Mnuchin Delineates Econ. Policy (Jan. 20)

In the twilight moment between administrations, the poetry of the campaign inevitably gives way to the prose of governing.  On the eve of the inauguration, testimony of the Treasury Secretary designate is more of a policy position commitment than when he was  nominated in November.  Now it counts.
Treasury nominee Mnuchin’s confirmation hearing yesterday before Senate Finance saw numerous important policy pronouncements, commitments and agreements — far more than have been elicited in other confirmation hearings.   We inventory these below, as well as instances where agreement was not reached or where the outcome is uncertain.   (Watch hearing)
If nothing else, I hope this update can provide distraction from a day many readers worked hard to go differently…
Steven Mnuchin doggedly scheduled private meetings with almost all of the two dozen members of Senate Finance.   It showed time and again as the questions and testimony at his confirmation hearing involved a minimum of grandstanding and witness-baiting.   No doubt the Senators figured out that Mnuchin wants to transact business, not promote an ideology.  His economic growth orientation and laissez-faire baseline are pronounced, but not to the point of being policy eccentric.
Business was indeed transacted at the hearing.  Below is a list of major policy areas where the nominee agreed to a position urged by one or more members of the Committee, as well as those areas where he declined to agree or his response is subject to interpretation or clarification (in colloquy with the Senator indicated in parentheses).
•  Tax Reform/Fiscal Policy
—   Mnuchin Rule — The Ranking Member twice asked the nominee whether he supports the “Mnuchin Rule” that there will be “no absolute tax cuts for the wealthy.” Mnuchin said he was honored to have a rule like Messrs. Volcker and Buffett but agreed to the quoted language, only adding “net net” equivocally at the end.  (Wyden)
—  Debt Limit — It shouldn’t be a surprise perhaps but still, given his iconoclastic boss, it was a relief to the Committee to hear that the nominee avoid the brinksmanship of Congress’ recent efforts to raise the debt limit.  (Bennet)
—  Deficits Don’t Matter:  Mnuchin accepted without elaboration or defense previously stated fiscal policy plans to increase the national debt by $2-3 trillion, (probably more, unless the CBO adopts dynamic scoring).  (Bennet)
—  But Offshore Tax Havens Do: Mnuchin agreed to support legislation to. close tax loopholes permitting overseas tax avoidance by US firms (Crapo)
—  Border Adjusted Tax:  Asked his views on a called the “border adjusted tax” Mnuchin was savvy but agnostic, saying he wouldn’t be surprised if the House passed it though Mr. Trump recently called it “too complicated.”   (Wyden)
•  Financial Regulation
—  Dodd-Frank dismantled?  Doubtful that the core — Titles I and II regulating  systemic risk and the designated Too Big To Fail financial institutions — of DFA, and certainly improbable that the Act as a whole, would be repealed.  (Warner)
 —  FSOC:  Asked point blank if he would repeal the Financial Stability Oversight Council (FSOC) and Orderly Liquidation Authority under Title II, Mnuchin quickly agreed on the former, though he said he could see procedural reforms for the Council.  (Sen. Crapo)
—  Orderly Liquidation Authority:
The nominee did not find fault with the DFA authority that requires FDIC resolution of non-bank financials and prohibits bailouts.
—  Glass-Steagall will not be restored; a “21st Century Glass-Steagall” is possible.
—  Volcker Rule:  Mend it (it lacks clarity), don’t end it.  (Cantwell)
—  CFPB:  Mnuchin indicated that he would keep the Consumer Financial Protection Bureau, but he would change how it is funded, primarily through government appropriations instead of the Federal Reserve.  (Carper)
•  GSE Reform
—  GSE Privatization:  The nominee walked back  his earlier statement calling for the privatization of Fannie Mae and Freddie Mac.  “My comments were never that there should be recap and release… I believe that these are very important entities to provide the necessary liquidity for housing finance.” (Warner)
—  Comprehensive GSE Reform:  The status quo of federal government conservatorship of the agencies is “unacceptable” but the  leading alternatives on the table represent “two extremes.”  (Crapo)
Agreement to Disagree
The nominee rejected appeals for agreement on several key issues.  He declined to provide details when Sen. Casey asked what fiscal policy would enable Mnuchin’s promised substantial middle class tax cut.   He also refused to state plans regarding the Earned Income Tax Credit (EITC) despite Sen. Wyden’s inquiry.
And although he ruled out repealing Dodd-Frank’s Title II TBTF policy, he did muse aloud that “we need to have proper regulation before the need for Title II goes away” and that he “would not repeal Title II without a  bankruptcy solution in place,” which may have been a warning to Warner, one of the Title’s principal and proud authors.

