Hedge Paper No. 73 – The New Oversight Lords

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The New Oversight Lords

Four and a half years after the enactment of PROMESA, the struggle continues in Puerto Rico against the oversight board and the vulture funds. The PROMESA era has been a difficult time that has seen several cataclysms: the destruction brought by hurricanes Irma and María, the earthquake and its aftershocks, and the global COVID-19 pandemic.

The oversight board has brought pain and hopelessness to the country. They approved the COFINA plan of adjustment, which meant over a billion in profits for hedge funds, while extending for 40 years the life of the largest sales and use tax in all of the US. [1] This money could have been used for education, health, housing, and infrastructure, but instead ended up in Wall Street’s billionaire institutions.

Austerity measures have made life harder for Puerto Ricans.

The people of Puerto Rico have fought back against austerity and corruption, and this struggle reached a boiling point during the 2019 summer uprising where thousands took the streets across the archipelago and forced the resignation of the hated Governor Ricardo Rosselló. That revolt showed everybody the power of the collective will when it says “basta ya”.

Organizations struggling against PROMESA and the debt face new challenges in this current conjuncture of Puerto Rico’s debt restructuring process. Some of the key points that define the moment are:

  • New administrations, both at the federal and the local level. The November 2020 general elections led to Trump’s defeat and a Biden administration with a Democratic majority in both congressional chambers. On the local level, the election resulted in a divided government, with the executive branch led by the Partido Nuevo Progresista and Pedro Pierluisi, an attorney that worked for the oversight board in the bankruptcy proceedings, and the Partido Popular Democrático with a legislative majority. In the Legislature, new parties, both from the right and the left, made significant inroads. This election represented the lowest point in terms of the results of the traditional parties, PNP/PPD, with at least 37% of the voters opting to vote for other parties, including an openly pro-independence party.[2]
  • A new plan of adjustment to restructure the central government’s debt has been filed by the oversight board. Hedge funds have already signed the deal, looking to rake in millions in profits.[3] On the other hand, the plan of adjustment includes cuts to the pensions of thousands of retirees, working class people who served the government and now face pension reductions from the oversight board. Retirees have been mobilizing against the cuts since they were first announced.
  • The Puerto Rico government’s official stance, as of the release of this report, is that it will not support any plan of adjustment that includes pension cuts.[4] This could lead to a deadlock since the oversight board needs the approval of a bill to proceed with the restructuring.

For the next three years the control of Puerto Rico’s government finances is in the hands of the Washington designated seven-member oversight board. The new oversight board is filled with a slew of corporate executives, lobbyists with hedge fund ties, and officials with records of implementing brutal austerity.

There are four new members and three members that got reappointed. In spite of the changes, however, we think that the oversight board’s new face represents continuity with the board’s previous actions until now. Given that the new members are not known well, and they will have the power to approve the new plan of adjustment, we present here their profiles.

Antonio Medina – The Pharma Protector

Antonio Medina is a former executive of Merck, a multinational pharmaceutical company that in 2019 reported $9.8 billion in net income globally.[5] According to Medina’s Linkedin profile, he started his career at Merck in 1992, working as a manufacturing engineer.[6] He rose up in the corporate hierarchy over the years, working in several positions in the United States, Puerto Rico, and Central America. He was appointed chief financial officer of Merck’s Brazil branch in 2009, a position he held for three years.

Medina then moved to the public sector in Puerto Rico. In 2013, he was appointed by then Governor Alejandro García Padilla as executive director of the Puerto Rico Industrial Development Company (PRIDCO), a public corporation created in 1942 to promote the establishment of manufacturing industries. PRIDCO assists industries looking to do business on the island by renting its industrial facilities, specially to the pharmaceutical industry.[7]

In an interview with El Nuevo Día, Medina mentioned that he knows the former governor through his friendship with Wilma Pastrana, García Padilla’s wife.[8] Medina was also a member of the board of directors of Puerto Rico’s Land Administration, a public corporation with the task of managing government-owned lands for economic development.[9]

Medina now runs his own consulting firm, Convergent Strategies LLC, a firm that describes itself as “dedicated to accelerate business growth, by helping companies become more competitive and achieve higher levels of financial performance”.[10]

Medina could serve as a bridge for communication between the oversight board and the PPD. He seems to have special interest in Title V of PROMESA, the law’s only provision related to economic development, particularly around the construction of “critical projects”.[11] Given his corporate background, Medina could be seen as an asset to the pharmaceutical corporations that for decades have taken advantage of huge tax exemptions while the people bear the brunt of the brutal austerity measures.

