tv Discussion on Puerto Rican Debt CSPAN February 10, 2016 11:26pm-12:56am EST
as a first-time voter, i'm trying to figure out what i like. i'm bouncing from candidate to candidate, campaign to campaign events. and i'm here at marco rubio's. i believe there's a candidate for everyone. and i'm looking forward to seeing who i like and who i will vote for. >> puerto rico has defaulted on some of its $72 billion debt, impeding its ability to finance government operations. a panel at the bipartisan policy center discussed ways for puerto rico to restructure its debt and resolve the fiscal crisis. this is an hour and a half. good morning. my name is aaron klein. i'm the director of the financial regulatory reform initiative. i'd like to welcome you all here at the bipartisan policy center for our in-depth analysis of the
upcoming super bowl. [ laughter ] no, we're all here on friday morning to discuss an issue that's incredibly important to millions of americans, both on the island and commonwealth of puerto rico, and throughout america. and it's a great privilege here at bpc, we are committed to advancing the common conversation that involves principled compromise on complicated issues. and i can think of no issue that is more complicated, more important, or more in need of principled compromise than how to deal with the problems going on in the finances of the commonwealth of puerto rico. so what we tried to do here is to assemble a all-star panel of folks with varying perspectives, differing lenses and experiences to come together to have this conversation. i think it's incredibly important for everybody here to understand that the treasury department ably led by secretary lew and the point person on that
who is here, tony weiss, has put out a thoughtful and detailed proposal on what to do. speaker ryan from the house of representatives has committed that the house will come out with a proposal, which he hopes to move through the chamber sometime next month and as we'll hear from our panelists, there are some real and important deadlines, that will require tough choices and action necessary to turn the situation around. so with that as the backdrop, let me introduce the panelists and then i'm going to join them on stage to begin the conversation where we will then eventually turn to the audience for questions. i'm going to start to the left, as you mentioned, antonio weiss, counsellor to the secretary at the department of treasury. antonio advises on domestic and international issues related to financial markets, job creation, and broad-based economic growth. i can tell you from having
served for four years in the obama administration the role of counsellor is key to providing insight, analysis and solutions to the secretary. antonio is distinguished in many ways. he has a bachelor's from yale, mba from the harvard business school, a member of the council on foreign relations, thank you very much for being here today, antonio. seated next to antonio is tony williams. for those of you like myself who grew up in the washington area, you know tony because he was the mayor. mayor williams served from 1999 to 2007. he's currently the ceo of federal city council. all of us who are in washington owe a great debt of gratitude to tony. he's widely credited with leading the comeback of washington, d.c. during his two terms as mayor. he restored the finances of our nationas capital, improved the performance of government agencies all by lowering taxes,
investing in infrastructure and services. sounds like a bipartisan group of outcomes. before his election, he importantly served as chief financial officer of the district's financial control board. you'll be hearing more about those thoughts from 1995 to 1998. like antonio, williams is a graduate of yale, with a master's in public policy and a jd from harvard. seated next to mayor williams is hector negroni. hector is the co-founder, co-ceo and chief investment officer of fundamental credit opportunities. hector's been a pioneer in the municipal market of the last three days, leading innovation and prioritizing trading, public/private financing securitiesation. before that, he had a career on wall street, working at goldman sachs, citigroup in a variety of leadership roles. he's from the island and has a distinguished history on the
island of puerto rico. in addition, he earned his bs from the wharton school at the university of pennsylvania. and before this turns into a university of pennsylvania love fest, i'll turn to david skeel, who is the professor of corporate law. he authored numerous publications. and also a history of bankruptcy law in america. skeel is a leading thinker, frequently quoted in the press. and as important to his contributions to public policy, he's distinguished in the classroom as well. winning several teaching awards, including the harvey levin award, and the robert gorman award for excellent in upper level teaching. so hopefully we'll all learn something today. so with that, it's my pleasure to join this great panel. i thought we'd kick it off,
antonio, with you. you and the secretary were down on the island last week. you've been at the forefront of this issue for quite some time. set the table for us. what's going on today in puerto rico? and where do things stand here in washington? >> well, aaron, first, thank you, and thank you the bpc for organizing this event today and bringing greater attention to this crisis. very simply and -- this is a question of 3.5 million americans. this is an american crisis. this is also a puerto rican crisis. and it is one which started as an economic recession, developed into a fiscal crisis, and is today a liquidity crisis, which shows signs of becoming a humanitarian one. let me give you just a few elements of that.
