Or rather, you can read about it here. Members include Professor David Skeel, whom many Slips readers will be familiar with.
Or rather, you can read about it here. Members include Professor David Skeel, whom many Slips readers will be familiar with.
The opinion is a good reminder that oral argument impressions don't always carry over to the final written product. In short, both the majority and dissent approach this as a simple matter of statutory construction, and in that regard the majority opinion is simply a more clearly articulated version of the First Circuit's opinion.
Neither the majority or dissent address the 10th Amendment implications of saying that states have to use chapter 9 if they want to reorganize their municipalities. After this opinion, there is no other option. This might suggest that the 10th Amendment concerns that once hovered around chapter 9 are effectively gone.
I find the majority's approach to the placement of the 1946 addendum to section 903 unconvincing, but of course I've already written that I saw section 903 as only coming into force when a state accepts the chapter 9 "bargain."
Is there any other provision of the Code in one of the operative chapters (7 and onward) that applies even when there is no eligible debtor? Here we have Justice Thomas telling us that part of section 903 applies to Puerto Rico right now, while the opening paragraph of the section is apparently hanging around "just in case."
The end result is that Puerto Rico now faces the unattractive choice of attempting an Argentina/Greece style workout (with likely lesser sovereign immunity than either of those debtors had) or swallowing PROMESA, along with its oversight board.
The composition of the former is an issue that Puerto Ricans might understandably worry about, especially since the board, and not the Commonwealth, has final say on what a reorganization plan looks like. Indeed, it is not so much a matter of "final say," as whether the oversight board will listen to Puerto Rico at all. There is no formal requirement in PROMESA that they do so. Nonetheless, given the alternatives, Puerto Rico might decide it has to hold its nose and take PROMESA.
The only thing we know for sure is that Puerto Rico is headed for a default on July 1. One branch of the decision tree has been taken away.
I'm still digesting the opinion, but the obvious conclusion is that impressions from oral argument may be misleading. It also suggests that states that do not use chapter 9, have no ability to come up with a state law alternative. It is chapter 9 or nothing, which may suggest that the 10th Amendment is no longer a serious concern with regard to chapter 9. And early in the opinion Thomas says that City of Ashbury Park was indeed overruled by the 1946 Amendments to 903, despite some actual doubt on that point (and nobody really addressing it in this case).
H.R. 5278, containing debt restructuring authority and an oversight board for Puerto Rico, inched closer to passage after yesterday's approval by the House Natural Resources Committee. A combination of Rs and Ds rejected amendments that would have unraveled the compromise (scroll here for the amendments and their fates). They indicated an appreciation for the automatic stay, for the downsides of exempting classes of debt from impairment, and even for the assumption of risk taken by recent bond purchasers (bond disclosures quoted!). The discussion reflected the creditor-versus-creditor elements of the problem and the need for a legal mechanism to discourage holdouts and encourage compromise. Even though they have been asked not to call it "bankruptcy" (or to say "control board"), it was clear they know the restructuring provisions come from Title 11 of the U.S. Code.
Given that derivation, many judges on the merit-selected bankruptcy bench could admirably handle the first-ever PROMESAnkruptcy, drawing on their directly-relevant experiences with large chapter 11s, if not chapter 9s.
But section 308 of H.R. 5278 prevents that, and the Natural Resources Committee, in light of its jurisdiction, may not have been in the best position to appreciate the resulting risks.
It has become something like conventional wisdom that the pending SCOTUS case involving the Recovery Act is no longer relevant. After all, the giant interest payment due July 1 is largely attributable to GO bonds, and the Commonwealth itself is not even subject to the Recovery Act. And the pending PROMESA bill would expressly override the Recovery Act.
Taking the last point first, we should not assume that PROMESA will be enacted before the Supreme Court rules. Indeed, there are many political reasons why Congress – the Senate in particular – might want to wait until the Supreme Court acts before advancing PROMESA.
