Deep conflicts of interest plague Obama’s newly appointed fiscal control board in Puerto Rico

Earlier this week, President Obama named seven unelected and unaccountable members to Puerto Rico’s Fiscal Control Board, the undemocratic body that will govern the island for the foreseeable future. Because the board has no resources to actually help with economic development, we have yet to find out how it could actually help the plight of the people living through the humanitarian crisis that is unfolding on the island.

After seeing the names, one thing that is certain is that some of them have deep conflicts of interest due to their ties to the same financial firm that helped drive Puerto Rico deeper into questionable debt deals—Banco Santander. This confirms the fear of many protesting in the streets of San Juan and in rallies organized by the progressive coalition Hedge Clippers in cities throughout the United States: that the primary purpose of this board is to protect the interests of Puerto Rico’s creditors rather than its residents.

{mosads}Two of the board members, Jose Ramon Gonzalez and Carlos Garcia, are former executives at Banco Santander, which was the lead underwriter on more than $2.5 billion in predatory debt deals with Puerto Rico during their time there. This included a capital appreciation bond—which is the government version of a payday loan—that the bank sold to the island while Gonzalez was CEO of the Banco Santander Puerto Rico. The bond has an effective interest rate of more than 360%, and because of the way it is structured, the interest counts as debt.

My organization, the ReFund America Project, released a report in June called Puerto Rico’s Payday Loans that found that Puerto Rico had $33.5 billion in illegitimate debt that arose from capital appreciation bonds with an average interest rate of 785%. Earlier this week, we released a new report, Scooping and Tossing Puerto Rico’s Future, which uncovered a pattern of banks convincing Puerto Rico to refinance the same debt over and over again to put off payments, while collecting $1.6 billion in fees. While Gonzalez and Garcia were helping run Santander, the bank sold Puerto Rico several of these toxic refinancing deals, for which Santander and other banks charged the island $23 million in fees. These fees also got added to Puerto Rico’s outstanding debt.

Santander’s predatory behavior didn’t end there. Last year, the bank settled with the Financial Industry Regulatory Authority to pay $6.4 million in penalties for failing to adequately disclose conflicts and risks to bondholders living on the island who purchased Puerto Rican debt. This misconduct began while Garcia was still a Senior Executive Vice President at Santander Holdings USA, the parent company of the bank.

Through our reports, we have identified $37 billion of illegitimate debt thus far, and we have called on the control board to cancel this debt in order to ensure that the people of Puerto Rico are not forced to endure further suffering to pay predatory interest and fees to wealthy bankers and investors. But if two of the seven people on the board used to help run a bank that sold some of this illegitimate debt to Puerto Rico on their watch, then how can we expect them to put the interests of Puerto Ricans first?

Garcia, was the President of Puerto Rico’s Government Development Bank from 2009 through 2011, during Governor Luis Fortuño’s Administration, and was the architect of Public Law 7, which rolled back some of the measures that were previously in place to protect Puerto Rican taxpayers from predatory Wall Street deals. For example, prior to the passage of the law, bond fees were capped at 2% of the bond principal. Public Law 7 did away with this provision, opening the floodgates for exorbitant fees. The fees on one of the bonds that Barclays underwrote in 2011 topped 9%. This same law also made it legal for the island to take out new debt to pay interest on older debt—which Puerto Rico has since done, to the tune of another $1.6 billion.

As the architect of Public Law 7, Garcia welcomed the loan sharks onto the island by paving the way for some of the most abusive lending practices.

If the control board is serious about helping the people of Puerto Rico, it has no choice but to reject this predatory debt as illegitimate and force creditors to take a haircut. Unfortunately, it is hard to think of any person who has less moral authority on this issue than Garcia.

Puerto Ricans do not need austerity. They need community investment and economic development. Because Puerto Rico’s per capita debt load is so mammoth—ten times higher than the average for US states—it is simply not possible for Puerto Rico to pay all of its outstanding debt and do right by residents. The control board will have to pick winners and losers. Board members must decide if they will stand with predatory banks and vulture hedge funds that are trying to profit off of human misery or with the people of Puerto Rico. One can only hope that they can put their conflicts of interest aside.

Saqib Bhatti is the Director of the ReFund America Project and a Fellow at the Roosevelt Institute.

The views expressed by authors are their own and not the views of The Hill.


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