Financial Policy • Mnuchin Hrg Today (Jan. 19)

The Trump cabinet nominee confirmation hearings are bringing into greater clarity  the policy goals of the incoming administration.   Although the policy focus to this point has been mostly non-economic, that began to change yesterday with the hearing of Commerce Secretary-designate Wilbur Ross.  Today should  provide a still-clearer policy picture when the Senate Finance Committee considers Steven Mnuchin’s nomination for Treasury Secretary.
With close to 24 hours before the Obamas depart 1600 and Donald Trump takes the oath, the new administration’s economic policy goals and timetable remain fluid.  This morning in Senate Finance, some important questions will be asked and maybe answered.  We look at these questions below.
Commerce Nominee Wilbur Ross

If the establishment has winced, blanched, or looked through its fingers at the Senate confirmation hearing performance of some Trump cabinet nominees, Wilbur Ross, the President-elect’s pick for Commerce Secretary, must have provided relief.  The bald billionaire told the Senate Committee on Commerce, Science and Transportation this morning “I am not anti-trade. I am pro-trade,” Ross testified.  TPP and NAFTA have flaws, he suggested, but not fatal ones.  Ross, 79, is a former longstanding registered Democrat.

If confirmed — which is a certainty — Ross will loom large in the Trump administration’s infrastructure plans.  During today’s hearing, Ross made it clear that the plan will not consist only of a large tax deduction infrastructure investors.  Instead, it will be an a la carte approach involving a mix of:

•  tax incentives

•  conventional appropriations

•  expanded municipal bond authority

•  Public-Private Partnerships

Treasury Nominee Steve Mnuchin

As the principal economic advisor to the president, the Secretary of the Treasury critically influences economic and financial policy.  As Secretary, Steven Mnuchin would be responsible for  domestic and international financial tax and broader economic policy.  As such, he will craft fiscal policy and manage the public debt, controlling the most powerful set of economic levers outside of the Fed.

Mnuchin is a former partner at Goldman Sachs and has no prior government experience.  As the head of mortgage lender OneWest, Mnuchin profited handsomely from the housing crisis and his firm oversaw foreclosure practices that have been highlighted in paid media.

OneWest is currently under investigation for unfair lending practices. The nominee has not published any work regarding his views on fiscal or monetary policy.

•  Dodd-Frank

For many, the first question is what Mnuchin’s plans are for Dodd-Frank, which Trump has promised to “dismantle.”  Mnuchin expressed the view  last month that federal financial regulatory practices have reduced the flow of capital to small and medium sized businesses because of rules constraining  lenders.  He says his guiding regulatory principle is to make sure the banks lend as freely as possible.  What this means for Dodd-Frank and provisions like the Volcker Rule is a topline question.

The nominee has brushed off his lack of government experience, citing his background in the private sector as sufficient experience.  He has said that he saw first hand the negative effects of Dodd-Frank from the private sector and knows how to fix the problem.  Mnuchin stood to profit from the financial crisis and he did, mainly on foreclosed homes.

A critical question for the nominee relates to the interagency body created by Dodd-Frank and chaired by the Treasury Secretary — the body that designates financial institutions as systemically important and subject to enhanced regulation:   “Do you believe that the Financial Stability Oversight Council (FSOC)  should be retained or abolished?

•  Tax Reform

Mnuchin has suggested that the incoming administration will propose the largest tax reform since the Reagan administration. He has endorsed reducing the top corporate tax rate from 35  to 15 percent, claiming that these cuts would “create huge economic growth” and “huge personal income.”

He has insisted that the administration’s tax cuts will not reduce upper-income taxes and that the overwhelming bulk of tax relief will go to the middle class.  The tax credits that many low and moderate income families earn under the Affordable Care Act would be abolished, ultimately skewing the tax cuts in favor of the wealthiest Americans.

The status of previously published Trump tax plans is uncertain, but per estimates of his latest one, a millionaire would experience a 14 percent tax cut, while middle class families would get not much more than a one percent cut.  This outcome is similar to Paul Ryan’s plan –by design — where taxpayers earning more than $1 million would see an 11 percent increase in income after tax while the bottom 80 percent of taxpayers will receive a cut of 0.5 percent.

