One of the central narratives put out by the Garcia Padilla Administration is that Puerto Rico needs a new bankruptcy regime outside the bounds of the US Constitution because a "rush to the court house" will be detrimental to the Island's citizens. Since when did Americans come to believe that adjudication of claims under the rule of law by courts of competent jurisdiction is something to be feared?
The Garcia Padilla Administration are likely afraid of the courts because they know they are wrong. Moreover, his Administration seems to have a serious problem with transparency, which can be a problem in court. Most recently, he denied that his government is moving assets out of the Government Development Bank (GDB) and into private banks while they were apparently doing precisely that. GDB's creditors will likely point to the denials as evidence of a "guilty mind". Oddly, being upfront about the need to protect the Commonwealth from a failed institution would likely have been defensible. See here and here for earlier articles on this topic.
The Governor and his legal advisors, Cleary Gottlieb, whose principal qualifications are having advised Argentina, Ecuador, Venezuela and Greece on debt restructuring, might wish the US Constitution did not apply to Puerto Rico-a position the US Treasury is promoting under the "Territory Clause", and one the first draft of a bill being introduced in the House of Representatives seems to embrace. However, as should be clear from Garcia Padilla's approval ratings of less than 20%, most of Puerto Rico's residents prefer to live in America.
The current discussion draft of a House Natural Resources Committee bill would bomb Puerto Rico into the Stone Age financially and make it a pariah in the capital markets akin to Cleary Gottlieb's emerging market clients. The bill stretches the boundaries of the US and Puerto Rico Constitutions by allowing a board appointed by the Obama Administration to impose involuntary losses on creditors with no consent mechanism and virtually none of the judicial protections contained in other US bankruptcy procedures.
Congress should slow down and let the courts discover the truth of the matter first. The only immediate consequence of no action by Congress would be that the Commonwealth could default on additional bonds--something the House bill would not prevent in any case. This would interrupt payments to creditors, but would not impair the Commonwealth's ability to provide essential services. The only consequence to the Commonwealth of defaulting would be that it must show up in court and explain itself. If the default is truly necessary, it should have little to fear. Having already spent well over $100 million on fees to legal and financial advisors it should be well prepared to present its case.
The executive and legislature must often act on limited information and with the distortions of political pressures. Neither is as well positioned as the courts to thoroughly investigate complex disputes between competing interests. The judiciary has the greatest ability of the 3 branches of government to focus on truth and objectivity.
The Recovery Act the Governor introduced two years ago, would have allowed him to appoint new judges to hear his bankruptcy cases, but he has done everything possible to avoid going before the Commonwealth's Supreme Court or the Federal District Court, which would be more impartial forums.
José Antonio Fusté, a serious jurist and former Chief Judge of the Federal District Court for Puerto Rico, is presiding over the challenge to Garcia Padilla's decision to default on Puerto Rico Infrastructure Authority (PRIFA) bonds. Judge Fusté also presided over Walmart's challenge to the Administration's attempt to create a special class of taxpayer with exactly one member (Walmart) in a lunatic attempt to bilk the Island's largest private employer. Judge Fusté's ruling, which was thorough and quickly rendered, is a fascinating read. It reveals a deep understanding of financial issues and awareness of the current fiscal crisis. His ruling also shows serious concern for the impact of his decisions on the residents of Puerto Rico. He can clearly be relied upon to give careful consideration to the impact of his decision on the well-being of Puerto Rico's residents.
The clarity, probity and rapidity with which Judge Fusté dispatched the Walmart petition stands in contrast to the response to Puerto Rico's fiscal crisis by the executive and legislative branches, who have been hampered by a lack of full and fair financial disclosure from the Commonwealth itself. This should be a reminder of how valuable the judiciary is in resolving issues where it is essential to first learn the truth.
Congress should allow the judicial discovery process to occur for at least some period of time. Hopefully Judge Fusté will get to hear the Commonwealth's other default cases as they arise. Puerto Rico's creditors should get their day in court, and the Governor should tell his story to the judge.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long bonds of the Commonwealth of Puerto Rico and certain agencies