Moreover, what the Supreme Court says with regard to the Recovery Act matters. For example, what if they rule that the 1984 addition of section 101's definition of "State" was impermissible, in the way that it treated the Commonwealth? That might render the Recovery Act subject to section 903 preemption, while at the same time allowing Puerto Rico the ability to authorize its municipal entities to file under chapter 9.
That could possibly force some rethinking of PROMESA, although I think we will still see some legislation. The details might change, however, if SCOTUS effectively amends the current Bankruptcy Code.
On the other hand, if the Recovery Act is upheld, what would stop Puerto Rico from expanding it to cover much more of the overall capital structure at issue? And the Recovery Act might serve as a model for a statue that could apply to the Commonwealth itself.
That, of course, might provide further incentives to pass PROMESA. Quickly.
In short, the Recovery Act is still important, just not in its present form. The current Recovery Act is too narrow to solve very much of the Commonwealth's problems. But what the Supreme Court has to say with regard to the Recovery Act might be very important.
To mention one final point in this regard, what if SCOTUS says that the Commonwealth is unlike other territories? PROMESA purports to be grounded in Congress' power over territories under Article IV, section 3 ...
After taking a look at titles III and VI of the new draft, some quick observations:
Overall, although the bill is not necessarily "ideal" or "optimal," it seems to at least be making forward progress. Of course, the Senate has not weighed in at all on this ... at least not publicly. And we should probably expect that even when enacted the bill is apt to be hit with a Recovery Act style Constitutional challenge.
I'm still working through the new draft of the PROMESA bill, which readers will recall provides new restructuring options for US territories (including Puerto Rico, of course). But I have to say I got a chuckle out of proposed section 303(3), which provides:
unlawful executive orders that alter, amend, or modify rights of holders of any debt of the territory or territorial instrumentality, or that divert funds from one territorial instrumentality to another or to the territory, shall be preempted by this Act.
If the orders are unlawful, do we really need a federal statute to preempt them?
It appears that the House legislation has bogged down. Two or three issues keep coming up, none of which make a whole lot of sense:
First, "bailouts." I'm not sure if people making this argument actually believe it or are just using a convenient, politically toxic buzzword. But the claim that extending chapter 9 to include some or all of Puerto Rico constitutes a "bailout" can't really be taken seriously. A bailout involves (a) the use of taxpayer money to (b) help investors avoid realizing risks they voluntarily agreed to take.
Neither is applicable here. Instead, this is the basic insolvency process doing its thing. Namely, losses will be allocated pro rata if bankruptcy applies. But no taxpayer money is involved, and in no case are investors being saved from their own poor investment choices.
Second, expanding chapter 9 does not raise takings or other scary "retroactivity" problems. If it did, then Congress could never have enacted chapter 9 in the first place. After all, there was no chapter 9 until there was a chapter 9.
More generally, it is quite clear that unsecured bondholders do not have a valid takings claim (under the Fifth Amendment) as a result of the enactment of a new bankruptcy law, in any context. For example, if a secured creditor is owed $1,000 and has a lien on a house worth $400, a new bankruptcy law that discharges the $600 unsecured portion of the claim raises no constitutional issues. That's Congress' power under the Bankruptcy Clause in action. A law that resulted in the creditor obtaining substantially less than $400 on the secured portion might raise a constitutional question, because the secured portion of a claim is "property" for these purposes. But that still does not prevent the rescheduling of secured debt, just the complete elimination of it.
And finally, no, no, no this does not open the door to Illinois filing for chapter 9. Illinois is a state, with full 11th Amendment and 10th Amendment powers. Puerto Rico is a territory of uncertain legal status. Apples ≠ Oranges.
The revised draft PROMESA bill (available here) is now under debate in Congress. The bill appears to respond to some early criticisms, although its length and complexity obscures answers to some important questions. Under the circumstances, it seems sensible for the Commonwealth to consider all of its options, including those that do not require Congressional action. These include, as Mitu Gulati and I write in the Financial Times (here, subscription required), changing Puerto Rico's own law in ways that might facilitate a restructuring.