Tax progressivity is a bedrock principle as old as the Code itself.  At a time of increasingly economical inequality, a reasonable question about the nominee’s commitment to the principle of progressivity, seeking his assurance that, as you have stated, taxes on the rich will not decrease and that the middle class will benefit from his eventual tax plan?

•  GSE Reform

Mnuchin has said that he will completely privatize Fannie Mae and Freddie Mac “reasonably fast.”  Since the USG took Fannie and Freddie over, the agencies have paid $255.8 billion to the Department of Treasury, making the government investment profitable for taxpayers.  Privatization will be good news for shareholders, but not necessarily all taxpayers.

This begs the question of transition, if Mnuchin still believes in the full privatization of Fannie Mae and Freddie Mac.  What would this mean for their cashflow to the Treasury Department? How will privatization make it easier for borrowers to get mortgages?  Will it increase lending?

A question not to ask the nominee unless you want to adjourn the hearing:  anything to do with Skull and Bones, the Yale secret society whose members by club tradition must, when asked about the society, immediately leave the room.

Puerto Rican Debt Relief (June 14)

Mike & Co.,

This afternoon, Senate Majority Leader McConnell promised that the Senate would take up the Puerto Rico debt relief  bill before the end of June, leaving hope that Congress can act in time to help the Commonwealth.  Puerto Rico faces a $2 billion July 1 debt payment; a payment that the island’s Governor has stated unequivocally they cannot fulfill.

The Supreme Court ruled Monday, 5-2 (Justice Alito recused himself), that Puerto Rico cannot write its own bankruptcy legislation, meaning that Congress is the island’s last hope for avoiding a messy default.

Until today, it wasn’t clear there was a path to relief in Congress.  With McConnell’s announcement, the path is clearer, if the timing isn’t, and is likely to involve tough votes for GOP moderates.

Tomorrow: report on the Fed meeting.




Sup Ct Bars Restructuring Scheme

At the core of yesterday’s decision was a Puerto Rican plan to restructure $20 billion of its debt, specifically the debt that stems from three of its utilities companies: those responsible for water, electricity, and road work/public transportation.

While Congress has long allowed states to enable local governments and government entities to file for bankruptcy should they become insolvent.  But not so for Puerto Rico.

In response, Puerto Rico’s legislature passed its own Financial Recovery Act two years ago.  The law would have restructured the public utilities’ debts without gaining consent of all of the investors who hold those debts.  The Recovery Act was challenged by investors, mostly hedge funds.


Puerto Rico’s lawyers argued that the Bankruptcy Code’s definition of “state,” combined with Congressional amendments to that code which specifically rule Puerto Rico “not a state” regarding Chapter 9 proceedings, essentially exempted the commonwealth from Chapter 9 requirements.  That would free the Puerto Rican legislature to make its own laws determining municipal bankruptcy and debt restructuring.


That argument did not persuade a Court majority, and Justice Thomas’ majority opinion mentions that the Court’s interpretation of the relevant laws tends toward a more narrow restriction than Puerto Rico’s does.  Because of this, Congress’ changes are seen as restricting Puerto Rico from undergoing Chapter 9 as well as restricting it from making its own municipal bankruptcy laws.




Yesterday’s ruling comes on the heels of two other territory-focused decisions:  last Thursday, the Court ruled that Puerto Rico could not independently prosecute individuals if they have already faced federal charges for the same crime, and in a separate ruling on Monday SCOTUS turned down an attempt by American Samoans to be granted U.S. Citizenship at birth.  Samoans are considered U.S. Nationals, not citizens, a unique designation among America’s territories.


Following these rulings, Puerto Rico’s Governor is seeking a chance to appear next week before a United Nations committee on self-determination to register a complaint about the commonwealth’s lack of clear self-governing capacity.

PROMESA — The Relief Bill

H.R. 5278, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), is now the only thing standing between Puerto Rico and a messy default.  The legislation passed the House of Representatives this past Thursday, June 9, and now awaits a Senate vote; the Obama administration and its Treasury Department have leant their support to the bipartisan effort and will move to sign the bill once it’s presented.

The main provisions of the bill:


  •  Oversight and Management Board

—  Composed of 7 members: 2 appointed by Ryan, 2 appointed by McConnell, 1 each appointed by Pelosi, Reid, and the President.  One of Ryan’s nominees must be Puerto Rican.

