By Jerry Goldberg
A big step in the robbery of the Puerto Rican people through the PROMESA bankruptcy proceedings occurred on February 4 when the NY District Court Judge Laura Swain approved a settlement on the illegal and fraudulent Puerto Rico Sales Tax Financing Corporation (COFINA) bonds. Under terms of the settlement, the debt principal on the COFINA bonds will be reduced from $17.6 billion to $11.9 billion, or by 32 percent. However, with interest payments included, the total debt service to be paid on these bonds will total $32.3 billion over the next 40 years.
In fact, this settlement amounts to a windfall for hedge funds. Wall Street funds, which bought these bonds at a price of as little as five cents for every dollar owed, now will reap a huge profit on their “investments” to be paid by the Puerto Rican people, the difference between the five percent value they paid on the bonds and the 68 percent payment they will be receiving.
With another $72 billion in bonds still to be negotiated, Martin Guzman, an expert in debt restructuring, compared this ratification of the COFINA settlement to the Titanic because it consumes practically all the resources the island’s government could use to pay off additional debt. More importantly, it also takes from funds for essential services that keep hospitals running, pensions paid, and teacher and police payrolls funded.
COFINA bonds are laced with fraud, similar to what happened in Detroit
The COFINA bonds are among the most fraudulent of Puerto Rico’s numerous financial instruments. Wells Fargo in particular played a role in rewriting these bonds on seven occasions. This robbery was because the bonds were underwritten as capital appreciation bonds, where the borrower does not make any principal or interest payments for the first several years, and when the teaser period is over, the borrower has to pay interest on the interest. Capital Appreciation Bonds are comparable to payday loans regularly foisted on low-paid workers.
In the case of the COFINA bonds, what began as a $2.6 billion debt mushroomed to $21.5 billion owed, with the $18.9 billion in interest, amounting to a 734 percent interest rate.
In addition, the COFINA bonds are legally dubious, because they are termed “extra-constitutional debt.”
The COFINA bond ripoff is similar to what the banks did in Detroit. One of the main triggers to the Detroit bankruptcy was the pension obligation certificates the city was lured into by Bank of America and UBS. These certificates also had questionable legality, as they were issued to get around the limits on debt provided for under Michigan state law. The debt on the certificates was compounded by interest rate swaps issued by Bank of America and UBS, which increased the debt load dramatically and then plunged the city into bankruptcy when the banks and rating agencies declared termination events and full payment of the total debt owed.
Bankruptcy order leaves possibility of future challenges to COFINA debt; intervention of masses will be decisive in the struggle
Bankruptcy is an equitable proceeding, under which the judge is empowered to declare a debt void if it is laced with fraud. In the Puerto Rico PROMESA proceeding, to avoid real examination of the bank’s activity, Judge Swain directed the banks into negotiations and then hastily approved their settlement on the COFINA debt, without an audit taking place, similar to the strategy that Judge Rhodes used in the Detroit bankruptcy (which was at least upset somewhat because of the intervention of the Moratorium NOW! Coalition).
However, Judge Swain’s order leaves open the possibility for further challenges to the COFINA settlement. In her memorandum confirming the settlement, she stated: “The Court notes that approval of the Settlement and Plan does not foreclose further investigation, whether through regulatory, law enforcement, or civil litigation channels, into the origins of Puerto Rico’s debt crisis and the application of the proceeds of the pre-PROMESA borrowings.” (see Case 17-03283, Doc #5047, entered 02/04/19)
The struggle in Puerto Rico against the colony’s robbery by finance capital is ongoing. The intervention of the masses will ultimately be decisive in overturning this gift to the hedge funds in the form of the COFINA settlement and canceling the entire debt imposed by the banks on the people of Puerto Rico and on working people worldwide.
Addendum, added on Feb. 16:
On Februrary 15, 2019, the 2nd Circuit Court of Appeals, on an appeal brought by the UTIER, held that the appointment of Puerto Rico’s fiscal control board was done in violation of the US constitution, specifically the “Appointments Clause.” While declaring the Fiscal Control Board as constituted an illegal body, the court still would not overturn the bankruptcy or horrendous decisions like the COFINA settlement which occurred under its auspices. Looking forward to seeing UTIER’s analysis of how it will move forward in light of this decision. Puerto Rico continues to be a center of the imposition of austerity by US imperialism, and with all the other world events, the struggle against PROMESA must not be overlooked by activists.
Goldberg is a lawyer who intervened in the Detroit bankruptcy on behalf of the Moratorium Now Coalition and retiree members of the group, and participated in the trial against the banks’ interest rate swaps.