“No to these asshole promises! This is slavery! Stop pillaging Puerto Rico!”
These shouts from dozens of protesters last Friday dominated the first public meeting in Manhattan of Puerto Rico’s fiscal control board, created by the Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA. Congress passed the act in June in response to Puerto Rico’s debt crisis.
But local resistance to PROMESA is mounting, as the unelected control board has usurped the island’s sovereign government and is poised to demand more austerity, without investing a dime in economic development. Years from now, when these consequences are felt, Puerto Rico’s 3.5 million citizens will undoubtedly question why a Democratic president agreed to sign the law, and why his emissary, Antonio Weiss, boasted about it.
Weiss, a 20-year investment banker at Lazard who became counselor to Treasury Secretary Jack Lew in 2014, has embarked on a victory tour, telling Bloomberg and The Huffington Post how he personally brokered the Puerto Rico legislation through Congress. By presenting himself as the architect of PROMESA, Weiss took ownership of its results. That puts him in a uniquely bad position, especially now that the control board’s deep banking industry ties have been revealed.
PROMESA—Spanish for “promise”—passed amid an atmosphere of crisis. Supporters insisted it represented the only hope for Puerto Rico to avoid a chaotic $70 billion debt default. “They tried to put it in biblical terms,” says House Democrat Luis Gutierrez, of Illinois, PROMESA’s biggest critic on Capitol Hill. “Can’t you just hear it? You will be healed, we will vanquish your sickness with PROMESA! You don’t think a hedge fund’s going to get paid even though your kid doesn’t have a schoolteacher.”
Despite numerous experts offering options to pressure creditors outside of congressional action, the perception that there were only two choices—PROMESA or catastrophe—damaged the outcome. “The administration made an enormous mistake when they said they only way to do anything was make a deal with Republicans,” says Stephen Lerner, a labor and community organizer active with Hedge Clippers, a hedge funds watchdog group. “They were negotiating with one hand behind their back.”
Unlike when Congress created financial control boards for New York City and Washington, D.C., in prior decades, Republicans offered no monetary aid to Puerto Rico in exchange for giving up its sovereignty, even though reversing a decade-long Puerto Rican depression requires investment. “PROMESA was not created to improve the lives of Puerto Ricans,” says Julio Lopez Varona, state director of Make the Road Connecticut, which has organized against austerity in Puerto Rico. “It was created to pay back the creditors.”
Indeed, at a panel hosted by the National Taxpayers Union last week, Bill Cooper, senior policy adviser to House Republican Rob Bishop of Utah, PROMESA’s author, candidly stated that the bill had two goals: restoring “fiscal responsibility” and allowing Puerto Rico to re-enter credit markets. “It is not a debt restructuring bill,” Cooper said.
That’s a key admission, because Weiss and his backers sold PROMESA entirely as a debt-relief solution. In fact, restructuring is a last resort. Fiscal responsibility—the primary goal—is simply code for budget-cutting. At last Friday’s meeting, the control board voted to oversee numerous government agencies, and asked Puerto Rican governor Alejandro García Padilla to submit a “fiscal adjustment plan” by October 14. The board has the power to cut the minimum wage for some workers, sell off public assets, and engage in mass firings. “The cuts are coming,” warns Gutierrez.
(Cooper, who had been rumored to be in line to head the control board as its executive, backed off last week after revelations of conflicts of interest. Cooper wrote the section of PROMESA that would expedite conversions to natural gas, despite having previously served as president of the Center for Liquefied Natural Gas, the trade lobby for producers and shippers.)
THE CONTROL BOARD’S seven members were chosen on August 31, with six coming from lists provided by congressional leaders and one tapped by the president. This structure, written into the law, guaranteed a Republican majority. An eighth member, Puerto Rico’s governor, doesn’t have a vote; in fact, no representative from the island has a say in its future. And the board’s lack of transparency—its members may hold meetings in secret and accept unreported gifts—compounds the perception problems surrounding a membership that specializes in high finance rather than economic development.
For example, Jose Carrión, an insurance executive who last Friday was selected as chairman, comes from one of Puerto Rico’s most prominent families. His father ran the biggest bank on the island, Banco Popular; now his cousin Richard Carrión does. Carrión himself is a significant shareholder. His sister, investment banker and Wall Street consultant María Elena Carrión, is married to Puerto Rico’s representative in Congress, Pedro Pierluisi, who has been accused of introducing legislation that would benefit his wife’s clients.
Carlos Garcia and José Ramón González were senior executives at the Puerto Rican arm of Spanish bank Santander, which underwrote $2.5 billion in predatory loans to the island with an effective interest rate of more than 360 percent, and made an additional $23 million by refinancing old Puerto Rican debt. The Financial Industry Regulatory Authority (FINRA) also fined Santander $6.4 million for re-selling fraudulent Puerto Rican debt to individuals without informing them of the risks. These are the least-likely people in the world to drive a hard bargain with creditors over debt.