—  Will require annually approved fiscal plans, submitted by the Puerto Rican government and subject to revisions required by the board.

–  Will require annually approved balanced budgets, submitted by the Puerto Rican government and subject to revisions required by the board.

—  Upon enactment there is a 7.5 month stay of litigation against Puerto Rico.  May be extended for a court ordered restructuring.  This is the first time that the federal government has created a statutory cooling off period that benefits a debtor.

—  All liabilities can be restructured through federal powers.  Allows for Puerto Rican debt to be brought to a sustainable level in a very powerful and sweeping way.



—  Creates the position of “Revitalization Coordinator,” appointed by the Governor of Puerto Rico who will be responsible for evaluating and helping guide forward “critical projects” to assist in the revitalization of Puerto Rican infrastructure.

—  Allows Puerto Rico’s Governor to lower the island’s minimum wage to $4.25 per hour for a time period not exceeding 5 years.


The legislation represents a major win for Speaker Paul Ryan, who has long supported the legislation specifically and a plan to help Puerto Rico generally, and for Minority Leader Pelosi.  Not only did the two leaders manage to pass the bill, the compromise earned a majority in both parties and sailed through the House, 297-127.

PROMESA creates a debt-restructuring process for Puerto Rico, and also establishes a 7-member financial oversight board which has the power to enforce balanced budgets and make difficult spending cuts within the island’s government.

Senate Action 

The Senate now needs to take up PROMESA, but lawmakers in that chamber are markedly less enthusiastic about the package than their House colleagues.  Senate Energy and Natural Resources Committee Chairman Lisa Murkowski said Thursday that her committee would “probably” consider the Puerto Rico bill, leaving open the possibility that it could move directly to the Senate floor.


Not only do Senators face pressure from their own parties – White House Press Sec. Josh Earnest: “We urge leaders in both parties to build on today’s bipartisan momentum and help Puerto Rico move toward lasting economic prosperity” – but the impending July 1 repayment represents a hard deadline for the bill to become law.


Senate Finance has oversight of PROMESA, and its Chairman, Orrin Hatch, said today that he would support the bill out of obligation to his party: “I think I’m going to have to [support H.R. 5278] but I don’t think it’s the solution.”


Concerns for the Next Steps


Some PROMESA supporters are concerned that Senators will amend the legislation and send it back to the House in an unpassable form.  Bob Menendez has hinted at marking changes which would make it harder for the Puerto Rican governor to initiate the minimum wage rollback provision, and would tighten language on pension treatments.


Sen. Bernie Sanders has threatened to filibuster the bill if the Senate decides to move it, but sources say the Senate likely has the 60 votes necessary to invoke cloture and limit debate on the bill.  The Senator from Vermont also released a competing bill in the Senate to handle Puerto Rico’s crisis – his bill would allow the island to declare bankruptcy, set up an avenue for Federal Reserve cash injections, and set up a “Reconstruction Finance Cooperation” entity.


Considerations for June


The House will be in recess during the last week of June, meaning that any changes to the bill in the Senate, which will then require House approval, will delay PROMESA enactment until early July at least.  Additionally, the careful and long lasting negotiations which led to the bill’s current contents indicate that fairly little room exists on either side of PROMESA to retain the bipartisan support that was used to pass PROMESA in the first place.

If the Senate acts in a way that jeopardizes the chances of PROMESA helping Puerto Rico before its July bond payment comes due (which is the only time that PROMESA is really helpful), then the United States will be forced to come to bear against a spreading panic within the municipal bond industry.  $800 million of the $2 billion bond payment due July 1 are backed by the “full faith and credit” of Puerto Rico, and a default on those bonds would throw into doubt the security of other American municipal debts.

Policymakers need to come to terms with how far they’re willing to go to voice their displeasure with this legislation – and then square that against the dire consequences that would follow the failure of this legislation.

Majority Leader McConnell may move the bill directly to the Senate floor for a vote to limit opportunities for changes and minimize debate on the package.  Most observers predict passage: it’s unlikely that McConnell would announce his plans if he didn’t have a path forward for this bill.

The Politics of the Carbon Tax (June 10)

Mike & Co.,

This afternoon, the House adopted a resolution 237-163 asserting that “a carbon tax would be detrimental to American families and businesses, and is not in the best interest of the United States.”

This kind of preemptive strike is unusual — there isn’t any serious carbon tax proposal before Congress right now, and neither party’s nominee has endorsed the idea.  Why did the House vote on this resolution at all and what does this mean for tax policy in Congress when the dust settles and 2017 comes into view?

