Thursday, September 1, 2016

The Puerto Rico Oversight Board Has Been Appointed (Sell on the News).

Yesterday, August 31, President Obama appointed the 7 voting members of the oversight board for Puerto Rico under the law colloquially known as Promesa.  The board has a broad charter and a ridiculously impossible task in front of it. 

Back in June, in a moment of weakness, I told a friend of mine at a hedge fund, “Sure, you can try to put my name on one of the lists of nominees.”  Then came August and his liaison in D.C. with the office of the relevant Congressional figure emailed me and said “You’re on the list” from that leader to the Administration.  Lest I get too arrogant, he took pains to let me know that most of the initial proposed appointees from the GOP side had been vetoed by the Administration; clearly I was not an “A-list” candidate inside the Beltway.  So I began educating myself on the law and the island’s predicament, and as I did, I became more and more fearful: “God, what if I do get appointed?  This thing is a disaster!”  So, while I felt obligated to live up to my undertaking, I was deeply relieved last night when said friend and said liaison let me know I had been passed over.  They explained, as the Wall Street Journal reported today, that the Administration had insisted on at least two of the GOP nominees being natives of Puerto Rico or having close ties there, and also (not reported in the WSJ) that the “Anglos” on the GOP side, Biggs of AEI and Skeel of U. Penn, had been cleared in the first round, so ultimately my presence on the list was, in retrospect, some sort of a gesture to my friend and his liaison as opposed to something that had a realistic chance of coming to fruition.  For which I am grateful.

Personal anecdotes aside, let’s look at the nominees’ backgrounds, keeping in mind that the underlying problem pits a consistently Democratic government debtor against a large number of institutional creditors.  As Mary Williams Walsh of the Times, whose reporting I think has been reasonably balanced, reports (my additions are in parenthesis):

The Republicans named to the board are:

■ Andrew G. Biggs, a resident scholar at the American Enterprise Institute (Mr. Biggs was also deputy commissioner for Social Security in the 2nd Bush administration and appears to be also a resident scholar at the free-market-oriented think tank, The Mercatus Center).

■ José B. Carrión III, president of Hub International, an insurance brokerage in Puerto Rico (This is a little misleading.  Hub International is a worldwide insurance brokerage (owned by private-equity firm Hellman & Friedman and headquartered in Chicago); Mr. Carrion is head of the Caribbean region, not the global company).

■ Carlos M. García, founder and chief executive of BayBoston Managers, a private equity firm. (Per his LinkedIn page, I found this:” Previously, he was appointed by the Governor of Puerto Rico as Chairman, President and CEO of the Government Development Bank for PR, the fiscal agent, financial advisor and bank of the Government of Puerto Rico. Mr. Garcia also chaired the Fiscal Restructuring and Stabilization Board created by law to safeguard Puerto Rico's credit rating. During his public service tenure (2009-2011), the Government of Puerto Rico improved its credit ratings and coordinated with federal regulators the implementation of a financial rescue plan for its banking system.”   I note that the Development Bank is one of the institutions whose restructuring is under the aegis of the Oversight Board).

■ David A. Skeel Jr., a University of Pennsylvania law professor with expertise in bankruptcy (His bio page from Penn’s website).

The Democrats are:

■ Arthur J. Gonzalez, a senior fellow at the New York University School of Law and a former chief judge of the United States Bankruptcy Court for the Southern District of New York (I assume Judge Gonzalez is well known to readers of this blog).

■ José Ramon González, president and chief executive of the Federal Home Loan Bank of New York.  (According to a press release from FHLBNY, like Mr. Garcia, he was also CEO of the Government Development Bank for Puerto Rico, one of the debtors whose restructuring he will now be overseeing.  The FHLBNY is a federally chartered cooperative whose members are mortgage lending banks in New York, New Jersey and Puerto Rico.  It is exempt from all taxation and its securities are given preferential regulatory treatment for risk-capital weightings under bank regulations.  These subsidies are stated to have been intended to assist it in its mission to support affordable housing (notwithstanding that prices have appreciated beyond many working families’ ability to purchase.))

■ Ana J. Matosantos, president of Matosantos Consulting and a former director of the California Department of Finance From a biography I found on the web: “Ana Matosantos has a number of firsts on her resume. She was the youngest, the first Latina and the first openly gay person to hold the position of Department of Finance director.

“She was also the first finance director to serve two governors of different parties.

“Matosantos grew up in Puerto Rico, the daughter of a businessman and a high school administrator, and received a bachelor's degree in political science and feminist studies from Stanford University in 1997. After graduating, she spent two years working at the San Francisco-based Equal Rights Advocates, a public interest law firm that focuses on women’s rights.

“She considered law school, but instead began her state government career as a consultant to the Senate Committee on Health and Human Services and as the human services consultant to the Senate Committee on Budget and Fiscal Review. Matosantos moved to the executive branch in 2004 as a member of the Health and Human Services Agency, where she served as an assistant secretary for programs and fiscal affairs and associate secretary for legislative affairs. In 2007, she became deputy legislative secretary for Health and Human Services and Veterans Affairs in the office of Governor Arnold Schwarzenegger where she worked on the administration’s comprehensive health care reform proposal.

“From April 2008 to December 2009, Matosantos was the chief deputy director for budgets.

Republican Governor Arnold Schwarzenegger appointed Matosantos, a Democrat, finance director in 2009. She was reappointed director by Governor Jerry Brown in January 2011 and 10 months later was arrested on suspicion of driving under the influence, pleaded no contest to driving while over the legal limit for alcohol and was sentenced to three years’ probation.

“She resigned her post in September 2013.” 

I write this post to point out that none of the appointees has any private sector restructuring experience, with the exception of a couple of “estate neutral” assignments Judge Gonzalez handled since leaving the bench.  (With all due respect to Professor Skeel (whose academic work I am sure is first-rate) and any other academic out there, I’ve never seen a full-time academic who could survive in a practice in a given debt restructuring situation.  Totally different mindsets and, after a point, skill sets.)

Indeed, with the exception of Mr. Carrion and Mr. J Gonzalez’s work at a government-subsidized lender, none of the appointees has any extended private sector experience of any kind.  

Last, notwithstanding that two of them held an executive office at the local development bank, none of them has any successful experience in economic development.  Most of the total years of employment of the board members come in government, government-subsidized, or not-for-profit institutions.  Yet, I would submit, the two things the island needs are economic development not dependent on infusion of funds from outside sources, and debt restructuring.

I point particularly to Ms. Matosantos.  Even though she appears to have been in office during the period California handed out IOUs to its suppliers, there is no comparison between what a giant economy like California can do to turn itself around and attract talented entrepreneurs and what a modest Caribbean island can do, especially when there is no restriction of emigration from the island to Florida, New York or other destinations on the mainland. 

Although I am sure all of them are well-intentioned, most have some kind of relevant expertise, and a couple appear to have a generally attractive philosophical outlook, overall the appointments seem to be lacking in key respects. Having studied the challenge that confronts them, I was dubious before the appointments were announced that the board could pull a comprehensive, consensual restructuring together; I am even more pessimistic now. 

I have not held and do not hold any positions in the debt of any of the debtors subject to PROMESA, including, as far as I know, mutual funds that might hold their debt. Nor do I have any business or real estate interests on the island.