We asked law students in a class we taught jointly at the University of North Carolina and Duke to consider ways the Commonwealth could restructure without Congressional authorization. Working in groups, they came up with some answers that are both creative and plausible. That doesn't necessarily mean easy or agreeable from the perspective of Commonwealth politicians. Some proposals envision amending Puerto Rico's constitution, while others rely on provisions of Puerto Rico law that authorize collectively binding debt modifications but that haven't been previously applied in this context. The important point, however, is that Puerto Rico may have a wider range of options than many think. The attractiveness of these options is relative. If Congress cannot provide an effective restructuring mechanism that respects the Commonwealth's right to democratic governance, other lawful options will begin to seem more attractive. Two of the student groups have made their work available on-line; their short papers can be found at the links above.
I again offer some initial thoughts on the revised draft bill, now subject to much debate in Congress:
The question is whether it is playing against the House of Representatives, and its heavy handed PROMESA draft bill, or its creditors.
In any event, according to the Financial Times, Puerto Rico's legislature has passed a law giving its governor "the power to declare a state of emergency and halt payments to creditors until January 2017."
There is a long history of these sorts of laws in the United States, most from the Nineteenth Century, although there were a few in the Great Depression too. Most were eventually struck down as violations of the Contracts Clause, but collection against Puerto Rico itself might run up against whatever sovereign immunity the Commonwealth might posses.
Some quick thoughts on the "bankruptcy" part of the proposed bill:
So this will be a chapter 9 preceding in all but name, with the oversight board acting for the debtor, whether the debtor likes it or not, in front of district judge who will be reading up on chapter 9 on the fly. In short, we are reinventing the wheel in a new, more complicated way.
The House Natural Resources Committee has released draft legislation - with the acroynym PROMESA - in response to Puerto Rico's financial crisis and Speaker Ryan's call for action. The contents continued to shift over the past few days but a recent version is here. PROMESA spans many topics, including an oversight board, employment law, infrastructure, and beyond. Without detracting from the importance of this range of topics, this is Credit Slips, so these initial observations focus on debt restructuring provisions principally housed in Title III of the bill.
I, too, join the cohort of surprised observers from this week's argument. For me, the biggest takeaway is not so much that the Justices were engaging in textual sport, it's that they wanted to engage in those gymnastics. That is, everyone seemed to get how unjustifiable the legal status quo is: it's clear the law is dumb, it's probable that Congress made a mistake, and so the Court had a very roll-up-their-sleeves attitude that struck me as, "What can we do to mitigate matters while being able to sleep at night that we are following an at-least-plausible reading of the text?" The subtext to that is that they were not searching for the most natural reading of the text but the reading that did the least harm that could fix a problem. (Surely a different colloquy would have ensued had the Late Justice Scalia been present!)
Note this is not "judicial activism" in my mind, because if it were true activism, they would just make up a doctrinal canon saying they can ignore the text when "manifestly unsound," or maybe open up the absurdity doctrine so wide you could drive a Jones Act tanker through it. I see this as remarkably pragmatic. We have to follow the text. If you can get us a reading that we can live with, we'll do it. That's why they kept pressing on what is the justification for this law. Their lack of enthusiasm to any proffered makeweight (treat triple tax-exempt bonds differently from PR vs USVI?!) was telling. If you're a judge, especially a Justice, I suspect you don't feel bad interpreting a law in a creative way if everyone but the self-serving litigants seems to suggest it's pointless. In fact, you probably feel good.
All this said, don't get too excited for reversal yet. The bondholders had some good textual counters in their briefs that didn't make oral argument. But the irritation of the engaging Justices with the law, coupled with the simmering undercurrent of subjugation inherent in the territory's second-class status, suggests this really could be an interesting opinion.
This post continues the long-running Credit Slips discussion of Puerto Rico's Recovery Act, now the subject of U.S. Supreme Court review in Puerto Rico v. Franklin California Tax-Free Trust, 15-233, as indicated in Lubben's recent post and in last week's preview. In the video above, posted with permission of the American Bankruptcy Institute, I interview Bill Rochelle, who was at the Supreme Court for oral argument and makes some intriguing predictions on the vote, timing of issuing the opinion, judicial selection, and other matters. A few more reflections below the break.