TGIF — what a week!  Good weekends, all…




Why the Vote?

This afternoon’s vote is a follow-on to the RNC’s anti-carbon tax resolution, which was passed at its January 2016 meeting, and to Sen. Blunt’s anti-carbon tax amendment that popped up during vote-o-rama last year and failed along a 58-42 vote count.  This resolution also reflects unease with President Obama’s $10 per barrel oil fee, which is essentially a carbon tax itself.

Today’s action on the Hill lays bare once again the internal conflict in the GOP. Pitted against each other are members with close ties to industry and those who deem the party line on climate change unsatisfactory.  Conservative think tanks have been responsible for some of the latter group’s turn around, with scholars at groups like AEI exploring the idea.

This is a vulnerable time for energy firms, who are still feeling the pinch of exceptionally low commodities prices.  Exxon, especially, is facing a combination of 13-year-low oil prices and a growing campaign to punish the energy giant for climate misdeeds.  The company has begun to voice support for a carbon tax as part of is PR strategy, but skeptical critics have ben unmoved by those actions.

Tax Policy Implications

Another motivation for today’s vote is the changing politics of this issue – conservatives are concerned that a post-election push for carbon tax legislation might leave their industry supporters high and dry with the horse out of the barn. Because of this, today’s vote was designed to force members to pick a side, making it more difficult to change their minds later.

Historically, a carbon tax has been considered the most effective method of limiting the use of carbon by economists, even conservative economists.  According to the CRS, a $20 per ton carbon fee would raise $1.2 trillion over ten years, which could then be used for tax breaks, paying down the national debt, reducing the deficit, or anything else.

Such a revenue source may prove sorely tempting for policy makers, especially those who want to pursue tax reform.  If a carbon tax were to be made the cornerstone of a tax-policy “grand bargain” then Republicans could do well for themselves.  As an example a 2015 bill by Sens. Whitehouse and Schatz that would use revenue from such a tax to offset the corporate tax rate.  Sen. Schumer has said that a tax deal with the carbon tax included would be “possible, but hard.”


A number of observers claim that 2017 could see carbon tax legislation being proposed by Republicans in the House and the Senate, reflecting the increased attention the idea has been receiving.  If the Democrats take Congress this November that wouldn’t even be necessary – especially if climate hawk members take on key committee assignments.

For all the talk of a 2017 push for tax reform, it seems poorly timed for Republicans to take any tax policy ideas off the table.

At a Carole King performance in Georgetown last night, Sen. Whitehouse said that the vote held today betrays GOP hypocrisy on the issue of climate change. “Every single Republican who’s looked at climate change for a solution has come up with a revenue-neutral carbon fee,”?adding that this resolution proves the GOP is beholden to the oil lobby.  Beyond rebukes like that the Senate seems more supportive of a carbon tax in general, with even Jim Inhofe saying that he’d see “what the trade-off is” for a carbon tax policy before choosing his position.

A House resolution is not binding, it’s only meant to express the general opinion of the membership and as such today’s vote is more notable for its odd timing than its usefulness as precedent.  Like closing the carried interest loophole, enacting a carbon tax is, in the long run, likely inevitable.  The politics surrounding such a policy are too good to pass up – it’s effective, efficient, and equitable as a way to limit carbon usage.

Puerto Rico Debt Deal (April 26)

Mike & Co. –-

On Sunday, a Commonwealth of Puerto Rico a $422 million bond interest payment comes due that can’t — or in any case won’t — be paid on time.  Gov. Alejandro Padilla has repeatedly said that the island cannot make that payment; others have questioned those statements.  Close behind follows a two billion dollar payment of principle due July 1, which presents a truly insurmountable barrier.

For the moment, there is little sense of urgency on the Hill surrounding HR 4900, the island’s leading debt restructuring bill.  Proxy fights lurk just beneath the surface –over the Hastert Rule, moral hazards relating to future state claims, and the minimum wage _ that make the bill as much about messages as solutions.  

Good weekends, everyone. 



Hastert Still Rules in the House

Speaker Ryan is struggling to gain the support of a majority of House GOP members for HR 4900, the Natural Resources Committee’s Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA).  The legislation would create a fiscal oversight board, a key requirement for Republicans, but also allows the territory to restructure some debt in order to keep making payments.  The House Freedom Caucus — about ## members –has continued to oppose any debt restructuring legislation, which it considers a “bailout” for the island.