the commonwealth ran out of cash in june, approximately, of this year. the only way in which they have been able to fund essential operations has been to delay payments to suppliers, to take funds out of insurance funds, including workers compensation funds, to borrow from the already depleted pension funds of $46 billion. virtually unfunded. and not to send out tax refunds. taxes with respect to 2014. what does this mean? the revenue forecasts have already fallen short. these actions which are necessary to provide liquidity are forcing the economy into deeper recession, and this is a fragile case. i should remind everyone that 58% of puerto rican children
today live in poverty. that's more than 40% of puerto ricans live in poverty. there is no room for error in this economy. and i think what has changed in the many months we have been traveling to puerto rico and receiving puerto ricans and puerto rican officials in washington, is that there is a palpable sense of fear, and a justifiable expectation on the part of our fellow citizens in puerto rico, that we, collectively -- and by we, i mean not those of us gathered at the bpc, but the administration and congress will act as we have always acted when there's a crisis that faces americans, which is to do what's necessary to stem the crisis to, protect the people and to allow the economy to continue on the path towards growth.
so we are encouraged by speaker ryan's commitment to introduce legislation by the end of march. there are very positive discussions taking place on both sides of the aisle. there is a broad and generally accepted recognition that this crisis needs to be addressed now. and we look forward to working with both chambers of congress in designing the appropriate response. >> so there's an urgency, it sounds like and a note of progress being made? is that fair? >> there is undeniable urgency and a need for action immediately. and there are promising discussions that are taking place in congress and there's a full-blown effort by the broader administration, and this is not
just treasury. i should mention this comes from the white house. this comes from all agencies of government. and -- but the proof will be in the action we take together and that has yet to happen. >> so, antonio laid out kind of a dire situation, and many folks in the room may not remember as i do that washington, d.c. faced a pretty dire situation, not at the humanitarian levels that were described, but mayor williams, you've been part of a turnaround, where you've come into a situation that had a problem, and left a city that was just booming. from your experience, what can the local government do when they're facing this type of situation, what can't they do, and what are the pros and cons of structures that enable them to do that, particularly the one that you were a part of, which was the d.c. control board? >> well, i think there are a lot of similarities between all the experience we had in washington,
d.c., and philadelphia under its control authority and our mayor rendell, new york, and the control authority in ed koch. talked to both of them as i started here in d.c. then senator governor, but then mayor, his highest job, winnow vich, in cleveland with their issues, and a lot of similarities between them. but i think the differences and i'll start out with the differences in terms of truth in lending. when i dealt in washington, d.c., like now, you had a treasury department now under jack lew, very, very able. economic counsel, very, very able, focused on d.c. but despite the acrimony in the 1990s, and there was political acrimony, you had a consensus, basically a bipartisan consensus between republicans and the clinton white house, that we had to do something for d.c. d.c. had to be successful.
i hope that that is the case now. then, you know, financial experience, financial expertise throughout the country was valued. i'm not sure it is now. like today, goldman sachs is evil. that's hard to deal with all those issues and people suffer from going through all that commotion and shenanigans. we had -- in fairness, let's not try to be superman, we did have a booming economy in the '90s. here the global economy's not really cranking on all cylinders, and you have real economic issues in the commonwealth. but with all that said, i do believe that there are some similarities. while i believe there's always moral hazard in any kind of financial crisis, you know, to use antonio's example of an urgency, if somebody builds their house on a shore and the hurricane comes and threatens the people in that house, you don't tell them, we're not going to rescue you, because you shouldn't be living on the shore. no, you go and you take care of
the immediate problem, then you take care of the longer issue. certainly the immediate issues have to be taken care of, because people's lives are at risk. but i think, this is my point, i do think it has to be done in a context of improving accountability, improving systems, settling expectations for citizens and investors, on which you can address the issues of a bad relationship with the federal government in terms of programs, in terms of fiscal relationship, address the issues of economic recovery, in the context of greater accountability, i do believe that. >> so what is the mechanism? you're both a student and a graduate of the program of control. controlled boards. what is the mechanism that you've seen have worked well that you think could work well in puerto rico? >> i think the control, like in
puerto rico, like here in washington, d.c., we have issues with the dominance and we believe subjugation by the federal government, we don't have full representation, and on the island, there are ways to address it. but everybody recognizes this unfair relationship with the federal government. my only point was, look, while we're dealing with longer term relationship, we can reset the table, deal with all the short-term, medium term, longer term issues and do it in a way that's politically defensible. you know i've worked under the authority of the control board and i was later elected mayor. so when people say the control board is the end of democracy and people hate control boards and forever and ever, that's just not true. i think if you use the control board setting, again, with leadership on the ground, with elected officials in puerto
rico -- i don't know where my voice is going -- and very, very importantly, you use this important to do good public education of where we are, explain to the people in puerto rico, here is where we are. here are the steps we have to take. very importantly, we're going to take these steps, some of these steps may be tough, but i think all of us would agree we're taking these steps toward a better future. i think all of us would agree, and this is certainly the case in d.c., you don't say we're going to take these tough steps and then we're falling off a cliff. no, we're taking these tough steps to get to a better place. and that is, i think, this is really underestimated in these fiscal situations, the role of leadership on the ground, the role of good public education, the ability to explain the financial situation in layman's terms to your constituency, it's so very, very important.