I did not realize that a US state had defaulted on its bonds, offering a historical comparative example of the difficulties facing Puerto Rico, its creditors, and mostly its citizens if the mess there is not subjected to an orderly, judicially supervised debt cleanup process of some kind. In a new working paper from the Cleveland Fed, O. Emre Ergungor tells the interesting story of the Depression-era default by Arkansas on various road construction bonds and its messy and politically charged path to a workout. A couple of apparent lessons are troubling. First, reaffirming the aphorism that $#!@ rolls downhill, most of the pain was suffered by Arkansas citizens and ordinary creditors, with bondholders pulling every available lever to ensure a soft landing for themselves. Ergungor sums up this lesson nicely: "in the absence of a dedicated judicial process for preserving the governmental functions of a state in debt renegotiations, sovereignty offers meager protections for the interests of the general public." Second, in a prophetic warning about bailouts, Ergungor describes the intervention of the federal Reconstruction Finance Corporation to provide liquidity for a refinancing of the workout bonds years later. As one would expect, a Chicago Tribune article took the feds to task for helping Arkansas in this way, insisting that the RFC chief "ought to be willing to to do as much for Illinois, Indiana, Michigan, Iowa, and all the rest of the states." I know Illinois would surely appreciate some federal support for its current behemoth pension burden. If the Executive intervenes in the Puerto Rico situation today, will we see another Tribune article like the one that criticized selective federal intervention for Arkansas? Does it matter that, technically, it is Puerto Rico's sub-units that are in distress, not the Territory itself? I struggle to understand even what all the issues are in the Puerto Rico debate, but Ergungor's paper helps me to put at least the financial problems in some useful context.
So Noah Feldman has a column up on Bloomberg that suggests that section 903(1) of the Code should clearly apply to the Commonwealth. It's a sensible argument, if you read that section entirely in isolation and know nothing about the overall structure of the Bankruptcy Code.
And while I say that intending a bit of the obvious snark – what else could be expected, he’s suggesting that my analysis is essentially daft – it is important to remember that the Supreme Court is not made up of bankruptcy experts. Thus, his column provides a fairly clear analysis of how Puerto Rico might still lose, despite the apparent leanings of the Justices in yesterday’s oral argument.
So if there is a non-frivolous argument for preemption of the Recovery Act, why do I think the Court might still overturn the First Circuit? It could happen one of two ways.
For the past two weeks, Credit Slips posts have considered the role of the Executive Branch in facilitating a Puerto Rico debt restructuring in the absence of Congressional action. That constraint is hereby relaxed, and thus future posts may well include the role of Congress and the judiciary in various combinations. For example, whatever one's view of the GM and Chrysler bankruptcies, they show that the administration can shape a restructuring by working within the framework of formal bankruptcy law. Imagine, for example, that Congress adopts the most modest of the proposals, H.R. 870, which merely fixes the unfortunate exclusion of Puerto Rico municipalities from ordinary chapter 9. The administration could put together post-filing financing packages with the stream of loan proceeds conditioned on the inclusion of various covenants, including those imposing fiscal reforms.
Meanwhile, March 22 is drawing near. On that date, the United States Supreme Court will review a legal challenge to the Puerto Rico Public Corporation Debt Enforcement and Recovery Act. Below the jump are reminders and new points about the role of this court fight in Puerto Rico's debt crisis and why Congress and the Executive Branch are not off the hook.
With a fiasco as big as the financial crisis, one of the only positive outcomes is there are a lot of lessons for the future. As Credit Slips thinks about how the administration might influence the resolution of Puerto Rico's bond problems, I think there are a few points from the financial crisis to consider.
First, and foremost, is the importance of explaining the issue. Particularly in times of crisis, the explanation/education end of things tends to be pushed to the back of policymakers. "Action" is favored over explanation, but ultimately if the public does not understand what is at stake and the administration's goals, the White House and others quickly have to waste time on the defensive or retreat into silence. Neither strategy helps the problem. One need only look at all the calls to audit or disband the Federal Reserve Board in the wake of the crisis actions around Bear Stearns to see the long-term problems that come from policy without a good public relations campaign. If you need another example, read this great and short piece by William Sage, called Brand New Law! The Need to Market Health Care Reform.
