encompass Waterfront): 4463

Gal 3C/06C 95.05 degrees West

18 mhz Lower

DL 3811 Vertical

FEC 3/4

SR 13.235

DR 18.295411

MOD 4:2:0


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About Fulton Financial Corporation(Nasdaq:FULT):

Fulton Financial Corporation is a Lancaster, Pennsylvania-based financial holding company that has banking offices in Pennsylvania, Maryland, Delaware, New Jersey and Virginia through the following affiliates, headquartered as indicated: Fulton Bank, NA, Lancaster, PA; Swineford National Bank, Middleburg, PA; Lafayette Ambassador Bank, Bethlehem, PA; FNB Bank, NA, Danville, PA; Fulton Bank of New Jersey, Mt. Laurel, NJ; and The Columbia Bank, Columbia, MD.

The Corporations investment management and trust services are offered at all banks through Fulton Financial Advisors, a division of Fulton Bank, NA Residential mortgage lending is offered by all banks under the Fulton Mortgage Company brand.

Additional information on Fulton Financial Corporation is available at

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