a great example of explaining financial distress in layman's terms, i say this as a financial person and i'm not as smart, but i would highly recommend to you tim gardner's book, it really lays out, explains to the layman, a financial crisis and how you approach it. >> always a pleasure to have a former boss compliment it. he understood the issue and guided america in a way that was to all of our benefit. but i'm pretty biased on that one. hector, there are a lot of conversations about tough choices. you advised many bondholders both on and off the island, who are thinking deeply about this. what is the outcome that they think is the best way to solve these problems? what does it include that will work and what should we exclude that won't work? >> thank you very much for having this terribly important
topic, both as a serious matter for our country and intimately important to me personally. family from puerto rico for a very long time. i think one of the greatest challenges we face, and hopefully this is helpful to resolving it, there's a fair amount of confusion around the facts. a healthy dose of conflation of what is the crisis and what is the catalyst for the crisis. the challenges that puerto rico faces on the social front, in the size and scope of its obese government and its, you know, not particularly great governance, have been around for some time. i don't take great pride in saying that. puerto rico has not run itself particularly great. but what has not happened is that overnight something has changed radically so that we have to have some huge response from the federal government to kind of set aside rule of law in order to slice a knot that can't otherwise be untied.
the truth is, puerto rico has not done a good job of collecting taxes and addressing an underground economy. it's not done a particularly good job of right-sizing its government. government need to decide what business business they're in, and what businesses they're not in. it's like having 78 dmvs, doesn't sound particularly efficient. and 60,000-plus issuers contend with this decision all day long. that's what governing entails, making the difficult decisions about revenues you can collect and governing and living within that context. and lastly, we do have near term issues with respect to getting equitable treatment under the federal programs. puerto rico does have some challenges with respect to the head winds of lack of harmony within the federal programs it's under. so the most important thing is to separate fact from fiction.
puerto rico's not some sovereign country. when i go down to visit my family, i don't see rows of strife on the streets. my family is not well off. we go down there and i see hard-working americans deeply proud of being part of this united states, but they're facing an immediate challenge with liquidity concerns. this is resolved in my view by a couple of things. we have to think about being very transparent in the financials. that's been a very big challenge. there's no recent financials. on one look, you can look at the commonwealth financials and say they raised revenues 20% this year, took down their cost of borrowing, because they defaulted and miraculously they're out of cash. and that's an oversimp livification, but without the facts it's hard to separate the truth from fiction. what we know about puerto rico is not all expenses are necessary. not all revenues are collected and not all debt is subservient to all those consequences. and so that's what drives the
liquidi itity crisis. they choose to pay for something versus something else. the decision made about puerto rico is all expenses are senior to all debt. so we have to consider all consequences and consider restructuring debt. i also look at this from the perspective of a municipal industry participant. one of the most dangerous things we can do is create precedence that create risks for the financial marketplace. setting aside special rules that flout the rule of law and create politically expedient solution says, upset the fragile equilibrium of the $3.7 trillion marketplace, which finances nearly 70% of the necessary infrastructure of these united states. we can't set that aside to solve this in a rush to hopefully make something politically appealing. so in our view, the ultimate solution hinges on three points. you know, clearly there's a need
for fiscal oversight. i think the mayor's experience on this is incredibly important, and the effort made in d.c. can be a good example around a control board. clearly there has to be some package of equitable treatment under a suite of programs in the federal government that allows puerto ricans to enjoy some stimulus to federal growth. this has to be a vision to the future. and lastly, puerto rico has a rack of debt. not all of it is insolvent. but we have to honor the constitutional obligations, honor the rule of law, service the senior depositions so we keep the municipal market functioning. we can come up with a lot of ideas that there's a tool in the marketplace that exists and it serves lots of other issues as well and that's the framework of chapter nine. packaging those together in some framework seems to be an elegant way of solving this liquidity
