Skeel on the Puerto Rico Oversight (NOT Control) Board

I have long been a fan of both David Skeel's research and him as a person. Not only was his book Debt's Dominion key to some of the earliest research I did on Collective Action Clauses, but he was always willing to answer my stupid questions about basic concepts (something that fancy tenured professors at Ivy League schools do not often do).  Over the years, as he has gotten fancier and fancier, I have continued to burden him with my stupid questions about bankruptcy and restructuring matters and he has never ceased to be generous; the proverbial gift that keeps on giving and never ever taking.

Last week, to penalize him yet further for his kindness over the years to me, I asked him to please come to talk to the students in my debt class about his work on the Puerto Rico oversight board (e.g., here). In our class, we read his work and it occurred to me that although it was a long shot, it would be cool to be able to talk to David in person.  And he said yes -- and that was even though I warned him that some of our seminar questions would be a tad bit hostile, in terms of pressing him about all the things that the control board had done vis-a-vis pensions, the lack of accountability of the board, imperialism, insular cases, etc., etc.

The session was amazing. The students did not disappoint in terms of relentlessly asking him tough and incisive questions (I was so very proud of them).  And he answered them in the way only he can do: in a generous and candid fashion. Alas, I cannot repeat the details of what he said, since we promised him that we would not report on any of that.  But I can lay out what I think are some of the key questions that I hope David will address in the book that I hope he will write when this is all over.

First, why was the choice made to treat Puerto Rican debt as if it were domestic municipal debt instead of treating it more like sovereign debt?  The fact that Puerto Rican debt circa 2012, when the @#@# hit the fan first, was all under local law meant that Puerto Rico could have used the "local law" advantage that Lee Buchheit's team used in both Greece and Barbados (on the latter, see Andrew Shutter's cool new article in the Capital Markets Law Journal, here).  Yet, Puerto Rico and its advisers decided to go down the municipal bankruptcy route, only to get themselves tied up in expensive legal losses for years.  My guess is that there was some political reason for the choices that were made to try and pretend that Puerto Rican debt was more like state debt than sovereign debt.  But I want to know more.

Second, why was assistance from the IMF not used?  As I understand it, the Oversight Board basically does the kind of job that the IMF does when it goes in to help over indebted countries.  The IMF has developed a lot of expertise in this exercise over the years.  Why aren't there are bunch of ex IMF stalwarts on the Oversight Board, helping out David and his colleagues?  

Third, while I'm full of admiration for some of the aggressive moves that the Oversight Board took vis-a-vis the creditors in terms of, for example, questioning the validity of 2012 and 2014 issuances that were arguably done in violation of certain debt limits, what calculations were made about how much this strategy would impact Puerto Rico's future cost of borrowing?  After all, one of the key objectives of the Oversight Board is supposed to be to return Puerto Rico to the capital markets. Someday, I'd love to see that the report that the financial advisers provided on this. (It probably pointed to the research showing that the sovereign and municipal debt markets have a notoriously short memory).

Fourth, what is the world is happening with the Aurelius case? I thought that we'd have a decision on that, in terms of the legality of the Oversight Board under the Appointments Clause, months ago.  Does the delay mean that those of us who predicted -- based on what happened at oral argument -- that the court was going to rule quickly in favor of the Oversight Board were perhaps wrong? Maybe the delay means that the Court is indeed going to deal with the ugly legacy of the Insular cases, something that they did not seem to want to do in November at the argument? (Yes, I know that David does not have special insight into what the justices are thinking, but I'm curious anyway).

I can't wait for David's book to come out.  I'll assign it in class and ask him to come back to talk to us again!

Comments

[Stephen Lubben]

On the first question, there is the First Circuit's (arguably wrong) prior decision that the Commonwealth is subject to the Contracts Clause.

[mitu]

Thanks so much for the comment. You are the real guru here, so I should concede. But here are a couple of likely inadequate responses. I should also say that that particular First Circuit option is not my favorite, despite my immense fondness for that Circuit. Here are a couple of responses.

First, you are right that, in hindsight, the First Circuit might well have ruled a use of the local law advantage to do what Barbados did to be violative of the Contracts Clause. They did seem to be pretty hostile to just about anything. My question though (and I was not clear enough in my blog post) was why the municipal bankruptcy strategy was chosen ex ante -- that is before the First Circuit had shown its hand. I think that politics was likely involved (e.g., a desire to avoid making PR seem like a separate sovereign). But I'm guessing based on zero concrete information.

Second, and I'm again just speculating here, I think that there is a pretty good argument that there were things that could have been done using the power of local law that would not have fun afoul of the Contracts Clause jurisprudence. (Caveat: I know next to nothing about Supreme Court jurisprudence on this, other than my small study of the gold clause and related cases from the 1920s and 30s). The Baja and Greek retrofit of CACs might not have worked for the First Circuit, but as Mark W has taught me, the power of local law is so very broad when jurisdiction is also local -- which it was in the case of these bonds. One example of a strategy, which would have involved minimal interference with the explicit contract terms, is articulated in this cool paper from some of Mark W and my students (all credit to the students, blame to me) -- https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2764380 (and they even got some interest from folks in the Puerto Rican legislature on this).