Ryan may be unwilling to break the Hastert rule, which informally requires that the Speaker only advance legislation with a majority of support in the GOP -– a cornerstone of Ryan’s push for the Speakership last year.

Bailout vs. Restructuring 

 HR 4900 does not authorize any federal expenditure tax to the territory; it simply allows the island to restructure its debts.  Still, the provision has been a “non-starter” for many within the Republican Study Committee  — about two-thirds of Texas conference — and is fantastically unpopular with creditors asked to take a haircut on their bond holdings.

Case in point: in the past week a television ad has begun to air which claims PROMESA represents “Super Chapter 9” bankruptcy protections and is a way to bail out Puerto Rico on the backs of “savers and seniors.”  These ads are bankrolled by the Center for Individual Freedom (CFIF).

The House Rescue Bill

HR 4900’s notable provisions are below:

  •  Territory Financial Oversight and Management Board

—  7 members appointed by the President

—  requires annually approved fiscal plans, submitted by the Puerto Rican government and subject to revisions required by the board

—  require annually approved balanced budgets, submitted by the Puerto Rican government and subject to revisions required by the board

  •  Adjustment of Debts

— the oversight board will have authority to authorize debt restructuring deals for entities with already approved fiscal plans and under specific requirements

—  no new debt issuances: “For so long as the Oversight Board remains in operation, no territorial government may, without the prior approval of the Oversight Board, issue debt or guarantee, exchange, modify, repurchase, redeem, or enter into similar transactions with respect to its debt.”

NB:  allows Puerto Rico’s Governor to lower the island’s minimum wage to $4.25 per hour for a time period not exceeding 5 years.  What’s rarely mentioned is that this provision would allow for a five-year period of effectiveness and would only apply to workers hired within that five-year span.

House vs. Senate

Adding pressure to the House leadership, Senate Majority Leader Mitch McConnell: “We’re going to let the House go first on Puerto Rico… they’ll be going first on Puerto Rico.”  But Senators are not sitting idly.  Senate Finance Chair Orrin Hatch, opposes HR 4900, has said that his office is working on his  bill.   And there are two Democratic alternatives.   Sen. Menendez’ Puerto Rico Stability and Recovery bill has gained a number of cosponsors:  Sens. Schumer, Brown, Warren, Cantwell and Blumenthal.

Moral Hazard

The bill’s opponents claim that debt restructuring in Puerto Rico will encourage spendthrift states to do the same. This is a significant hurdle for HR 4900, driven as much by ideology as by fact.  Arkansas was the last state to declare bankruptcy, in 1933.  One of the chief ways that states can repay their debts, cutting spending or raising taxes, isn’t enough to cut it in Puerto Rico where nearly half of the islands inhabitants live below the poverty line.

A secondary concern regarding the impact of this bill on states is the chance for Puerto Rico’s restructuring to trigger a run on municipal and state bonds, or to at least cause a rise in their interest rates.  Market actors, including PIMCO (which holds $40 billion in muni bonds, but none from Puerto Rico), have said that they don’t see much risk for “contagion” between Puerto Rico and other states if the territory restructures its debt, nor do they see cause for fear on rate changes.

The three issues above form the crux of Ryan’s predicament, to wit: any Puerto Rico bill needs support from both Democrats and Republicans to pass in time for the July 1 deadline, but any bill that can gain sizable Democratic support cannot gain the majority of Republican support necessary to follow the Hastert rule.

A Hard Deadline

The failure of Congress to address the crisis in Puerto Rico could put the $3.5 trillion municipal bond market at greater risk than if they were to allow Puerto Rico to build a deliberate and responsible framework for debt restructuring.

No matter what legislators think of Puerto Rico’s governance failures, which have certainly contributed to this crisis, the fact remains that inaction on Congress’ part will result in the territory’s default and a far greater chance that federal money will need to be used to bail out the island.  As things stand now, the GOP risks ensuring that their own worst nightmare comes true in Puerto Rico – that the island will get a bail out, will restructure its debts, and will continue to operate without any sort of financial oversight board.

Puerto Rico Debt Deal (Apr. 4)

Mike & Co. —

The House, which is still on recess this week (the Senate is in) continues to march toward Speaker Ryan’s self-imposed April 29 deadline to vote on a legislative solution to deal with the Puerto Rico debt crisis.  Two relevant SCOTUS   cases to be handed down before June further complicate the picture.