crisis so we can build a future for puerto rico. >> so hector, i have to say, since we're all talking about personal connections in this space, i grew up here with my mother as a leading maritime lawyer and i will say this with some pride, i think she was the world's expert on the application of the jones act to u.s. territories. unbeknownst, i didn't understand what it meant as a small child, but the island of puerto rico owned a steamship company. that makes sense. you pointed out all these things that municipality, that commonwealth owns, parts of industry and municipality it's in, it's very hard for 78d municipalities to be the leader and say, i'll be the one that gets sub sumd. what kind of structure do you see and what's the role, if any of the federal government, in providing that framework to make those tough choices that you describe need to be made, not just for the liquidity solvency today but importantly for the
bright economic future that we all aspire for for puerto rico? >> an independent control board that provides fiscal oversight for the immediate purposes of writing a budget, keeping all the expenses in check, making sure that there's process and control in a world where there seems to be less than there should be, is invaluable. and then of course facilitation of the growth initiatives. you know, whether it be through the harmonization of programs or the consideration of privatization of assets. one of the things i often say in general, municipal governments have to decide the business they're in. not every one should be in the parking business, not every one should be in the airport business. you have to decide what you can afford to be in, and why it suits your constituency. i think a control board would be enormously useful in guiding towards that end. >> david, i want to bring you into the conversation because the rule of law, bankruptcy,
these are things on which you are one of the world's experts on. and you've done a lot of work in financial regulations, particularly on questions about too big to fail. and the key theme in your work is the preference to bankruptcy and the consistency in application of the bankruptcy code to other things, bankruptcy, not bail-out. that's a common theme among many folks in the republican party. what i'm a little bit confused any is kind of, now the republican party seems to be coalescing around this idea of a control board, which has broad support here, but has been much more silent on questions about bankruptcy. and so, why is that? why is bankruptcy so preferable in financial positions and should it be preferable in this, as hector alluded to, in this position? and to start off, for everybody in the room, why can't puerto rico act like michigan when they
put detroit into bankruptcy recently? and what are the ramifications of that, and where do you think this situation ought to end up? >> let me add my thanks to those of the other panelists. this is a very, very important conversation, maybe the most important conversation at this particular moment in time. and it's a privilege to be part of it. so why can't puerto rico use chapter nine? why can't they use bankruptcy or something like bankruptcy? there's a two-part answer to that question. the first is for reasons that are not clear to anybody that i know, puerto rico was excluded from chapter nine in 1984. the term "state" was defined for the purpose of the federal bankruptcy laws in a way that made puerto rico a state for every purpose under the bankruptcy laws except filing
chapter nine. so puerto rico is not able to use bankruptcy the way the 50 states can authorize their municipalities to use bankruptcy. so against that backdrop, which everybody was aware of, puerto rico said, since we've been kicked out of chapter nine, and we're in this very severe crisis, what we'll do is, we'll put in place our own restructuring law that will look a little bit like chapter 9, won't be quite as broad as choo chapter 9, but will be a territorial restructuring law. so puerto rico did this in 2014. they put in place a law that's known as the recovery act. what has happened, that law has been struck down by two federal courts. it's been struck down by a federal trial court. then was struck down. the striking down was upheld by a federal appellate court and the rationale was, there's another provision in chapter 9,
not the entrance provision, but another provision that says states can't enact their own restructuring laws. and what the courts have said is that other provision applies to puerto rico, prohibits it from enacting its own restructuring law even though the rest of chapter 9 doesn't, even though puerto rico doesn't have access to chapter 9. that issue is now in the supreme court. the supreme court agreed to hear the case. it will be decided this term. my suspicion, although as i was telling my bankruptcy students yesterday in class, my track record on predicting the supreme court, it's about zero, but it's well below 50%. my guess is, it won't be decided until the summer. and whatever happens will be too late to be a major part of the solution to this crisis, is my