As president of Puerto Rico’s Government Development Bank, Garcia actually wrote the law (Public Act 7) that repealed interest rate caps for fees on Puerto Rican bond deals, and that allowed the use of new debt to pay off old debt. Both actions benefited Garcia’s former employer. Now he can do so again on the control board. “We just ran a campaign where Bernie Sanders challenged the allegiance that the party had with Wall Street,” fumes Gutierrez. “What do we do in the middle of that? Approve PROMESA!”
Aside from financial ties, the only other expertise among board members is cutting budgets. Andrew Biggs, another Republican appointee, is an American Enterprise Institute resident scholar and one of the nation’s leading critics of social insurance. He supported Social Security privatization while on George W. Bush’s National Economic Council, and has endorsed cutting public pensions and refunding payouts to taxpayers. It’s hard to square the White House’s claim that PROMESA protects pensions with the appointment to the board of someone dedicated to undermining pensions. This is why investors expect the board to prioritize its bonds over pension payouts; even the Democratic appointees are seen as creditor-friendly. “We have started to buy again,” Peter Hayes, head of municipal bonds for BlackRock, told the Financial Times.
The first board meeting was held thousands of miles from Puerto Rico, at the Alexander Hamilton Custom House in in Lower Manhattan. On the House floor, Gutierrez called it a “home-court game” in the shadow of Wall Street. “This is the first time I’ve ever heard people refuse to travel to a tropical island,” says Gutierrez. “It just shows the incredible distancing of this institution from the people of Puerto Rico.”
The distance didn’t stop protesters. The meeting lasted only 30 minutes and was repeatedly interrupted. Protesters planted stickers of the Puerto Rican flag on the iconic Wall Street bull a few blocks away. The control board (known on the island as “La Junta”) plans to meet in Puerto Rico in mid-November. Its members should brace themselves.
There’s a rich history of activist resistance in Puerto Rico, from pro-independence movements dating back to the 1930s to the successful campaign to stop Navy bomb testing on the island of Vieques. “This is life or death for what we call our country,” says Xiomara Caro, a lawyer and organizer with Se Acabaron Las Promesas, or Promises Are Over. “PROMESA is the next level of colonialism. If you’re a colony, financial exploitation is at the center.”
On August 31, protesters led by Promises Are Over shut down a conference promoting PROMESA, which was organized by the Puerto Rico Chamber of Commerce. Juan Torruella, a federal judge in Puerto Rico appointed by President Ronald Reagan, even called for an organized “civil resistance movement” to combat PROMESA in a speech last month. “We don’t have lobbyists or investment firms,” said Xiomara Caro. “We have a mass of people and our presence.”
Meanwhile, a cascade of actual crises has befallen Puerto Rico in recent months. As of mid-September, health officials reported over 22,000 Zika virus cases in Puerto Rico, including 1,871 pregnant women. One hundred seventy victims have been hospitalized, with two deaths from a paralysis condition tied to the virus. Two weeks ago, nearly half the island suffered from three days of blackouts after a fire at an energy substation toppled two transmission lines. This was a practical inevitability after decades of austerity and neglect of the electrical grid.
The sense of urgency, so palpable when fighting for PROMESA’s passage, was absent in the aftermath of actual urgent needs. The control board, concerned mainly with austerity, has no expertise in public health or energy infrastructure. The blackout did not even derail efforts to privatize the government-run electricity authority; in fact, it probably helped. “Not taking care of public systems is a way of building arguments for privatization,” says Caro.
Even PROMESA’s major selling point—that it would ward off creditor litigation—has been proven wrong. Hedge funds and insurance companies continue to challenge the law in court, in a bid to get full value on their debt. Meanwhile, an island debt commission—reviewing the debt issuance for its legality and legitimacy—is unlikely to get much traction with a board determined to pay creditors as much as possible.
The sorry spectacle reflects how little importance Congress affords a territory like Puerto Rico. It has no electoral votes or financial relationships with politicians. Nobody involved in negotiations had any incentive to expend political capital on behalf of the island’s residents, rather than on deep-pocketed investors.
And then there’s Weiss, hand-picked to render this deal. Critics say his history on Wall Street inescapably led to a deal friendly to financial interests. “When you take Weiss and tell him to get this done, there’s a strong inclination for him to work with the people he’s already worked with,” says Gutierrez. “It’s like expecting somebody who’s Catholic all their lives to turn out Lutheran. They’re not going to change.”
Correction: This story has been corrected to indicate that Stephen Lerner is a labor organizer active with Hedge Clippers, a hedge funds watchdog group. Lerner is also a fellow with Georgetown University's Kalmanovitz Initiative for Labor and the Working Poor.