While Puerto Rico today becomes the first US state jurisdiction since the Great Depression to default on its constitutional debt, the higher spheres of power in the US capital begin to gather a list of possible candidates to constitute the Oversight Board. This board will seek to reestablish Puerto Rico's budgetary discipline and will give way to a renegotiation process for the Island's debt, if necessary.
This is a confidential process that has been carried out for several weeks and is now gathering speed, after the President of the United States, Barack Obama, signed bill H.R.5278 (S.2328) into law: the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA).
According to at least four different sources, the candidate search and evaluation process will begin this month, so that Obama may be able to appoint the seven board members starting in August.
El Nuevo Día had previously quoted Congressman Rob Bishop, who stated that the Oversight Board, whose powers go above the Puerto Rican government, should become operational by September.
Yesterday, minutes after Obama turned this controversial board into law, Governor Alejandro García Padilla decreed a default on Puerto Rico's general obligations, as well as on other debts whose payment is guaranteed by the Constitution.
Meanwhile, García Padilla declared a state of emergency for the Convention Center District Authority, the Retirement Systems Administration and the University of Puerto Rico.
“Although PROMESA will not be able to immediately prevent additional defaults from Puerto Rico, its approval provides an orderly process of debt readjustment, preventing a cycle of escalating lawsuits, and it establishes a standard framework to allocate Puerto Rico's various types of debt,” said Ted Hampton, Senior Analyst and Vice President at Moody's Investors Service.
A Model Similar to DC.
According to Hampton, one of the most urgent tasks the Oversight Board will have is to create a five-year (at the least) fiscal plan for Puerto Rico.
“These plans will force Puerto Rico to develop a debt sustainability analysis, which is a practice Puerto Rico has lacked,” Hampton stated, while pointing out that the approval of the bill will favor creditors.
Hampton also said that, although PROMESA does not specify how Puerto Rico's economy will be rekindled, the law requires that the fiscal plans include the funds necessary to achieve this objective. Likewise, the law also creates a congressional task force to identify development strategies for the Island and changes in the federal law that could help revert almost two decades of economic downturn.
“In that sense, PROMESA sets a path for a board that behaves similarly to the one in the District of Columbia, which was established in 1995 and oversaw substantial financial administration improvements (for the federal capital),” Hampton remarked.
Against the Clock.
However, in Puerto Rico's case, the congressional task force will barely have six months, and it will not be assigned any resources to fulfill its mission. Also, the board will need a fiscal plan as soon as possible to ensure budgetary adjustments before the automatic lawsuit suspension—which started yesterday and extends until next May—expires.
This is why, according to sources of El Nuevo Día, there is such urgency to the process of identifying candidates, a process where congressional advisers, bondholder groups, politicians, lobbyists and officers from the US Treasury and the Puerto Rican government all want to exert influence.
Urgency for Names.
“There is an urgency to identify the candidates. The White House wants to deal with the issue as soon as possible,” said a source who reached out from 1600 Pennsylvania Avenue, in Washington, DC.
According to our sources, Governor Alejandro García Padilla, Resident Commissioner Pedro Pierluisi, and representatives from several investment and lobby groups already submitted recommendations to the majority leaders of the US Senate and Congress. Nonetheless, at press time, El Nuevo Día could not ascertain what recommendations, if any, were made by the primary elected leaders of the Puerto Rican government.
According to PROMESA, by September 1st, Obama should appoint a board director, as well as the other six members. The remaining six will be selected from a shortlist provided by the primary leaders in the US Congress and Senate.
Unlike the first drafts that gave way to PROMESA, which established stringent conditions to avoid conflicts of interest, the candidates to the Puerto Rico Oversight Board should possess “knowledge and expertise in finance, municipal bond markets, management, law, or the organization or operation of business or government.”
According to the law, the Republican Majority Leaders in Congress and the US Senate—Congressman Paul Ryan (Wisconsin) and Senator Mitch McConnell (Kentucky)—will submit a list of at least 10 candidates for Obama's consideration. In Ryan's case, he will submit at least six candidates, three of which should have permanent residence or business in Puerto Rico.
In the meantime, the Democrat Minority Leaders in the US House of Representatives and the Senate—Nancy Pelosi and Harry Reid—will follow suit, submitting three candidates each.
Yesterday, Analyst Daniel Hanson, from Height Securities, as well as three other sources of El Nuevo Día, identified Anthony A. Williams (former mayor of Washington, DC) and José Ramón González (renowned Puerto Rican banker and current president of Federal Home Loan Bank of New York) to be in the candidate list Obama will receive.
Similarly, according to conversations with at least four of our sources in Puerto Rico, New York and Washington DC, they've been able to identify José A. Fourquet (former executive director of the Inter-American Development Bank), Roberto Herencia (current director of First Bancorp), and David H. Chafey (former president of the Government Development Bank Board of Directors) to be part of the candidate list as well.
The lists being compiled in Congress and the Treasury also include renowned figures from the debt-restructuring world. A name that has been heard is Harry Wilson, founder of MAEVA Group, who became known after claiming the General Motors transformation and who played a decisive role in its reorganization, which was subsequently backed by President Obama by means of the support package to the US automotive industry in 2009.
Another name that has been making the rounds is Thomas Bennett, a retired bankruptcy judge from the Northern District of Alabama who settled the bankruptcy of Jefferson County, a jurisdiction that resorted to Chapter 9 of the US Bankruptcy Code after almost three years of unsuccessful negotiations with its creditors.