Ley de Quiebras de PR

PARA AÑADIR A LOS INSULTOS, AHORA TAMPOCO SOMOS SERIOS

En el día hoy, el amigo Benjamín Torres Gotay dice en su columna dominical que “[n]o hay mucha gente seria que crea que la deuda es pagable en su totalidad en los términos actuales, o que se pueda hacer sin que implique descomunales sacrificios para el ciudadano común.” Creo que el Dr. Carlos Colón de Armas, el Dr. Elías Gutierrez, Dr. José M. Saldaña y este servidor, para dar ejemplos, si creemos que se puede pagar la deuda sin “descomunales sacrificios”. Esto sin mencionar los continuos insultos que el Gobernador profiere contra aquellos que desenmascaramos las mentiras en sus agendas e informes. Demos, pues, un vistazo a la alternativa del impago.

PR necesita desesperadamente inversión. ¿Cuantos invertirían en un territorio que no cumple con sus deudas? Más aún, si hiciéramos como Ecuador, que hizo una Comisión (como la empuja el Representante Natal) para determinar que deuda es legítima y cual es odiosa ésta nación libre y soberana no pudo ir al Mercado por 7 años. PR tiene un terrible problema de flujo de caja, ver Conway & MacKenzie Commonwealth of Puerto Rico Liquidity Update, del cual poco ha salido en prensa, a la página 11. Ha llegado al extremo de canibalizar las pocas corporaciones públicas para allegar fondos. No ha podido emitir deuda de $2.9 billones a pesar de una garantía/gravamen de la crudita y la AAA tampoco ha podido flotar una modesta emisión de $750 millones, en parte por la soberana estupidez de los abogados del Gobierno en su solicitud de certiorari al Supremo Federal sobre la quiebra criolla decir que la AEE, la AAA y Carreteras no pueden pagar su deuda actual. ¿Como va el Gobierno de PR operar por 7 años sin préstamos puente? ¿Cómo podrán terminarse los múltiples proyectos de la AAA, inconclusos por el malgasto de sus fondos? ¿Cómo se podrá terminar el Supertubo, tan criticado y ahora tan necesario?

Más aún, la negociación de la AEE nos ha tomado más de 1 año y a pesar de los reclamos del Gobierno, no ha terminado. Se acordó con los “odiados” fondos buitres, el 35% de los bonistas, un acuerdo que ya ha sido harto criticado como insuficiente, y falta el otro 65%. Recordemos también que durante este periodo la AEE pago sus deudas. Lo cual nos lleva al próximo asunto: ¿Impagará el Gobierno alguna de sus deudas mayores para demostrar su incapacidad? El Informe de Conway MacKenzie nos dice que en diciembre de 2015 habrá un déficit de caja de $733 millones y de $520 millones en enero, o sea $1,253 millones de déficit en esos dos meses. Al mismo tiempo, PR tiene que pagar $1,299 millones entre esos dos mismos meses, incluyendo $332 millones en GO’s que están protegidos por la Constitución. Si PR impaga, lo demandarán en la corte estatal o federal y perderá. Recordemos que la Constitución provee una causa de acción contra el Secretario de Hacienda para obligarlo a pagar, ver Artículo VI, sección 2 .

El Secretario de Hacienda podrá ser requerido para que destine los recursos disponibles incluyendo sobrantes al pago de los intereses sobre la deuda pública y la amortización de la misma en cualquier caso al cual fuere aplicable la Sección 8 de este Artículo VI mediante demanda incoada por cualquier tenedor de bonos o pagarés emitidos en evidencia de la misma.

Otro punto del cual difiero totalmente es cuando Torres Gotay indica que hay “retirados que invirtieron de buena fe en el Gobierno y merecen su pago total. Pero fallaron. Seguramente porque fueron mal orientados, pero invirtieron mal. Todo el que tiene dos ojos de frente, sabe hace años que la supuesta prosperidad de Puerto Rico en la que invertían era una fantasía.” Varios puntos salientes; ¿hace cuantos años se sabe que la bonanza de PR era fantasía? ¿Bajo Sila, Aníbal y Fortuño? ¿Y los que invirtieron antes de eso, eran ciegos? Recordemos además que un inversor prudente y razonable usa las casas acreditadoras y los mercados para hacer sus inversiones. Es solo en agosto de 2013 que los mercados abandonaron a PR a raíz de la quiebra de Detroit y luego lo hicieron las acreditadoras. Es bien fácil decir hoy día que esto se sabía cuando hace dos años no era la realidad del Mercado. No solo eso, recordemos que alrededor de 30% de los bonistas son de PR. ¿Cual será el impacto sobre estos retirados si PR impaga? ¿Y se protege a los empleados del ELA pero no a los retirados?

