It is common knowledge that Puerto Rico is a financial mess and that it arrived at its current predicament due to its government’s unwillingness to make difficult decisions. Ex-Governor Luis Fortuno made an attempt to return the island’s finances to sanity, but his efforts cost him his reelection bid. His successor, Alejandro Padilla, has undone much of what he tried to accomplish, more or less embracing a “business as usual” model of governance that morphed into a strategy of blaming the bondholders when the island’s fiscal situation became dire.
Congress created a so-called Fiscal Oversight Board to address the Commonwealth’s finances in a way that sidestepped the political constraints that prevented previous governments from exercising fiscal responsibility. Since the board is unelected and largely autonomous, it need not fear voter reprisal when making the difficult decisions that are necessary to return Puerto Rico to solvency.
However, it is now rumored that the board, at the discretion of member and former bankruptcy judge Arthur Gonzalez, is considering employing two law firms, along with a financial advisory firm, with lamentable records in advising governments in financial crises. The firms in question—Cleary Gottlieb, Proskauer Rose and the financial advisory firm Millstein & Co.—have been employed by Puerto Rico for some time already, but notably failed to prevent the situation the island now finds itself in. They have a playbook for dealing with fiscal crises that involve resisting reforms and blaming bondholders.
Cleary Gottlieb has spent the last two years working on Puerto Rico’s “restructuring.” After receiving tens of millions of dollars in consulting fees from its government the economy is no more restructured than before, although considerably poorer. Cleary’s main strategy in these negotiations has been to push for major losses to bondholders with little else in the way of real reform. The firm has also been on the payroll of the Argentine and Greek governments for whom it has proffered the same advice: delay fiscal reform, vilify bondholders, employ brinkmanship and send a big bill to the client without improving a thing.
Proskauer Rose represented Puerto Rico’s Government Development Bank in a case before the Supreme Court last year and argued that the island should be allowed to simply declare bankruptcy to divest itself of its “unmanageable” debt. Fortunately for everyone—except perhaps Proskauer itself—it failed, as a bankruptcy would have proven disastrous for the island’s financial future. The government’s access to capital would have been badly hindered for a significant period of time had they succeeded.
Both of these law firms are good at profiting off of crises but have shown themselves to be unable to actually solve them. It’s clear that Puerto Rico needs a new playbook if it is going to achieve lasting structural reforms and if the Fiscal Oversight Board is going to be viewed as credible in the eyes of potential investors.
Turning to the usual suspects as the board’s advisers instead of considering other law firms who have a similar practice of dealing with distressed governments also smacks of cronyism, which may be par for the course in Puerto Rico but shouldn’t be the practice of the board as it tries to change the tone of doing business on the island. It should endeavor to surround itself with advisers focused on the same goal it professes to be for—which is to extricate the island from its decade-long recession and revive economic growth first and foremost.
Puerto Rico’s oversight board has the potential to accomplish great things, but it can only do so by enacting real, meaningful change, not by continuing the same tired policies of yesteryear. In selecting legal representation, it should lead by example, display a good faith willingness to clean house, and start fresh.
Ike Brannon is president and Logan Albright is director of fiscal research at Capital Policy Analytics.
