We the People Are the Pawns
The Title III bankruptcy proceedings enabled by the Puerto Rico Oversight, Management and Economic Stability Act (Promesa) are a bit like chess—there are kings and queens who rule over the game; pawns, who are expendable; a legislature that is toppled, but in denial; and a federal judge, Laura Taylor Swain, who will decide the ultimate outcome in this debt game. Meanwhile, legal rooks run amok, making a king’s ransom in what are known as professional and legal fees that are costing Puerto Rico well over $1 billion.
The pricey truth is precisely what prompted former Emergency Manager Kevyn Orr, who oversaw Detroit’s $18 billion bankruptcy proceedings, to call Promesa the Lawyer Relief Act. Orr knows a thing or two about these things. In Detroit, the proceedings prompted Judge Steven Rhodes to give really tight haircuts to creditor constituents, and the municipality to give away pricey waterfront real estate and valuable parking lots, coliseums and such to creditors who had liens in bond covenants that made those deals somewhat palatable.
In Puerto Rico, Judge Swain is in the process of weighing evidence presented during eight days in November to determine whether to confirm the eighth version of the plan of adjustment (POA). You read right, the eighth version—at less than affordable rates. This is occurring against the backdrop of a legislature that intends to greenlight going back to the market to issue $7 billion more in debt.
Que chévere—just what we need.
The truth is Promesa is chock-full of thorny questions: How long do you freeze pensions for teachers and other retired government workers; is 10 years tenable or do the people have to eat cake? How do you repay the Bonistas del Patio, those who put their full faith and credit in Puerto Rico bonds at par, unlike hedgies who came as wolves in sheep’s clothing to feast on the fatted calf at bottom dollar?
Perhaps it is encouraging to hear Judge Swain echo contemplative statements when her honor says she would take Title III for debt restructuring, and Title VI cases, with consensual action clauses, under advisement. Judge Swain believes these people, who are most affected by this bankruptcy, have made their plight known. What will she do to ease the pain—this journal thinks the answer is “very little.”
During the court proceedings, people made cases for their clients, populists grandstanded and the truth commenced to rear its ugly head. Entre broma y broma, la verdad se asoma goes the Spanish saying.
In this edition’s cover story, senior reporter José Alvarado explains that complexities in the math underpinning the POA and the truth about what the government has in the till is one of the factors that could delay a decision well into the first quarter of 2022. Lawyers such as Peter Hein, who is a retail investor, claim the POA violates both the U.S. Constitution and the commonwealth’s Constitution. Although he tosses his “my credit is better than your credit” argument, he punctuated remarks with numbers—that Puerto Rico’s government has some $25 billion in the bank, which is being used for operational costs. The government begs to differ, as it presented a report reflecting $12.2 billion as of Oct. 29. In Hein’s cross of the OBoard’s director, Natalie Jaresko, the iron maiden admitted that the amended POA preempted more than 50 commonwealth laws. In Promesa’s debt game, there is sleight of hand.
In listening to testimony by economist Andrew Wolfe, who was on the the team that helped draft the 2015 report spearheaded by the International Monetary Fund’s Anne Krueger, acknowledged that Puerto Rico had failed to enact many of the labor reforms and recommendations to ease doing business that allegedly would save some $30 billion for the island over 30 years. Going back to the market after certifying the POA was not one of the recommendations.
It is astonishing to hear an announcement by the OBoard that it would further tweak the POA to include several bennies such as Act 80 for incentivized public employee retirement; Act 81 for a dignified retirement and Act 82 for the liquidation of accrued leave days. And the cherry on top is the prohibiting of the 10-year restitution of the defined benefit pension system. Even Marty Bienenstock, he of the Ley de Quiebra Criolla, admitted that implementing acts 80 and 82 is not a risk worth taking because it affects the POA’s feasibility. Perhaps Bienenstock spoke the truth when he said that local laws are incompatible with Promesa. There is pain coming; that market access will not keep at bay.