Wall Street banks and hedge funds are collecting enormous fees from Puerto Rico in exchange for infusions of cash to keep the island on life support. As Bloomberg notes, it’s yet another case in which Wall Street and blue model governance have become strange bedfellows:
The commonwealth, grappling with a shrinking economy, paid banks led by Barclays Plc (BARC), Morgan Stanley and RBC Capital Markets $28.1 million in underwriting fees when it sold $3.5 billion of bonds on March 11, according to documents filed with regulators and released today. That’s $8.04 for every $1,000 of securities, up 27 percent from when Puerto Rico last sold bonds two years ago and still had an investment-grade credit rating.Initial investors, including hedge funds that bought most of the tax-exempt bonds, saw gains of as much as 7.5 percent during the first two trading days. Puerto Rico used $90 million in proceeds from the sale to pay Bank of America Corp., Morgan Stanley and other banks for breaking derivatives contracts.
Chicago lawmakers, take note: While you’re forced to raise taxes, cut services, and fire people, Wall Street will help you shirk looming downgrades and defaults. You can then claim to be “out of the woods,” with bills triumphantly paid for another 12–15 months. As investment bankers and hedge fund managers line their pockets with underwriting fees, they’ll continue to line up at your door to negotiate the next transaction. When the next round of default and downgrade threats comes, you can admit defeat, or you can pony up. With your job on the line, the choice won’t be hard to make.