House Speaker Rep. Paul Ryan (R-WI) wants Congress to pass a law that would cause Puerto Rico bondholders who own $73 billion in notes from the territory’s government to be treated the same way the federal government treated Chrysler bondholders back in 2008 and 2009.
Friday morning, Ryan addressed a special meeting of the GOP caucus to attempt to persuade recalcitrant conservatives the cram down is a good idea.
If the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA)
Rep. Sean Duffy (R-WI)
has sponsored and Ryan supports becomes law, Puerto Rico would use the special dispensation provided the territory in the bill to force bondholders to accept pennies on the dollar prior to or during a bankruptcy filing.As George Mason University professor Todd Zywicki and the Heritage Foundation’s James Sherk wrote of the Chrysler bondholder cram down:
In bankruptcy, the secured status of these bonds should have meant that the secured creditors would be paid in full before any money was allocated to subordinate creditors, such as the UAW’s VEBA plans. Instead, the plan imposed by the government forced Chrysler’s secured creditors to accept only 29 cents on the dollar, while the UAW recovered most of the value of its claims.
As Breitbart News reported previously, if PROMESA passes, Puerto Rico’s bondholders would receive the same kind of treatment as Chrysler’s bondholders.
[The] plan that would let Puerto Rico wipe out $33 billion of its $73 billion debt in bankruptcy.
Leadership of both political parties are backing the creation of a federal “control board” and legal authorization for Puerto Rico to file bankruptcy. The effort would pave the way for a “cramdown” of about 45 percent of the island’s debt, without any spending cuts.
Conservatives in the House say that’s a bad idea.
Ryan is technically right that the PROMESA bill is not the same kind of immediate bailout of billions in direct loans to Puerto Rico as the 2008 auto bailout of Chrysler and General Motors, a good portion of which was subsequently written off.
But in many respects, his argument today echoes the words of former President George W. Bush, who defended the TARP bailout of banks that he later used to bail out the auto companies when he infamously said: “I’ve abandoned free market principles to save the free market.”
Ryan’s need to intervene in order to save the increasingly unpopular Puerto Rico bailout is urgent.
On Wednesday, the House Natural Resources Committee rejected PROMESA in a surprise move, preventing it from coming to the floor of the House for a vote.
The bill’s passage through the committee was expected to be a slam dunk.
As recently as Tuesday, a confident Natural Resources Committee Chairman,
Rep. Rob Bishop (R-UT)
, said “It is the Island’s best shot to mitigate its financial collapse and future calls for a bailout, which would be untenable. Congress must act now to avoid a humanitarian crisis that will severely impact 3.5 million Americans living in Puerto Rico and millions of Americans on the mainland.”The bill’s sponsor, Rep. Sean Duffy, was equally confident:
The three and a half million Americans living in the U.S. territory deserve the attention and support of Congress. After decades of mismanagement, Puerto Rico’s investors also deserve better. A protracted and chaotic legal battle would not serve the interest of creditors or the island. Worse would be a mutli-billion dollar taxpayer bailout thrust on the shoulders of America’s taxpayers and retirees. The PROMESA Act will ensure that the island meets its debt obligations in a controlled, responsible manner, without saddling the U.S. taxpayers with the bill. If we get this right, we have an opportunity to put the people of Puerto Rico on a path to economic opportunity. However, if we do nothing, the American people will be on the hook.
But that confidence evaporated in 48 fast moving hours.
As The Hill reported:
Speaker Paul Ryan (R-Wis.) will try to sell fellow Republicans on a bill to help Puerto Rico deal with its debt crisis at a special meeting Friday.
Ryan said the morning conference meeting would be solely devoted to Puerto Rico, in an effort to educate members and bring them on board with the bill, which has faced persistent conservative opposition.
“A lot of members are just coming up to speed on this,” he said Thursday. “It is why tomorrow morning, we’re doing a policy conference on just the issue of Puerto Rico. The members who have been spending a lot of time on this are going to give a presentation to the broader conference to bring people up to speed.”
The fate of that legislation took a turn for the worse late Wednesday, when the House Natural Resources Committee abruptly canceled a markup of the bill.
