Dear Mr. Berko: In 2013, my stockbroker had me buy $60,000 worth of Puerto Rican Sales Tax Financing Corp.’s tax-free bonds. I bought these bonds for my individual retirement account. The coupon was 5.5 percent. I paid $770 per $1,000 bond ($46,200 total), and they were supposed to mature in 2022. I got a great 7 percent current return, and the bonds were guaranteed by the collection of sales taxes in Puerto Rico. But now the bottom has dropped out. The bonds pay nothing, and I’ve lost at least 50 percent of my investment. My broker says that the bonds were recommended by his firm and that he didn’t know they were risky. Three of my golfing buddies use the same broker and own the same bonds. What are our chances of getting out of this without getting scorched? Could you explain what happened?
— C.D., Springfield, Ill.
Dear C.D.: Puerto Rico was a foreseeable economic disaster. It was a result of such gross political stupidity that even members of Congress were stupefied.
For at least a decade, Puerto Rico (meaning “rich port” in Spanish) was a predictable disaster from which only a limited recovery was possible. Bondholders, mostly hedge funds and bottom feeders, purchased huge pieces of Puerto Rican debt because Congress encouraged them to believe that those bonds had the imprimatur of the U.S. Treasury. Wall Street’s hedgies and bottom feeders bought the island’s bonds at enormous discounts, pocketing 8 to 12 percent tax-free. Now they’re bleeding like stuck pigs.
For years, these funds paid dues to their congressmen, believing Washington would, if necessary, rescue and guarantee Puerto Rico’s bonds. But for unexplained reasons, when push came to shove, Congress refused to guarantee Puerto Rico’s debt.
