The Greece-ification Of Puerto Rico: Get Your Money Out Of Oppenheimer Funds

(Please note:  the term “Greece-ification” was coined by John Titus  of Best Evidence, who will be a guest on the Shadow of Truth podcast show tomorrow).

A big fight is brewing between Oppenheimer Funds and the Governor of Puerto Rico.  The battle is a smaller scale version of the battle between the EU and Greece.  Currently hedge funds own $15 billion in Puerto Rican debt, mutual funds hold $11 billion, and comatose high net worth investors have been stuffed with the rest – $46 billion – by their brain-dead, trusty financial advisors.

Too be sure, there is no doubt many $10’s of billions in credit default swaps connected to the bond insurance on Puerto Rico’s debt underwritten by MBIA, Ambac and Assured Guaranty.  I would not be surprised if Oppenheimer has exposure in this derivative form as well.

Puerto Rico announced on June 28 that it was unable to handle the debt service requirements of $72 billion in debt it has issued over the years.  The debt issued by Puerto Rico is structured as “super” municipal bonds.  This is because it is triple-tax free for everyone in the United States.  Typically muni-bonds are only triple-tax free for residents of the issuing municipality.

Because of this “super” tax-exempt status, the yield hog investors groped for Puerto Rican debt like groping pedophiles running a daycare center.  Despite the junk bond rating status of this debt, investors continue to beg for it like Oliver Twist groveling for gruel.

Puerto Rico’s economy has been sliding for nearly 10 years.   Nearly 50% of the island’s residents are living in poverty.  Yet the buyers of Puerto Rico’s debt continued to have insatiable appetite so Wall Street was more than willing to oblige, naturally.

The Oppenheimer Funds mutual fund complex is the largest bagholder of Puerto Rico’s debt.  including $4.4 billion of uninsured bonds.  Not including tobacco bonds, insured debt and pre-funded bonds,as much as 13%  of some of Oppenheimer’s bond funds’ total holdings are in Puerto Rico’s bonds.

This explains why Oppenheimer has assumed the role of Germany in the ongoing battle between creditors and Puerto Rico’s Government.  Puerto Rico’s Governor is seeking to restructure the $72 billion in debt down to a level that will enable Puerto Rico to continue servicing it.  The alternative is to force Puerto Rico to implement draconian budget cuts and tax hikes which would crush the economy and throw even more of its residents in brutal poverty.

Without getting into the details, Puerto Rico can not file bankruptcy in order to force a restructuring of the debt, although Congress is considering legislation which would enable the island to take this route.  If this occurs, 13.8% of Oppenheimer’s asset base will get hammered.  In my experience as junk bond market trader, in this particular asset sector yield hogs almost always lose their shirt.

The message here is clear:  If you own any Oppenheimer mutual funds, you are a complete moron if you do not call up your mutual fund custodian and sell them all tomorrow.  

Source links for this analysis:  Investment News and Vox.com

13 thoughts on “The Greece-ification Of Puerto Rico: Get Your Money Out Of Oppenheimer Funds

  1. I thought President Obama said last week that Greece and Puerto Rico would have no major effect on the US. Define major.

    I guess its all about perspective.

      1. We have been totally innundated with cock and bull stories.

        When we hear the truth we cannot reconize it.

        Oppenheimer cannot be the only one with big risk potential. Thankfully we are not seeing actual defaults where derivatives get triggered according to the contracts.

  2. Yup. This is what I expect from this sight. Prompt, thoughtful analysis that helps understand future events. Thank you.

  3. Dave, we sure are seeing a frenzy of auditions for most surprising financial talent, with entrants from every size category. When does it become regional or global?
    Not long after, although replacement structures such as BRIICS involve many dozens of nations, creating speculation a “Bretton Woods 2” or global reset must ensue. The powers that were (establishment and pedigreed, self-anointed .1%) bureaucrats, bankers, entertainers, insurers etc. have badly fumbled their intended Agenda 21 reorganization, corporate consolidation and final identification, privatization and monetization (incl. securitization) of all life and property claimed by the Queen of England and shadow governments/black nobility.

    Time to get back into metals
    By Pete Thomas | July 13, 2015 | http://www.resourceinvestor.com/2015/07/13/time-get-back-metals
    http://www.futuresmag.com/2015/07/13/time-get-back-metals#.VaRYXrfuaDM.twitter

    The orthodox, captured media is struggling to avert reclassification of their primary mission- as unredacted audience and readership numbers crater- using tentative coverage of alternative news topics, in the vain hope of preserving the status quo. This two page take on PM’s alternates between veiled plagiarism and grudging, shallow recognition, typified by this ending:

    “Now lets’ lift our thumb off the pause button and look out upon the world with a more educated overview. I hope it is becoming apparent that at the current levels and with the concept of safe harbor a little clearer now, it simply demands from the prudent investor that they must revisit the metals market as an educated investor. Even if the examples above hopefully never happen again, preparation for the worst case and hoping for the best case seems to fit right into this over view. It truly seems to be time to disregard the current downtrend and start to dollar cost average into metals. The average investor should look upon the chaos as more of an indicator of the general direction of the global situation to come and start to accumulate some metals as an alternative to paper.