Second, lawyers are fairly lousy at administration. They negotiate hard but the practicability of getting relief is not their strength. We can take a lot of blame for this as law school professors, in that we should teach skills in organizational behavior, project management, etc, especially for those interested in policy. With the financial crisis, the problem was not that the HAMP loan modification term was too stingy or bad on its substance. The problem was severe delays and tangles in rolling out the relief. Jean Braucher has an excellent piece--the title, Humpty Dumpty and the Foreclosure Crisis, gives away the punchline. Whatever is done with respect to Puerto Rico needs to be efficiently administered. In this regard, I think the involvement of seasoned chapter 11 bankruptcy lawyers is a great development. These lawyers are used to being keenly focused on administrative costs in an insolvency situation, and provide a much needed counter-perspective to traditional Washington policymakers. I think if more consumer bankruptcy lawyers had been consulted during the design of HAMP and similar Making Homes Affordable programs, those programs could have been more consumer-friendly, using where people stumble in bankruptcy to identify likely obstacles in obtaining a loan modification (such as submitting paperwork and describing one's own financial situation accurately).
Third, and finally I think the financial crisis reminds us not to get lost in the billions of dollars at stake and the high finance concepts. Behind every bond, there are real people--investors, Puerto Rican residents, taxpayers, and others. The quality of a solution to Puerto Rico's financial problems is not a Wall Street issue; it is a Main Street issue.
I know nothing about the statutes delegating "home rule" authority to the Commonwealth, but do they have any reversionary clauses? For example, if there's crisis, war, etc., can the federal government revest in any power? Leaving aside the political unpalatability, wouldn't that leave the executive branch with a freer hand? Building, can the President (temporarily) draft the island's residents, then issue an order taking (for fair/discounted value) any debts related to providing services for this vital military installation? Or how about declaring it a giant national monument? OK, feel free to go back to common sense if you want now. (Hey, we were supposed to think creatively...)
When I think about "bondholders," I tend to think about their lawyers. (That probably says a lot about the crowds that I run in). In the case of Puerto Rico, we've seen affable, whip smart, expensively dressed New York lawyers make cogent arguments against many of the bond restructuring proposals. But these lawyers are not the bondholders themselves, who are a much more diverse lot. While the hedge funds may be voicing many of the arguments via their fancy attorneys, there is a large, and and largely silent, bondholder community of Puerto Rican residents. The number that I've seen for the share of bond debt held by residents is 40%, although it is difficult to validate this, and it almost surely varies depending on the bond issuer, bond vintage, and other factors. Thomas Mayer estimated to Congress that $15 billion in PR bonds are held by Puerto Ricans (this works out to a lower figure than the 40% share it's still hefty).
In the public debate about Puerto Rico's fiscal crisis, people have noted that the debt is widely held across the country--that this is not "just" a Puerto Rico issue. PR bonds were given tax-advantaged status, regardless of the bondholder's place of residence. But that does not mean that residents of Puerto Rico themselves--for either fiscal or civic reasons--are not an important group of bondholders. Their concerns about a bond default and willingness to restructure may be quite different than hedge funds or institutional investors. Why? And how might this affect the Administration's interest--or taxpayers' interest generally--in a workout for bondholders?
It has been a humbling torrent of creativity, and I am honored to chip in a tuppence at the eleventh hour. After an existential preface, I consider how one might use (or resist using) federal credit enhancement in the inevitable debt exchange.
Hard to believe it has been over a year since a creditor representative opposing H.R. 870 characterized chapter 9 municipal bankruptcy as "the Wild West" in Congressional testimony. Whatever uncertainties bankruptcy law contains (and, sure, they are not trivial), our symposium reveals that the true legal wilderness in government debt restructuring lies beyond the boundaries of title 11.