If a bill cannot be passed by the end of the month, Puerto Rico will run up against a $470 million bond payment, due May 1, that it likely cannot make, with bigger obligations coming due this summer.

More on the terms of the debate over a solution in Congress and the cases in the Court below.  Next will be a prospective and then a look back at the Fiduciary Rule expected from DOL midweek.




Right now, most of the wrangling in Congress is over a draft bill that would tackle the two main issues surrounding Puerto Rico’s financial troubles.  Negotiations revolve around how to combine two proposals for dealing with the Puerto Rico crisis, both of which must be present to gain enough bipartisan support to push legislation forward.

  1. Debt Restructuring

Either allow for Puerto Rico to carry out a Chapter 9 bankruptcy proceeding (which US states, but not territories, can do already), or create some other similar system to restructure the territory’s debts.

  1.  Conditionality

Among the main conditions that the GOP insist on, and the Democrats tend to resist, are:

—  completion of private negotiations with creditors take place before relief is implemented

—  creation of a credible fiscal plan

—  passage of a balanced budget

—  establishment of a Financial Control Board of financial advisors who will audit Puerto Rico’s finances, control the territory’s budget, and work to put Puerto Rico on a path to sustainable investment.  The Board’s activities would include:

  •  establishing reporting and disclosure requirements for the Puerto Rican government
  •  auditing the government’s books to look for inefficiencies and waste
  •  pushing through a budget if the Puerto Rican government cannot
  •  determining whether or not a fiscal plan form the government is reasonable

Forward Calendar

The full House bill is expected to be introduced by April 11, with markup occurring by April 13.  Already the House has flown past Ryan’s original March 31 deadline, causing it to be extended to April 29.  The bill is the product of weeks of intense negotiations with Treasury and Puerto Rican officials.  A House Natural Resources mark-up is expected during the week of April 11.

Puerto Rico’s next large bond payment, scheduled for May 1, when $470 million is due.  If somehow a stop-gap measure is put in place then Congress would have until July 1 to make more permanent arrangements, as a $1.9 billion payment comes due that day.

Legislative State of Play

Rep. Rob Bishop, chair of Natural Resources, released on March 28 a bill that would create an independent Fiscal Control Board and allow for Puerto Rico to restructure some of its debt, under the auspices of that same Board.

Democrats quickly announced that they could not support the draft in its current state, citing concerns that the legislation goes too far in empowering the Board and would undermine the authority of Puerto Rico’s government.  Under the bill, the Board would exist within the government of Puerto Rico but would be independent of the Governor or legislature of the island.  In return, Puerto Rico would be able to restructure some of its $70 billion in debt.  Restructuring would only be an option after the government turned over audited financial statements to the Board, passed a budget, and pursues voluntary debt negotiations with creditors.

Regarding the House bill, Minority Leader Nancy Pelosi said in a statement that “

the “sweeping powers of the oversight Board proposed in Republicans’ discussion draft are far from what Democrats can support.”

In the Senate, Finance chair Orrin Hatch has talked about sending a relief bill through his own Committee.  It calls for debt restructuring, an oversight board, and tax breaks designed to bolster economic growth on the island.  Until he releases a draft bill, it is assumed that the House will be the first to legislation on the issue.

Subtext:  Conditionality vs. Paternalism

Puerto Ricans could be forgiven for hearing in some of the arguments in Washington a vaguely paternalistic tone to them.   Legislators routinely — perhaps very reasonably in the context of debt relief legislation –bring up the need for oversight, budget auditing, control boards, and reporting requirements for the government of Puerto Rico.  For some Puerto Ricans, the debt crisis right now feels like another instance of Congress micromanaging their affairs.

It is clear that the Treasury Department is trying to thread a political needle in pushing a fix for Puerto Rico’s debt crisis. However, this is a time sensitive situation. A top Department official warned lawmakers last that the island is in need of “an immediate solution” and that delay will only increase the ultimate size of the restructuring deal.



Puerto Rico’s Debt Crisis (Mar. 5)

Mike & Co. —

The February jobs report came out this morning better than expected.   Once again, the US economy maintained strong job growth without wage gains.  Wages fell 0.1 percent in February, but 242,000 positions were added to the economy, marking 72 months of uninterrupted job gains – the longest streak on record.

Additionally, labor participation rose by 1.5 million Americans since November – making it the highest it has been in 16 years (62.9 percent of the overall share of Americans).