Republicans said the delay was spurred by Democrats in Congress and the Obama administration. Committee Chairman Rob Bishop (R-Utah) said the administration was still trying to alter the bill, making a markup impossible.
And Ryan contended that the bill did not receive consideration because Democrats were not willing to back it.
But a Wednesday morning hearing on the bill also made clear there was ample conservative discontent as well. Several committee members lambasted the proposal, arguing it was a bailout for an island territory with a record of fiscal mismanagement. . .
The current bill does not commit any federal funds to Puerto Rico. Instead, it establishes an outside control board to monitor the island’s finances, and allows the island to go to court to try and restructure some of its debt if voluntary negotiations with creditors fail.
On Thursday, Ryan gave an advance preview of his pitch:
There is chaos occurring. Puerto Rico passed a law negating, arguably, their debt. We want to bring order to the chaos. And the need for Puerto Rican legislation is to bring order to the chaos. And my number one priority as speaker of the House with respect to this issue is to keep the American taxpayer away from this. There will no taxpayer bailout.
We want an oversight board, just like we did with the District of Columbia a number of years ago, to be involved, to provide the kind of leadership and structure that is necessary for Puerto Rico to gets its own fiscal house in order and to guide the kind of debt restructuring that is necessary so that Puerto Rico can continue to access the capital markets and keep the taxpayer out of this.
That is our primary responsibility is to protect the American taxpayer and to help bring order to the chaos that will befall Puerto Rico if the status quo continues going in the direction it’s going.
Ryan took exception to television ads calling PROMESA a bailout of Puerto Rico:
I’m not going to characterize who is behind what ads because I don’t know who is behind what ads. A bailout is getting the taxpayer involved. We are — our whole entire purpose of this is to prevent the taxpayer from getting involved and not having a taxpayer bailout. That is why we are going the path we are going to prevent to taxpayer from being involved in this.
What Ryan fails to note is that Puerto Rico has been a regular recipient of funds from federal taxpayers for years, and PROMESA will do nothing to change that pattern of support.
In fact, Congress is currently considering a separate proposal to increase federal subsidiesdirectly to Puerto Rico residents through the extension of Earned Income Tax Credits. That’s a neat trick, especially since residents of Puerto Rico currently do not have to file or pay any federal taxes.
In 2013, the federal government spent $2 billion on food stamps to residents of Puerto Rico, and that amount appears to be increasing with each additional year.
An estimated one-third of the island’s residents receive food stamps.
Forbes contributor Martin Sullivan argues that Puerto Rico is already receiving $8 billion in subsidies from an obsure IRS ruling:
There’s no one in the administration or in D.C. that’s contemplating a federal bailout of Puerto Rico,” White House press secretary Josh Earnest told reporters on June 29. That statement is simply false. It may be true that the Treasury is not contemplating cash subsidies or loan guarantees for Puerto Rico, but it already is providing something just as good: tax credits for U.S. companies operating in Puerto Rico on a Puerto Rican tax designed to give those companies U.S. tax credits.
Sound complicated? Yep. That’s why nobody is paying attention. Think about it this way: Puerto Rico imposes a tax that the federal government pays. U.S. companies operating there are just the middlemen.
Here are the details.
Since 2011, approximately 20 percent of Puerto Rico’s total revenue collections have come from a temporary excise tax on certain products manufactured in Puerto Rico. . .
Now here’s the financial magic. On March 30, 2011, the IRS released Notice 2011-2 ruling that this new excise tax was a foreign tax creditable against U.S. taxes. The notice stated that the new tax was novel and that “determination of the creditability of the Excise Tax requires the resolution of a number of legal and factual issues.”
Until these issues were resolved, the IRS would not challenge taxpayers’ claims that the tax was creditable. Further, if the IRS decided the credit was not creditable in the future, the new position would apply only prospectively. Thus, most of the new tax burden imposed on multinationals doing business in Puerto Rico was eliminated by Treasury.
In 2008, President George W. Bush acknowledged that he abandoned free market principles when he tried to sell the TARP bailout to the American people.
At least President Bush was honest about what he had done.
Speaker Ryan, it seems, wants to obscure the real consequences of PROMESA as he tries to sell it to his House colleagues.