Medina was nominated to the oversight board by the Speaker of the House of Representatives, Nancy Pelosi.[12]

Justin Peterson – The Vulture Lobbyist

Justin Peterson is a lobbyist and a fervent Trump supporter that has potential conflicts of interest given his recent work for hedge funds that have millions invested in Puerto Rico’s bonds. These same hedge funds are still key players in the negotiations to restructure the debt, meaning that, as an oversight board member, Peterson has to approve the very deals that his former Wall Street clients have a financial interest in.

Peterson is managing partner at DCI Group, a lobbying firm founded in 1996 that is mostly known for its campaigns on behalf of its corporate clients.[13] DCI has also been known for its astroturfing tactics, organizing campaigns to make them falsely appear as grassroots initiatives.

In the last ten years DCI has had at least three big clients with millions of dollars in claims against the government of Puerto Rico.

First was the now defunct Doral Bank, which claimed a tax refund worth around $240 million against Puerto Rico’s Treasury Department.[14] While the case was fought in court, DCI, on behalf of Doral, subcontracted lobbyists to pressure the local government from Congress, set up a website exclusively to highlight the bank’s claims, among other things.[15]

In the end Doral both lost the case and went bankrupt. But DCI’s dealings in Puerto Rico would continue through its relationship with BlueMountain Capital Management, one of the largest bondholders of the Puerto Rico Electric Power Authority (PREPA) until the end of 2019.[16] During 2014-2015, a critical moment when the debt spiral was getting out of control, BlueMountain went on the attack. First, it challenged the García Padilla administration’s approval of a law authorizing the bankruptcy of the government’s public corporations, including PREPA, which by then was negotiating with its creditors.[17] The challenge was successful.[18]

BlueMountain then hired DCI Group, along with other lobbying firms, to lobby against a congressional law that would have allowed Puerto Rico’s government to declare bankruptcy under the federal Bankruptcy Code. DCI then subcontracted Liberty International Group, a former Florida House of Representative member’s firm that charged $190,000 for eight months of work.[19] Hedge Clippers and allies protested outside BlueMountain’s headquarters in New York City in July 2015 over the hedge fund’s aggressive tactics in Puerto Rico.[20]

When the Puerto Rico Oversight, Management, Economic, and Stability Act (PROMESA) was discussed in Congress, DCI Group and Peterson started working for the Ad Hoc Group of General Obligation Bondholders (GO Group), one of the key groups of vulture funds in the bankruptcy proceedings. DCI, with the help of other firms, lobbied PROMESA related issues.[21]

Peterson was an adviser of the GO Group.[22] Since its establishment, the Ad Hoc Group of General Obligation Bondholders has evolved to include just two members, Aurelius Capital and Autonomy Capital. These two hedge funds had as much as $1.4 billion invested in general obligation bonds, as reported in a financial disclosure in March 2019.[23] Both firms are still key players in the current negotiations to approve a plan of adjustment for Puerto Rico’s central government. Aurelius and Autonomy reported holding a combined $874 million of GO bonds in their last financial disclosure.[24] According to Peterson and DCI, Peterson has not worked with the GO Group since mid-2018.[25]

Peterson was appointed directly by former president Donald Trump.

John E. Nixon – The Budget Slasher

John E. Nixon is an accountant with government experience in the states of Utah and Michigan. In his native Utah he served under Governor Jon Huntsman as director of the Office of Management and Budget. He also served as chief financial officer for the University of Utah from 2014 to 2019.[26]

Most important, Nixon was part of Michigan’s financial team when several of its cities were subjected to severe spending cuts to balance their budgets. Governor Richard Snyder appointed Nixon as the state’s budget director.[27] He served from 2011 to March 2014.