Más aún, a las Cooperativas el Gobierno de PR las convenció de invertir en sus bonos. Ahora mismo estas tienen $1,100 millones en bonos de PR y alrededor de 30 de ellas, según COSSEC, están en problemas económicos. ¿Cual va a ser el impacto en la economía de PR si estas impagan. COSSEC solo tiene $268 millones para cubrir los depósitos de los socios y cero dinero para los accionistas. Esto podría ser un golpe mortal a un sector exitoso de la maltrecha economía Boricua.

Cabe señalar que el informe de Conway MacKenzie también dice, aunque no explica como, que PR podrá pagar esa deuda en diciembre/enero pero insiste en un déficit en junio de sobre $500 millones y PR tiene que pagar sobre $1,900 millones, incluyendo $780 millones en GO’s en julio de 2016. Mismo problema. Y como indiqué anteriormente, los bonistas, antes estas pérdidas demandarán y ganarán. Contrario al escenario que presenta el Gobierno, esto no será litigación de años. Debido a su importancia, el Tribunal Federal y el Tribunal Supremo de PR moverán las controversias con rapidez para darle seguridad a todos.

Otro punto importante es que el informe de Conway MacKenzie, a la página 45, nos dice que para el año 2018, el Retiro de los Empleados del ELA estará en negativo. El resultado de esto es que el Gobierno tendrá que buscar alrededor de $1,500 millones adicionales para pagar a los retirados, los cuales tienen un derecho constitucional al pago, ver Bayrón Toro v. Serra, 119 D.P.R. 605 (1987). Algo parecido ocurre con el Retiro de Maestros, página 46, que también se agota en el 2018 y habría que pagar poco más de $700 millones anuales. Y recordemos que aunque el Gobernador “reformó” el retiro del ELA, no ha hecho la contribución adicional que se suponía hiciera, página 44.

Más aún, el “Puerto Rico Fiscal and Economic Growth Plan” el cual bauticé en el programa radial El Azote como “Una Porquería”, depende de que la Legislatura apruebe varias medidas de reforma laboral, que aunque necesarias, tienen cero oportunidades en la Cámara donde varios legisladores de mayoría han negado su apoyo. Más aún, esta porquería depende en gran medida que el Congreso elimine la aplicación del la Ley Jones a PR, de paridad en fondos Medicaid/Medicare, permita el congelamiento por 10 años de cualquier aumento al salario mínimo, la aplicación del Capítulo 9 del Código de Quiebras a la isla, etc. Esto no es más que un wish list sumado a la carta a Santa Claus. Not going to happen.

En vez de esta porquería, el Gobierno debería estar reduciendo sus más de 100 agencias, reduciendo los gastos de publicidad y los gastos en asesores financieros, por mencionar unos cuantos. Se habla sobre reducir agencias pero esto toma tiempo en el mejor de los casos y no lo vemos ocurrir. Otra medida a corto plazo que deben considerar es reducir la jornada laboral a cuatro días, de ser necesario.

Como nos han indicado los economistas Colón de Armas y Gutierrez, el problema no es uno de recaudos, sino de gasto. Entre 2006 y 2014, a los puertorriqueños se nos han aumentado los impuestos por los diferentes gobiernos en $12,000 millones, ver página 20 del libro de Gustavo Vélez, El Ultimo Tarjetazo: De la Chatarra a la Oportunidad, 2015. Así que ya los boricuas estamos incurriendo en “descomunales sacrificios” y lo que falta con la entrada en vigor del IVU a los servicios profesionales.

En síntesis, el plan del Gobierno es una porquería y el impago que sugiere la columna de Torres Gotay sería mucho peor que simplemente la austeridad que sugerimos los que queremos que se pague la deuda. Todos hemos hecho ajustes menos el Gobierno. Que lo haga también.

Lies, Inaccuracies and Faulty Statistics

I had not seen so many inaccuracies, innuendos and half truths in a long time until I read the Report by the Democratic Staff of the Committee on Natural Resources entitled Profit at any Cost: How Some Hedge Funds Win By Making Sure Puerto Rico Loses.