The report from Puerto Rico is not as sunny.  The territory is still waiting on a Congressional bill designed to handle the ongoing debt crisis on the island.  More  below.




Puerto Rico’s Time Bomb

The Puerto Rican debt crisis has been an ongoing concern for both Congress, Wall Street and the Obama administration for some years now – the territory’s bond ratings have been steadily dropping into the junk category and fell from A- in 2005 to CCC+ last April.  At the heart of the matter is $70 billion in bonds that Puerto Rico owes and says it cannot pay on.

Because Puerto Rican bonds are tax exempt in all 50 states and the District of Columbia, making them incredibly popular investments for mutual funds, pensioners, and big banks.  Over 20 percent of mutual funds in the United States hold at least some Puerto Rican bonds, with $11.3 billion in portfolio, with a further $15 billion in bonds held by hedge funds.  Now that the territory’s bonds are in the “junk” category, pension funds and insurance firms are unable to hold them any longer.

The diverse list of bond holders has thrown a wrench into the plans of those who would rather allow Puerto Rico to default on its obligations – something which would require legislative action (the territory doesn’t have that luxury, unlike states).  If Puerto Rico is allowed to renege on its contractual agreements, the argument goes, then it creates a moral hazard for other entities to do the same rather than make the tough choices necessary to honor their obligations.  The fact that many of these bonds are essentially held by ordinary Americans (through mutual funds and pensions) makes the argument all that stronger for many representatives.  A state hasn’t declared bankruptcy since Arkansas did so in 1933.

Moral hazard is inherent in a debt restructuring deal; here, the path for Puerto Rico toward capital markets after anything of the sort would still be an especially painful one (see: Argentina).  Additionally, there are few serious proposals to grant the island full Chapter 9 status.  Most opt instead for some form of negotiated haircut agreement combined with extending maturities on the bonds; these proposals are likely to succeed, considering Puerto Rico is almost certainly unable to maintain its bond payment schedule without a restructuring agreement.

Administration Position

Testifying before the House Committee on Natural Resources on Feb 25, Treasury official Antonio Weiss warned lawmakers that Puerto Rico needs “an immediate solution” if it’s to survive past May 1, when a $470 million bond payment is due.  Soon after that, on July 1, a $1.9 billion bond payment will come due as well – Puerto Rican representatives have already declared they cannot meet those payments without assistance.

Weiss laid out the administration’s two-part plan: first the territory must be allowed to restructure its debt obligations, second a fiscal oversight board should be established to assist the island with managing its finances.  Importantly, Weiss stopped short of advocating for bankruptcy protection for Puerto Rico and told the committee that “an advisory board is not adequate to do the job” alone.

House Democrats voiced concern over the financial oversight board, Rep. Luis Gutiérrez: “They’re saying that there’s a joint responsibility, but it seems to me that all of the responsibility is being weighed on the people of Puerto Rico.”

Meanwhile Republicans claimed that any plan to restructure Puerto Rican debt was a non-starter; a few hours after the hearing the Republican Study Committee announced it would oppose any plan including such a provision.  “Changing the rules mid-game would be unfair to Puerto Rico’s creditors who entered into these arrangements with agreed upon terms and would delegitimize future transactions,” said RSC Chairman Bill Flores.

Policy Options

Until recently the two parties have maintained starkly contrasting views on how to best deal with Puerto Rico’s debt crisis – Democrats have pushed for a forced debt restructuring, with some calling for the island to be granted Chapter 9 bankruptcy protections, meanwhile Republicans called for a financial oversight council to make the tough fiscal decisions necessary for Puerto Rico to maintain its debt obligations without reneging on its agreements.

The administration, through Weiss, has advocated a middle of the road approach. By adopting both proposals and avoiding the further edges of each (no bankruptcy, and no unaccountable board staffed by Wall Streeters), the administration hopes to find compromise between each group.  And it seems like it might work.

Finding Compromise

Recently, however, the conservative stance against debt restructuring has lessened – with some Republicans saying that they could support a PR bill as long as it doesn’t include Chapter 9 bankruptcy.  House Natural Resources chair Bob Bishop has been working on a bill for Puerto Rico that does include some element of debt restructuring, and recently said ““I’m sure RSC will be satisfied with what we do … to say that some element of [debt restructuring] could be in there, yeah.”
The House is still sticking to its end of March deadline set by Speaker Ryan for putting forward a final bill on Puerto Rico on the floor for a vote.