There are three options for House Republicans to take with respect to the burgeoning debt crisis in Puerto Rico. All three are bad.
If you’re like most Americans, what you know about the Puerto Rico debt problem is what you’ve seen on the nearly ubiquitous cable news commercials warning that “the politicians” are going to “bail out Puerto Rico” and its left-wing government by “robbing Americans of their savings.” This, because there is a bill being kicked around in the House Natural Resources Committee that would allow for a restructuring of some $70 billion in government debt the island territory has run up over the years. The bill in question is being pushed by House Speaker Paul Ryan and a number of other Republicans, but it’s being assailed on both sides.
Essentially the bill, titled the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), is a cramdown. It would put a commission together that would seek to force Puerto Rico to reform its fiscal policies — the island’s government is an avatar of Latin American leftist waste and corruption, particularly personified by its staggering $4 billion K-12 public education spending and thoroughly mismanaged government-monopoly power company. The bill would also impose a haircut on the bondholders by allowing Puerto Rico to access Chapter 9 municipal bankruptcy laws in large part. Several major Wall Street hedge funds helped accelerate the island’s debt crisis by snapping up $3.5 billion in bonds Puerto Rico floated in 2014, after its debt had been downgraded to junk status.
From a Republican perspective, the question is whether the cramdown favored by Ryan is a better option than the “let it burn” stand favored by Rep. John Fleming (R-Louisiana). In a Daily Signal piece last Friday, he warned that a debt restructuring for Puerto Rico will only pave the way for a similar debt default by irresponsible governments on the mainland.
Fleming’s take is very simple, very understandable, philosophically right, and probably the one Democrats are drooling over the prospect of the GOP adopting in an election year. Already, Hillary Clinton has called for more federal dollars to go to Puerto Rico through Medicare and Medicaid, supposedly to address inequities in funding for the island. No sooner does the GOP vote down a debt restructuring for Puerto Rico than her campaign, and the entire Democratic Party, will crank up the identity politics engine and call conservatives “racists” for failing to help Puerto Rico — as they promise to ride to the rescue with a full bailout.
Which is why Ryan is pushing the PROMESA bill. He wants to get the issue off the table so it isn’t used against his party in House and Senate elections, not to mention the presidential election, in the fall.
But then there are the ads. If you think the ones decrying the “Puerto Rico bailout bill” are in support of Fleming’s position, don’t be so sure.
Why? First, Ryan was correct when he argued last week that the opposition to the Puerto Rico bill is actually being funded by Puerto Rico’s bondholders. Ryan’s position is that if the bill isn’t passed Puerto Rico becomes Greece, only with fewer resources than Greece had. Since Puerto Rico isn’t a sovereign nation it can’t apply to the International Monetary Fund, for example, and a debt crisis in Puerto Rico could easily turn into a humanitarian crisis. The island is already suffering from a low birthrate, spiraling unemployment, and wide-scale out-migration, which has contributed to a protracted economic decline lasting more than a decade. Add a debt crisis to that and you could have an economic shutdown that brings with it civil disorder and unrest, which is already starting.
Guess who gets blamed for that because they “stood by and watched.” Not that Republicans had much of anything to do with running Puerto Rico into the ground in the first place.
But should the humanitarian crisis happen, Ryan and his allies predict a full federal bailout of Puerto Rico is going to be the Democrats’ position — and any opposition to that will no doubt be cast as racism toward Puerto Ricans and other Hispanics.
The current ads that demand Republicans oppose this bill come from an organization called the Center for Individual Freedom, a 501(c)(4) which does some good work at times but isn’t above some mercenary activity to pay the bills. CFIF got started as an outfit funded by tobacco companies to fight government attempts to outlaw smoking in the 1990s. Nowadays it does a broader base of mostly laudable work pushing for a less-intrusive government, but once in a while delves into something like this Puerto Rico controversy. Money from the likes of Karl Rove is suspected to be the reason.
CFIF doesn’t reveal its donors but has received grants from conservative groups American Action Network and Crossroads GPS, according to disclosures from those organizations.
CFIF dropped $900,000 on airtime on CNN, MSNBC and CNBC, plus more than $500,000 on D.C.-area broadcast and cable, and $86,000 on radio spots in Bishop’s district, as well as those of fellow committee members Doug Lamborn (R-Colo.), Raul Labrador (R-Idaho) and Cresent Hardy (R-Nev.), according to data compiled for POLITICO by The Tracking Firm. The ads call the bill a bailout tantamount to allowing Puerto Rico to declare Chapter 9 bankruptcy that would also open the door for states to follow suit — which proponents say is untrue. The spots urge viewers and listeners to contact their representatives.
The campaign takes the same position as hedge funds such as Aurelius Capital Management, Monarch Capital Group, Stone Lion Capital Partners, Davidson Kempner and Fundamental Advisors.
Monarch, Aurelius, Fundamental and Davidson Kempner declined to comment. The others didn’t respond to requests for comment.
All those bondholders got together and hired the high-powered Washington lobbying firm DCI to beat the bill. Former Florida congressman Connie Mack is the lobbyist on the Hill trying to kill it.
The other organization trying to stop the Puerto Rico bill is 60 Plus, the “conservative” senior citizens’ advocacy group founded as an alternative to AARP. 60 Plus is being accused of the same kind of mercenary thing CFIF seems to be doing, though 60 Plus would argue it’s their members’ retirement savings being crammed down should the bill pass.
The plan isn’t a complete cramdown, by the way, or at least the version that was discussed last week isn’t. It would protect the holders of Puerto Rican general obligation bonds while other debt instruments would take a haircut. Fundamental Advisors and Och-Ziff Capital Management, two firms who have apparently made Puerto Rico’s Democrat congressional delegate Pedro R. Pierluisi and his investment-banker wife rich by taking colossal positions in Puerto Rican debt in that $3.5 billion junk bond sale in 2014 (with the wife’s investment house based in San Juan pocketing huge commissions), hold general obligation bonds.
So Fundamental Advisors makes out either way. Either the bill passes and they’re protected, or it fails and there’s a full bailout and they’re protected. But if the bill passes, Pierluisi is a hero and he wins the gubernatorial election in Puerto Rico. That would mean Fundamental and Och-Ziff own the Puerto Rican governor the way Meyer Lansky owned Batista in Cuba.
Make no mistake, the money behind those ads is betting that if the Puerto Rico cramdown bill isn’t passed it isn’t going to be Fleming’s position that ultimately prevails. That money is betting on a Puerto Rican humanitarian crisis being “proof” that Republicans hate Hispanics and one of two things resulting — either a full-scale GOP retreat, which leads to a federal bailout for Puerto Rico and, subsequently, a procession of cities and states Democrats have run into the ground with the help of those same bondholders, or the election of Hillary Clinton and a Democrat majority in Congress which will produce the same result.
Puerto Rico doesn’t deserve a bailout, though perhaps there are adjustments to its status (a Jones Act exemption to assist its shipping industry, changes in the tax code) that would make sense and might allow its economy to recover. The bondholders who knew Puerto Rico’s debt was unpayable and still bet on the island probably deserve worse than a cramdown. And the GOP deserves to be able to stand on the sidelines preaching about the wages of stupid, bloated, Democrat government.
Nobody will get what they deserve here. The wrong folks will get more. The right folks will get less.