They start by saying that the “amount Puerto Rico owes now exceeds the size of its entire economy.”(Page 2) Bull! According to the World Bank, in 2013, PR’s GDP was $103,134,778,000. This is the latest official figure we have. Even with reduction of the GDP, $72,400,000,000 debt is only about 69% of the GDP. If we look at Greece, it is 177.1%, Belgium is 106.5%, Italy is 132.1% and so on. And the reason GDP is used instead of GNP is because it gives you a better measure of what you can tax in order to pay the debt.

Another inaccuracy is that most of the debt is held by public corporations. They hold around $25 billion of the PR debt. According to the latest Government Development Bank Quarterly Report dated May 7, 2015, PR’s GO debts total $23,804 billion. PR’s GO’s have the protection of the island’s constitution which requires that in case of a lack of funds in the budget, they be paid before anything else. See, Article VI, section 8 of the Constitution. That leaves us with $48,400 billion as potentially subject to Chapter 9. However, 11 U.S.C. § 109(c) requires that state law specifically allow a municipality or public corporation to file for Chapter 9 protection. If Law 71-2014, the Recovery Act, is any indication of the legislature’s intent, municipalities (because their biggest creditor is the GDB), the GDB and its subsidiaries, Fideicomiso de Niños, the Commonwealth’s Retirement System and its instrumentalities, the Judicial Retirement Fund, the Agency for Municipal Financing, AFI, COFINA, the Teacher’s Retirement Fund, and others were excluded from filing for its protection. Therefore, one can conclude that the legislature would not allow them to file for Chapter 9 protection. If one excludes these parties bonds, one is left with only $24,914 billion that could file for Chapter 9 protection, leaving $47,290 unprotected. See pages 56 and 64 of Government Development Bank Quarterly Report dated May 7, 2015. In a report designed to convince of the importance of Chapter 9, this should be mentioned.

The report also states that the causes for the crisis are manifold but only points out to low employment and labor participation and lack of tax advantages. (page 2). It does not mention the increase of expenditures by the Government and over $12 billion in new taxes collected from 2006 to 2015. See page 20 of El Ultimo Tarjetazo: de la Chatarra a la Oportunidad by Gustavo Vélez 2015.

In pushing for Chapter 9, the report (pages 2-3) claims that creditors and debtors will delegate the decision of the debt to the Bankruptcy court. True, but it forgets a couple of things. PREPA, PRASA etc., have very active and powerful unions, whose contracts can be impaired under bankruptcy law, as well as pensions, as they were in Detroit. Bondholders lost more, but these two groups also got a haircut. Is this what stakeholders want? Doubt it.

Report continues saying that hedge funds have offered to buy PR’s debt in “exchange for extraordinary financial guarantees.” Wonder what that would be? In 2014, PR issued $3.5 billion in debt, waived 11th Amendment immunity, allowed to be sued in NY and the issue was to be governed by NY law. Lately, the news say that bondholders want 10% interest, which is what the latest issue is paying right now and a lock box, which we have in the COFINA bonds. Nothing extraordinary there and nothing new.

The Report bemoans (at page 3) the Loser report saying it calls for cuts in teachers, without mentioning that there has been a reduction of 25% students enrollment and expenditure increase of 39%. It also fails to mention that the economic report by Dr. Anne Krueger also recommends the firing of teachers and other cost cutting measures.

At page 4 the report quotes the doyen of liberalism, the NYT, by denouncing austerity, without mentioning that this is the standard IMF recipe, espoused both by Dr. Krueger and Dr. Loser. Just take a look at what happened in Greece, Ireland, and Spain.

Also at page 4 the report states “BlueMountain Capital Management in July filed the law suit that prevented the government of Puerto Rico from implementing a law allowing public municipal authorities to restructure their debt.” Actually, Franklin California Tax Free Trust was the first to file and the report fails to mention that both the Federal District Court for the District of Puerto Rico and the First Circuit Court of Appeals determined that the PR law was preempted by Federal law. Oops.

The rest of the report tries to show that since 2014 investors knew that investing in PR was risky. This assumes that because it is risky, all the legal recourses of the documents have to be suspended. This is a ludicrous idea. Moreover, it fails to show how much of the bonds are owned by hedge funds. Although I have not found a study on this issue, what most analyst have mentioned is a 15% ownership. In addition, even if it were 50%, that does not change the fact that there are many investors who bought the instrument at full value when it was issued and for whatever reasons, decided to stick with it instead of selling at a deep discount.

Reports like this do not help PR. It actually hurts it. One expects better performance from Congressional staff.