Snyder’s victory in Michigan’s 2010 gubernatorial election gave power to a ruthless state administration that pushed severe austerity measures. One of Snyder’s first steps was to declare a “financial martial law”, taking advantage of Public Act 4 of 2011, a law that broadened state power to intervene in cities with financial difficulties.[28] Those interventions were executed by “emergency financial managers,” officials that had the authority to slash budgets, revise obligations, consolidate government units, eliminate public positions, sell public properties, fire employees, all without the approval of the democratically elected officials.[29]

Opponents fought back with street mobilizations and a referendum that repealed the much-hated law.[30] Snyder and the GOP responded by approving a new law reinstating the emergency powers just five weeks after the referendum.[31]

Nixon, as state budget director, helped drive Snyder’s onslaught against public services while simultaneously cutting taxes for corporations. Even though Nixon resigned in March 2014, in the middle of Snyder’s two term governorship, he had already established the fundamentals of Michigan’s current pro-corporate tax framework. To make up for corporate tax revenue losses, the Snyder/Nixon administration went after working people, approving a tax on pension income.[32] On the other hand, an analysis by The Center for Michigan found that from 2008 to 2016 the State of Michigan cut over $2 billion in business taxes, adjusted to inflation.[33] All this meant a shift of the tax burden from corporations to individuals.[34]

Recently, Richard Snyder and other officials were indicted with criminal charges concerning Flint’s water crisis.[35] Flint, a small city of 100,000 residents north of Detroit, was under pressure from the Snyder/Nixon administration to save money, and in 2013 decided to switch its potable water source as a way to slash spending. The decision was a disaster, exposing thousands of residents to lead poisoning.[36] Nine officials currently face criminal charges, including Snyder, who faces two counts on willful neglect of duty.

Nixon was nominated to the oversight board by the Minority Leader of the House of Representatives, Kevin McCarthy.[37]

Betty Rosa – The Bureaucrat

Betty Rosa is a former school administrator who currently serves as commissioner of the New York State Education Department and president of the University of the State of New York (USNY). She was recently confirmed to these positions after holding them as interim since August 2020.[38] The USNY is the government agency in charge of establishing the education policy which all educational institutions in the State of New York, both public and private, from pre-kindergarten to universities, have to follow. It is led by the Board of Regents, a 17-member body elected by the New York State Legislature.[39] The regents also head the New York State Education Department, where they designate a commissioner to manage the state’s education policy and oversee higher education and cultural institutions.

Rosa rose up in New York’s educational system management, from principal, to senior superintendent in the Bronx’s school district, to the Board of Regents of USNY, where she was appointed in 2008.[40] She was reelected to the Regents twice and in March 2016 was designated by other members of the board as chancellor, a position that presides over the Regents’ meetings and appoints its committees.[41] She resigned in August 2020 to become interim commissioner of education.[42]

Rosa has a consulting firm, BDJ&J Associates LLC, where she serves as president. The company provides consulting services to schools and nonprofits related to educational services.[43]

Rosa was nominated by then Senate Minority Leader (now Senate Majority Leader) Chuck Schumer.[44]

David Skeel – The New Chairman of Austerity

David Skeel is a professor of corporate law in the University of Pennsylvania Law School. He specializes in bankruptcy law and has written and co-authored several books on the subject and financial regulations.[45] Skeel was nominated to the oversight board by then Senate Majority Leader (and now Senate Minority Leader) Mitch McConnell, who also renominated Skeel for his second term.[46] Skeel was designated as chairman of the Board in October 2020, taking the position that was held since 2016 by José Carrión.[47]

Andrew Biggs – The Republican Operative

Andrew Biggs is a resident scholar of the American Enterprise Institute for Public Policy Research (AEI), where he specializes in pensions, retirement, and social security issues.[48] Founded in 1938, AEI is considered to be the leading conservative think tank in the US. Its current president defines AEI as “center-right”.[49]

Biggs held two positions within George W. Bush’s administration. He was briefly associate director in the White House’s National Economic Council, which provides economic advisory to the president. From 2003 to 2007 he held several positions in the Social Security Administration, eventually rising up to become deputy commissioner.[50]

An investigation by the Center for Investigative Journalism found that Seth Klarman, founder and president of The Baupost Group, one the largest hedge funds in the world, was a member of the board of trustees of AEI while Biggs was already a member of the Board.[51] The Baupost Group had almost $1 billion invested in COFINA bonds through ten corporations named Decagon Holdings, behind which Baupost tried to hide its identity.