The full story offers plenty of caveats and risks for creditors - including that this approach could be considerably less protective of creditors' interests than bankruptcy - so do read the whole thing. Although the piece does not expressly mention the Executive Branch, prior Credit Slips posts (such as here) have illustrated the potential combination of the Administration's use of soft powers to promote restructuring efforts formally initiated by Puerto Rico - again, potentially without the creditor protections normally associated with bankruptcy and without other pieces of financial reform that many have advocated.
Watch here at 1pm ET to see former Treasury official Brad Setser, now senior fellow at the Council on Foreign Relations, talk about Puerto Rico (along with Cate Long, Dick Ravitch, and Aaron Kuriloff). [March 9 UPDATE: transcript available here]
Read here for proposals of Puerto Rico governor candidate Ricardo Rosselló Nevares, including Treasury assisting with interim financing, with an analogy to GM and Chrysler during the 2008 financial crisis (see point 6 in the document).
[March 9 UPDATE: lest anyone need reminding of what can happen when a majority of creditors cannot bind holdouts, check out Anna Gelpern's recent assessment of the Argentina settlement]
One problem complicating any resolution of Puerto Rico's financial distress is that there are a multiplicity of issuers. There are separate claims on separate issuers, and it won't work to resolve just some of them, as they are all ultimately drawing on the same set of economic resources. While there are claims on different assets, they value of those assets derive from Puerto Rico's overall economic production. This multiple debtor problem makes Puerto Rico materially different from, say Detroit, where there was one primary debtor (the City of Detroit). (I don't know the legal status of Detroit Public Schools--is it separate from the City, the way the Chicago Public Schools are?) As far as I'm aware, Chapter 9 filings have almost always been single entity filings, rather than filings of multiple associated cases, as occurs with Chapter 11.
So what can be done to deal with the multiple issuer problem? Even if Puerto Rico were allowed to file for bankruptcy (or its various sub-territorial entities were allowed to file), it doesn't solve the problem. While there can be multiple bankruptcy filings and the different cases can be administratively consolidated, that is a very different thing that actual consolidation of debtors, and the inability to resolve claims on one debtor can hold the other cases hostage. It doesn't do any good to resolve the general obligation debt if creditors can force the electric utility to raise prices through the roof. With this sort of multiple entity case, the hostage value held by creditors increases significantly.
Puerto Rico's division of governmental authority into various government units is a form of asset partitioning. This asset partitioning might have helped Puerto Rico get more credit than it should have on cheaper terms ex ante (for a model, see here), but ex post this sort of asset partitioning can blow up in a debtor's face if there is no way to reconsolidate in order to restructure. (Consider, for example, the value of the LA Dodgers without their stadium and without the parking lots by the stadium.) Partitioning via devolution of authority to multiple local government units and authorities is a more permanently binding form of asset partitioning than corporate subsidiaries or even than some securitization arrangements.
Below I present three ideas for how to resolve the multiple issuer problem: consolidation via exchange offer; consolidation via merger; and consolidation via the creation of a common co-issuer entity that is bankruptcy eligible.
Our brainstorm (remember the ground rules) has included Levitin's MacGyver-inspired local currency, eminent domain, and liberally-interpreted exchange stabilization, Weidemaier's use of COFINA doubts to wedge open the door for a Executive Branch/Puerto Rico partnership, and, thanks to economist Arturo Estrella, a long menu of options with examples, summarized succinctly as "where there is a will, there is a way" (p. 1) (english report at bottom of this page). Could the federal government underwrite new bonds in an exchange offer, asks Pottow? Be the mediator with a big stick, asks Lubben? Might a holdout creditor be liable to shareholders if it rebuffed a reasonable deal, asks Jiménez? (scroll to the comments). Marc Joffe notes the potential analogy of the City of Hercules tender offer (as well as the fact that Levitin's local currency suggestion has a history from the Depression).
Lawless reminds us of the risks associated with discriminatory treatment of Puerto Rico's debt and access to legal tools. Of course, there is a long history here. Maria de los Angeles Trigo points to UT professor Bartholomew Sparrow's study of the Insular cases. And while most expect debt relief will be conditioned on some sort of fiscal oversight, it needs to be designed in a way to avoid the foibles of the past.