view. it's possible i'm wrong about that. but the decision will come too late and it's at best 50/50 that puerto rico's going to win, i think, in the supreme court, as crazy as that seems. i maybe should note, i and a co-author of mine filed a little amicus brief saying the supreme court should reverse the lower courts. but back on the question of bankruptcy generally and why do republicans seem to be coalescing toward a control board plus checks, something that sounds a little like a bail-out approach? my first reaction to that question is, i hope that's not where republicans are coalescing. my sense is, my sense may be wrong, but my sense is that that was kind of an opening bid. that the opening bid was what i would call a bail-out, a little bit uncharitably, what you might
call a check, aaron, and not a bankruptcy option. but there has been some hostility among republicans to a bankruptcy or restructuring option. why is that? it seems to me there are two factors that occur to me for why there has been hostility. one is that many creditors have been hopeful that bankruptcy isn't necessary. that there's another way that would involve puerto rico fixing some of the things that hector was talking about, maybe a check of some sort, or a few checks from the government, and so there was a sense that maybe we don't need bankruptcy. why pull out the big weapon when you don't need the big weapon. i think the group of people that hold that view has shrunk considerably in the last few months. and i don't think that view is nearly as widely held. in fact, i think i heard almost all of us on this panel suggesting some sympathy for
some kind of restructuring mechanism. the other reason why republicans have been a little bit leery of a bankruptcy or bankruptcy-like alternative, is, there's a concern that this is the slippery slope to bankruptcy for states. that puerto rico is allowed to file for bankruptcy, particularly if it's not just the municipalities which is what chapter 9 would provide, but the commonwealth itself. the concern is, next thing you know, illinois, we'll be talking about a bankruptcy approach that would pull in illinois. republicans have not been sympathetic to that approach. but it seems to me, to go back to where you started the question, aaron, that the same kinds of thinking that made republicans enthusiastic about bankruptcy for large financial institutions also applies here. that it's a fix to a disaster, it gives you a way to resolve
the disaster after it's happened, and it creates better incentives for the future. if you know that your clients may be restructured if your borrower is unable to pay, that's going to change the way you think about lending. i think that's a good thing. i also think bankruptcy can have some good effects on politics. bankruptcy doesn't usually affect politics, but it would do things like, with pensions, cause you to think about whether you're funding your pensions properly or not. let me stop there. >> aaron, did you want to jump in? >> i don't think bankruptcy is a good thing if you leave the same political status quo in place. and i don't think it's a good thing to use bankruptcy simply to and solely to the exclusion of everything else, just clam down the doubt and you don't want to look at the long-term structural issues that got you into the situation in the first place. you take care of the patient in the emergency room but you got
to make sure the patient leads a different life to use the analogy. >> just to put a footnote on that, i'm not at all opposed to a control board. in fact, the approach that i have personally outlined for puerto rico would include both a control board and not chapter 9, but a territorial restructuring law. >> so i want to turn it over to antonio. because treasury and the white house have laid out a ten-page plan. many of you in the room have read it. if you haven't, i urge that you do. it talks about fiscal oversight, restructuring authority, increase in federal funding, and i can tell you from my experience when i served in congress, puerto rico is randomly treated at varying levels for federal funding throughout a wide variety of programs, particularly the treasury proposal would increase puerto rico's share of federal health care funding.
puerto rican citizens, despite being american citizens, are often not counted and getting their proportional amount as much as they would in the state for many programs, particularly in health care. so i want to start for commending you for leadership on this. often it's easy to give a kind of shock that you hear the treasury or the white house isn't providing leadership and this is an example where you are. you can agree or disagree with your plan, but you're out there leading in that space. so what response have you gotten from congress, from democrats and republicans and other stakeholders on your plan? >> i mean, as i said at the outset, aaron, and there's a lot in what's just been said i'd like to respond to, but i'll answer your question and then maybe leave a little space for further comment. there is broad agreement first that this is a crisis. there's no debate about that. second, even on this panel, you're hearing agreement that there should be a restructuring
of the debt. there may be a disagreement as to which debt gets restructured, but there is agreement that there should be a debt restructuring. and that there should be appropriate oversight. and there may be disagreement as to what constitutes appropriate oversight, but we're all talking about that as well.