ORAL ARGUMENT ON THE RECOVERY ACT

On May 6, 2015, the United States Court of Appeals for the First Circuit held the oral argument in the case of Franklin California Tax-Free Trust, et al. v. Commonwealth of Puerto Rico, et al. before judges Lynch, Torruella and Howard, in reference to the Recovery Act (quiebra criolla). Although there is no real time transmission, podcast was available late in the afternoon. Each party was allotted 15 minutes for argument and 5 minutes to the two amicis (friends of the Court).

As the losing party in the District Court, the Government of Puerto Rico, the Department of Justice and Alejandro García Padilla, represented by Christopher Landau, started the argument. The Government started arguing that in 1984, Congress amended Chapter 9, municipal and state corporations bankruptcy, to exclude PR from said chapter and hence, section 11 U.S.C. § 903(1), was inapplicable to the Recovery Act. Also, there was no evidence of Congressional intention to preclude PR from making its own bankruptcy law for municipalities and public corporations. Judge Torruella asked him to discuss opponent’s argument that bankruptcy law did not apply to banks and insurance companies and the need for uniformity. He also asked why was PR excluded, answer is that there is no record of why. Judge Torruella asked whether this was a case of no-man’s land of Guss v. Utah, 353 U.S. 1 (1957), Government said it was not but this was an exceptional case. What no man’s land means is an area of federal law in which the federal agency does not take jurisdiction but the state does not have jurisdiction because of preemption. Judge Howard asked whether the definition of state included territories before 1984 and the answer was yes. Judge Lynch asked further on the issue and the answer was that from 1898-1978, there was no definition of state in the law, 1978-1984 included territories and 1984 to the present, PR and DC are excluded.

Martin Bienenstock then took his turn representing Melba Acosta and the GDB and started by saying 903 did not apply to PR because it is excluded from Chapter 9. [Sounds like a good argument but what happens to those states that do not allow its municipalities and public corporations to apply for Chapter 9 protection? For those who don’t know it, 11 U.S.C. § 109(c) requires that state law specifically require that a particular entity file for Chapter 9 protection. Hence, it could be argued that 903 necessarily has to apply outside Chapter 9] Judge Howard asked about the severability of sections 307-309 of the Recovery Act and the authority to transfers assets. Bienestock tried to sidestep the issue but Judge Lynch forced to explain that the sections only applied when there was a case under Chapter 3. He continued to discuss that Judge Besosa went too far by invalidating the whole Recovery Act. [On this, he has a point. Judge Besosa enjoined PR from using the Recovery Act but he could have decided that 903 precluded the island from composing (impairing) the debts of creditors without their consent. Remains to be see if the Circuit Court will agree.] Bienenstock finalized by saying that the case was all about negotiating leverage.

Lewis Jeffrey Liman argued for PREPA as amicus curiae. PREPA was sued in the district court but was dismissed by Judge Besosa. Nevertheless as an amicus, put in its two cents. He started by saying that Congress did not intend to preclude PR from using its sovereign rights. Judge Torruellas asked about the measures PREPA could take. What he meant was the argument by plaintiffs’-appellees that PREPA could increase rates, etc. and not restructure or go into a Recovery Act. Liman said that in 2014, PREPA could not pay its debts but thanks to the Recovery Act it was able to get the forbearance agreement and negotiate with leverage. He said that plaintiffs offered a receiver but that everyone agreed that a receiver could only collect funds, but has no power to forbear, provide a super-priority lien, and can’t provide a stay. He continued explaining that PREPA could not raise rates since they were double of the rates in the states, that they were too high, that PR was poor and that business are leaving as are persons. He also mentions that it would need regulatory approval. If PREPA in the future asks for a rate increase in the near future, Mr. Liman’s argument is the perfect foil to any such effort. This important testimony as from minute 29:42 on, most specifically, minute 31.

It was then the bondholder’s’ turn. Matthew D. McGill argued for BlueMountain, and started saying that in 1984 Congress did not allow PR to enact state municipal bankruptcy to be enforced all over the nation. Good point. Judge Torruella again asked if Congress created a no-man’s land. Obviously this means he is very much considering that this case is one where federal law is preemptive but in a very exceptional situation it does not act and state law is preempted. The answer was that no state may enact a bankruptcy law. Judge Torruella then asked about statutory definition v. dictionary definition in a law. The answer was basically that in this case, the dictionary definition made more sense. Torruella then asked if Congress excluded PR from Chapter 9, why is 903 applicable. In a clever answer, McGill said that PR was excluded from being eligible for Chapter 9, not from Chapter 9 itself.