However, The Intercept, with help from the Public Accountability Initiative, found that the ten shell companies were owned by Baupost.[52] Biggs claimed he did not know Klarman was an AEI trustee and that AEI never tried to influence his work with the oversight board.[53] Hedge Clippers was the first to mention Klarman’s participation in AEI.[54]

Andrew Biggs was nominated to the oversight board by then Senate Majority Leader (and now Senate Minority Leader) Mitch McConnell, who also renominated Biggs for a second term.[55]

Arthur Gonzalez – The Bankrupter

Arthur Gonzalez is a former bankruptcy judge that served in the US Bankruptcy Court for the Southern District of New York.[56] Gonzalez also teaches bankruptcy law in the New York University School of Law. where he became a senior fellow following his retirement in 2012.[57]

Gonzalez was designated to the oversight board because of his experience dealing with big bankruptcy cases. He oversaw the 2001 bankruptcy of Enron, the energy company that was involved in an accounting fraud that ultimately brought it down. He also oversaw Chrysler’s bankruptcy, one of the big automobile corporations in the US that fell into crisis as a consequence of the 2007-2008 crisis.[58]

Gonzalez was appointed to the oversight board directly by former president Obama for his first term.[59] He was then nominated by the Speaker of the House of Representatives Nancy Pelosi for a second term.[60]

  1. https://news.littlesis.org/2018/11/20/the-cofina-agreement-part-2-profits-for-the-few/

  2. https://www.noticel.com/elecciones/politica/ahora/top-stories/20201104/electores-golpean-el-bipartidismo-y-reparten-sorpresas-a-diestra-y-siniestra/

  3. https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=MTAwMTA4MQ==&id2=0

  4. https://www.metro.pr/pr/noticias/2021/02/10/gobernador-dice-terminos-economicos-acuerdo-inicial-junta-bonistas-factibles.html

  5. https://www.businesswire.com/news/home/20200205005307/en/Merck-Announces-Fourth-Quarter-and-Full-Year-2019-Financial-Results

  6. https://www.linkedin.com/in/almedinacomas/?locale=es_ES

  7. http://www.pridco.com/

  8. https://www.pressreader.com/puerto-rico/el-nuevo-dia1/20160821/281496455696232

  9. https://iapconsulta.ocpr.gov.pr/OpenDoc.aspx?id=e4ee0137-a0c6-4fea-adbb-b08e1479398b&nombre=TI-15-07

  10. http://convergentstrat.com/about/

  11. https://www.pressreader.com/puerto-rico/el-nuevo-dia1/20201220/281616717969279

  12. https://www.theweeklyjournal.com/politics/fomb-appointee-sees-incredible-opportunities-for-puerto-rico/article_b30ce284-406f-11eb-9392-ebaf13f1ef1d.html

  13. https://www.dcigroup.com/leaders/justin-peterson/

  14. https://sincomillas.com/doral-contrata-los-servicios-de-shapiro-para-defender-su-reembolso-de-hacienda/

  15. https://www.politico.com/story/2014/09/doral-financial-puerto-rico-bank-111289

  16. During the bankruptcy proceedings, BlueMountain reached a peak of $690 million of PREPA bonds in November 2018., then started winding down its investment during 2019. It stopped reporting its claims in 2020, meaning apparently that it sold out its position. Peak: https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OTAwMTIz&id2=0. Last financial disclosure: https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OTI4NzEw&id2=0

  17. https://www.prnewswire.com/news-releases/bluemountain-capital-management-llc-files-lawsuit-against-government-of-puerto-rico-268168712.html

  18. https://www.reuters.com/article/usa-puertorico-idUSL1N0VH04V20150207

  19. Lobbying reports: 1st quarter: https://lda.senate.gov/filings/public/filing/9f5d2fc5-4364-4ac5-aa48-4216035f351b/print/ , 2nd quarter: https://lda.senate.gov/filings/public/filing/a8221038-a842-42df-949d-9daf39b24f1e/print/ , 3rd quarter: https://lda.senate.gov/filings/public/filing/e16209d3-a396-4945-8058-9ceeadc5f440/print/ , termination: https://lda.senate.gov/filings/public/filing/3beafe3c-6afe-42d0-b21f-147dd8bd1c44/print/

