With major defaults looming for Greece and Puerto Rico, and concern regarding Illinois and numerous U. S. cities, much has been made of profligate borrowers. All of this coming after the major collapse in the U. S. residential mortgage market.
How about irresponsible lending? Did anyone really believe that lending money to homeowners, without adequate credit checks and realistic equity, made financial sense? Did anyone really believe that a poor island in the Caribbean, with a population of 3.7 million, could support aggregate debt of more than $72 billion?
This is not the place to rehash how all of this came about.
The important issue is that investors should be very careful. When someone bought a Puerto Rican bond, they may have focused on the fact that the interest is not taxable by the IRS, your State or City. But how secure is the principal?
Investors and their advisor(s) should be aware of the big picture when committing funds. Everyone seems to understand the importance of careful research for the equity side of the portfolio, but how much attention is paid to the fixed income side?
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®
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