Will Puerto Rico be the next Bear/Lehman?

US congress is not stepping in to bail out Puerto Rico as many believed it would.  Thus, an historic bond default is likely on deck.  Well, where have we heard this tune before?  Oh, that's right.  It was Lehman bros and Bear Stearns back in 2008.  Lehman needed $138bn in government backed liquidity injections in order to break it up in an organized fashion.  In the case of Bear, "Over the course of seven days, the nation's fifth largest investment bank went from being profitable and seemingly overcapitalized, to being forcibly led to the auction block by its government overseers.".   How can this happen?  Simply because fractional reserved "assets" have fake valuations.  If the herd loses confidence then paper based assets that would have sold for billions yesterday are worth nothing today.  This is not my definition of an asset.  It is my definition of musical financial chairs.

The US financial powers could have saved Bear and Lehman before they collapsed but for whatever reason, perhaps because they still knew that the fear could be used to steal billions from taxpayers, they let the failures occur.  So I wonder if Puerto Rico is the next round of calamity here.  Who knows what chain reaction results from El Puerco Grande defaulting on its bond obligations.  NOBODY.  In fact, these bonds were rated as if nothing could ever go wrong.  go wrong.  go wrong.  Why?  Because it was written on some piece of paper that they cannot default!  What a joke!  Debt cares for no laws.  If debt must be serviced by law but cannot be serviced because the economic output of the debtors is too low then the law will simply be changed to reflect reality.

So the real issue here will not be Puerto Rico's default.  It will be the concept that general obligation (GO) bonds in reality have no legal teeth.  Bondholders cannot squeeze blood from a turnip any more than any other kind of debt holder and that is a game changer.  If GO bond holders see Puerto Rican default as being a precedent setter if not a trend setter then maybe they won't be so quick to buy the worthless paper of CA, NY, and many other clearly bankrupt Puerto Ricos waiting to happen at the state level.  It could cause an exodus from the bond market, also known as a liquidity crisis which could have implications far wider than just Puerto Rico.

I don't know what the event will be but all this debt is leading us to a bad ending at some point.