Returning to Lubben's mediation theme, let's push the brainstorming a step farther: could Treasury appoint a federal judge, such as Chief District Judge Gerald Rosen (E.D. Mich.), to oversee the mediation, and demand that all creditors participate in good faith until released? Even in the absence of legal authority for this move, would creditors formally object or fail to show up?
Thanks to participants and readers for active involvement so far, and please keep your thoughts and reactions coming this way.
Puzzle photo courtesy of Shutterstock.com
Jacoby asks what can the Executive Branch do to help out Puerto Rico. The most practical thing it could do, right now, is to facilitate an exchange offer. Whether the Treasury itself can act as a mediator, or at least facilitate mediation by some outsider, this seems like the quickest way to a real solution to the near-term problems the Commonwealth faces. Treasury might also act as an overseer of reforms and a (comparatively) neutral voice with regard to Puerto Rico’s financial information.
Yes, it would be great to resolve the Commonwealth’s awkward legal status – and maybe, just maybe the Supreme Court will do that this term. Or at least start the process. But long before that can happen, Puerto Rico is facing potential defaults. Those need to be addressed right now. If the Executive Branch can facilitate the negotiation of a comprehensive exchange offer, the Commonwealth will gain time to solve those bigger, long term issues.
Melissa's post asked what the executive branch could do to facilitate restructuring of Puerto Rico's debt. I'll get to that, but I first want to talk about Puerto Rico itself. At first glance, the Commonwealth seems to be in a uniquely terrible position. It has the disadvantages of a sovereign (e.g., no bankruptcy) but lacks the advantages (e.g., legal and/or practical immunity from legal enforcement). In fact, it lacks only most of the advantages. One advantage of sovereignty it does enjoy--and that many "true" sovereign borrowers are obliged to forego when they borrow--is that much of its debt is governed by its own law. That law can be changed (subject to constraints in the U.S. constitution) or interpreted in ways that give the Commonwealth needed restructuring flexibility.
Recently, I have been spending a lot of time thinking about the psychology of other people's indebtedness. I see parallels from this work and the way we think about Puerto Rican government debt. This thinking then tends to stand in the way of solutions.
An example is the psychological idea of the fundamental attribution error. This heuristic means we over-attribute other people's behavior to their personality rather than their circumstance. The guy speeding past me on the highway is a jerk instead of late for a meeting. Our neighbor who has filed bankruptcy is irresponsible rather than the victim of a job layoff. It is not that some people aren't jerks or irresponsible. Rather, we over-attribute behavior to personality rather than circumstance. If you don't see my point, there is probably something wrong with you. (Get it?)
OK, so I start from the premise that holdouts don't want to restructure debt but others do. Thus, the goal should be incentivize restructuring in a way that beats up on holdouts. Could the Feds say they'll offer financing (e.g., underwrite new bonds) for people who exchange bonds/debt?
Puerto Rico debt restructuring legislation is flying fast and furious around Congress. But the air contains more than a whiff of defeatism regarding the prospects of passage. Bills vary greatly in substance and scope, and yet apparently the response of powerful creditors is consistent: they want to retain the right to be holdouts and are making that position perfectly clear to our elected representatives.
Credit Slips contributors are no strangers to anti-restructuring advocacy, whether framed as moral hazard or otherwise. To that end, we embark on a virtual symposium inspired by the following question: What could the Executive Branch do to facilitate the restructuring of government debt in Puerto Rico absent Congressional action?
On tap to brainstorm around this theme in the next two weeks are (in alphabetical order): Anna Gelpern, Melissa Jacoby, Bob Lawless, Adam Levitin, Stephen Lubben, Katherine Porter, John Pottow, Mark Weidemaier, and Jay Westbrook.
Credit Slips is pleased to have had the following persons join us as continuing blog authors in the past or as guest bloggers for a week. Their contributions have added new perspectives and ideas to this site, and we thank them for their participation.
PAST REGULAR CONTRIBUTORS
GUEST & OCCASIONAL CONTRIBUTORS
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