    Trading commodity futures and options involves substantial risk of loss and may not be suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge and financial resources. Opinions are subject to change at any time, and are not a solicitation or recommendation to buy or sell commodity futures or commodity options. Past performance is not indicative of future results. The information contained in this message has been obtained from sources believed to be reliable, but is not guaranteed as to its accuracy or completeness. The average investment in alternatives is generally considered prudent at 5-10% of assets. Never borrow to invest.”
    http://www.futuresmag.com/2015/07/13/time-get-back-metals#.VaRYXrfuaDM.twitter
    http://www.resourceinvestor.com/2015/07/13/time-get-back-metals

  4. Sovereign, State, or government debt needs an occasional default or debt forgiveness to maintain the elite’s status quo. This is what the banksters don’t get. In the case of Greece or Puerto Rico massive austerity means declining ability to enforce control over the people they are trying to govern. If you can’t keep the hospitals open, the fuel flowing, grocery stores stocked, the police in the street, the airport open, etc… The status quo cannot be maintained. Even the people working at these banking institutions will no longer be able to function as their living conditions become threatened. You can live in your walled enclave, but you can’t go to the mall, the grocery store, the movie theater, or even a restaurant without fear. (See Venezuela) I use to spend a lot of time in P.R., there’s a small army of police that patrol the condato / wealthy area. They keep crime from the tourists and the elite. Once they are gone, it won’t take long for personal safety to become the defining issue of their existence. The island is already unsafe. If the government cannot fund itself, then they will see already massive unemployment skyrocket even further. All for funny money accounting ledgers enforced by criminal bankers. It does not matter if a default is official or unofficial. In the end, left unchecked we get a very crazy and hazardous world.

  5. The good to all this is a government that is forced to right size. I was amazed at how many people got jobs when a new governor took office. Thousands of new faces showed up to work as directors or managers because they supported the winning side. Then 4 years later the same thing happened again, as the otherside rewarded its cronies. Over and over again, this process continued until there was no more blood left to suck out of Puerto Rico. There will be a default, there will be pain, there will be a reckoning. Will there be debt forgiveness? It doesn’t really matter. The Puerto Rican government will be forced to right size. Unfortunately, the patient may already be dead. The bankers are just the vultures coming in to feast on a rotted carcass. There is very little left. It all has to be re-developed and a huge amount of investment in infrastructure is needed. If you ever go to Puerto Rico you will see that they are not so Rico.

  6. Pete:

    think locally and I use the KISS method.

    Illinois is out of cash. In order to meet pension obligations it has to cut back on services.

    Chicago is probably close to out of cash -so Mayor Rahm asked Gov Rauner for financial assistance. The broke going to the broke for help, th etheatre of the absurd.

    The pension beneficiaries, when pressed admit they had a great deal -spiked salaries when they were in their 50’s so they could retire in their 50’s with salaries and pension based as as if they waited to 65 levels.

    So they retire, get a higher level of benefits early and the school systems have to pay the new entrants. to take their place. Its a quagmire and now in Illinois the “Social Services ” departments are out of money , vendors to the state are not getting paid.

    The IL infrastructure is deteriorating,

    Next, Chicago and IL have been able to get better interest rates on new debt issued. What happens when the insurers will not insure Chi or IL (because they have balance sheet problems with Puerto Rico as Dave discussed here earlier). who really wants to hold new Chi or IL debt if it cannot reasonably be expected to be repaid?

    Meanwhile the new Prep Gov who wants to do something is met with total resistance by teh Democratic Leaders who are the cause of the problems.

    Once you study Chicago and IL you understand the depths of the problem.

    The pension beneficiaries still believe they will be fully paid since its guaranteed by law. They are counting on higher taxes to pay their benefits. That could happen but the illinois tax payer base shifts and high income folks, especially retirees, move to low tax rate states and we have influx of immigrants at base earnings if they are even reporting earnings. So tax increases go out the window.

    Companies in the Chi Metro area find it beneficial to move to either Wis or Ind.

    So watch IL and Chi to see business changes, government and we need not look overseas to see services reductions .

    by the way, John Nuveen, the muni mutual fund company has calculated that Chicago needs to double property taxes to fund the pensions. Ya think that woudl cause a bit more than a rippl ein teh Chicago social economic structure incl property values? Add in an increase in mortgage rates and property values dive.

    Further, cook county is planning on implementing a 1% sales tax. which would raise Chicago sales taxes to either 12.25 or 12.75%, so if people have anything left to spend, that too gets taxes and I hear Chi is about to tax companies like netflix for the services they provide. Chicago is on a tear to raise money. All roads are open except reducing retirees benefits, who by the way get free full healthcare at retirement.

    one day the news headline will be that either Chi or IL has literally run out of cash and is forced to cease operations.

    1. So lets see..
      1. The burden of the state increases as cronyism demands ever increasing resources. Think early pensions, high paying jobs, rewarding your supporters with lucrative contracts

      2. The state borrows more from creditors. The debt levels increase and servicing the debt also increases. The government monster must be fed.

      3. Tax burden increases to support debt and crony largess

      4. People and corporations leave

      5. Tax revenues decline. The state must sell off the people assets to feed the beast and pay the creditors.

      6. Services fail, infrastructure fails, No investment, no money.. see Chicago, Detroit, Puerto Rico, and several states.

      7. At this point. The debt is abandoned simply because there isn’t any productivity left. What we are left with is desperate poverty. From which many things can grow including civil war, revolution, global war, looting, strong arm fiefdoms. Historically they were called baronies, dukedoms, fiefdoms, kingdoms etc. Did you ever go through old Europe on vacation? There is a reason all those towns and cities were on hills with fortified walls. The wheel of time keeps spinning and we keep making the same stupid errors.

  7. Was Oppenheimer one of those fund companies that signed up the credit backstops recently? I think Vanguard was one, but I wonder if Oppenheimer did something similar.

  8. Maybe this is just another move by the state dept to subsume puerto rico, much like germany is conquering greece without firing a single shot. Economic hit men everywhere.

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