Thomas Moers Meyer argued for Franklin and dove right in by saying that PR was in a no-man’s land as in the Utah case. Judge Lynch then asked whether Congress had decided to keep the power to decide when and at what time PR would be eligible for Chapter 9 and if Congress does not act, Judge Torruella’s no man’s land scenario would come into effect. She continued by saying that PR had asked Congress for inclusion in Chapter 9 and that Congress had many options and Meyer agreed; Chapter 9 or others. It seems to me that at this point, minute 56, the Gov. lost its case. Judge Lynch’s option would mean that Congress decided to keep for itself the power to put PR in Chapter 9 or not. Since Congress has power to legislate over PR pursuant to the Territorial Clause of the Constitution, see Harris v. Rosario, 446 U.S. 651 (1980), this would mean that PR does not have the power to enact a bankruptcy law. Heavy stuff and much more sweeping than Judge Besosa’s decision.

Marc E. Kasowitz argued for the Association of Financial Guaranty Insurers, an amicus curiae for the bondholders. He immediately agreed that there was a no man’s land situation here and reminded that Court that when DC had economic problems in the 1990’s it went to Congress to be included in Chapter 9. Congress instead created a Financial Commission to run the districts finances. He also mentioned that Lisa Donahue, PREPA’s restructuring officer had stated that her plan, due on June 1, 2015, would include measures to take care of the utility’s problems. Judge Lynch answered that she was happy to hear that.

What is strange of Judge Torruella’s questions is that none of the briefs, including amici, make any mention of Guss v. Utah. Judge Torruella did not reveal whether he believes Puerto Rico’s situation with Chapter 9 is a no-man’s land as established by this case, but the inference is there to make. On the other hand, as the Judge asked Mr. Mayer, the no-man’s land situations pursuant to Guss are very narrow.

Something similar happens with Judge Lynch’s statement that Congress reserved the right to decide when PR could or could not enter Chapter 9. Although bondholders cleverly continued to argue that the Constitutional delegation to Congress to pass bankruptcy laws, once exercised, preempts any state or territory from making its own composition laws, they did not actually make this argument. One can guess that Judge Lynch will uphold the injunction issued by Judge Besosa but on other grounds, as may Judge Torruella. Judge Howard, as is his practice, made very few questions and I have no idea which side he is leaning.

Martin Bienenstock, representing Melba Acosta and the GBD, in his rebuttal turn, basically argued that PR was different than DC, that it was a Commonwealth, that Congress had approved a Constitution and had police power. Judge Lynch did not seem very convinced and asked “what is your point with all this”. Bienestock answered that Washington did not have police power but PR did. Whether that is true, Judge Lynch did not sound convinced.

This oral argument was different from most oral arguments in the First Circuit. The judges asked very few questions, rare for this Circuit and very few were in the Government’s. favor. Seems that Judge Lynch and Judge Torruella believe that PR cannot enact a bankruptcy law, but for different reasons. This may end up a 3-0 case with two opinions or even a 2-1 in the bondholders favor.

I must point out, however, that if the Government wins the appeal, the case will return to Judge Besosa, and plaintiffs will file summary judgment as to the claims he left alive, to wit, impairment of contractual obligations and taking of property (the right to appoint a receiver) without just compensation. It is very likely that Judge Besosa, who let these claims survive, then determine it is unconstitutional for violation these two provisions. It will be back to square one.

Mr. Kasowitz’ comment on the DC Financial Commission deserves further inquiry. In 1994, the District’s finances were a mess and Mayor Barry, who was arrested and convicted for crack use by the Federal Government was mayor. The District requested to be included in Chapter 9 but instead, Congress created a Financial Commission to take care of DC’s finances. At this point, all financial decisions in DC were taken by this Commission. It existed from 1995 to 2001 and was considered a successful experiment. I have privately floated this idea with economists and some politicians and all have said it is a good idea. You can read my blog post on this subject here. If the First Circuit upholds the unconstitutionality of PR’s Recovery Act and the island cannot continue to pay its bondholders, a type of Financial Commission could be an alternative to inclusion in Chapter 9 or a massive bailout. Food for thought.

Finally, I expect a decision by the panel soon since Judge Lynch said they knew it was an important and that they would work hard on it. Also, from the oral argument it is clear they have an idea of under what provisions to decide. It will probably be little more than a month for us to receive the decision.