  20. https://www.foxbusiness.com/markets/hedge-clippers-protest-bluemountain-capital-over-puerto-rican-debt-crisis

  21. One of lobbyist firms hired by DCI to lobby about PROMESA issues was West Front Strategies LLC: Second quarter: https://lda.senate.gov/filings/public/filing/e08b8b46-5a56-4356-895f-a14ba89a525b/print/ , termination: https://lda.senate.gov/filings/public/filing/1321684b-23e1-480f-8029-38985f16ebcb/print/

  22. https://caribbeanbusiness.com/gos-may-come-to-an-agreement-before-stay-expires/

  23. https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OTA1NDUx&id2=0

  24. https://cases.primeclerk.com/puertorico/Home-DownloadPDF?id1=OTk3MTg5&id2=0

  25. https://www.wsj.com/articles/trumps-appointee-to-puerto-rico-board-criticizes-its-record-11602235800

  26. https://www.linkedin.com/in/john-e-nixon-cpa-424a8773/

  27. https://www.deseret.com/2010/12/5/20157484/utah-budget-director-to-be-super-executive-in-michigan#helen-thatcher-left-of-the-dept-of-work-force-services-and-john-nixon-of-the-governors-office-of-planning-and-budget-testifies-before-a-legislative-meeting-about-cuts-to-the-general-assistance-program-in-room-125-at-the-utah-state-capital-thursday-june-29-2006-august-miller-deseret-morning-news

  28. https://www.theatlantic.com/politics/archive/2011/03/michigan-declares-financial-martial-law/348852/

  29. https://www.michigan.gov/documents/treasury/FiscalEmerg_271926_7.pdf

  30. https://www.mlive.com/politics/2012/11/election_results_michigan_vote.html

  31. https://www.mlive.com/news/2012/12/michigan_lawmakers_pass_new_em.html

  32. https://www.dailytribune.com/sports/angry-protesters-rally-against-snyders-tax-plans/article_5cf8ed7c-78a8-521d-b4cc-38444258b420.html

  33. https://www.bridgemi.com/michigan-government/snyders-michigan-business-taxes-fall-burden-shifts-residents

  34. https://www.freep.com/story/news/local/michigan/2018/06/22/rick-snyder-budgets-shift-tax-burden-away-corporations/721297002/

  35. https://www.michigan.gov/ag/0,4534,7-359-92297_99936-549541–,00.html

  36. https://www.vox.com/2015/12/15/10237054/flint-lead-poisoning

  37. https://www.bondbuyer.com/news/trump-names-three-puerto-rico-oversight-board-members

  38. http://www.nysed.gov/news/2021/board-regents-unanimously-appoints-dr-betty-rosa-permanent-commissioner-education

  39. http://www.nysed.gov/about/about-usny

  40. https://nyassembly.gov/comm/Ed/20080324/

  41. https://www.wsj.com/articles/bronx-educator-betty-rosa-named-n-y-regents-chancellor-1458567204

  42. http://www.nysed.gov/news/2020/board-regents-appoints-dr-betty-rosa-interim-commissioner-education

  43. https://www.linkedin.com/in/betty-rosa-4053a51/

  44. https://cb.pr/trump-propone-nuevos-nombres-para-la-junta-de-control-fiscal/

  45. https://www.law.upenn.edu/cf/faculty/dskeel/

  46. https://www.noticel.com/ahora/gobierno/la-junta-de-control-fiscal/20210106/jcf-da-la-bienvenida-a-la-reeleccion-de-david-skeel-y-nombramiento-de-arthur-gonzalez/

  47. https://www.noticel.com/junta-fiscal/ahora/top-stories/20201006/david-skeel-es-el-nuevo-presidente-de-la-junta-de-control-fiscal/

  48. https://www.aei.org/profile/andrew-g-biggs/

  49. https://www.washingtonpost.com/opinions/2019/07/03/how-does-center-right-think-tank-approach-conservatism-trump-era-aeis-robert-doar-discusses/

  50. https://www.aei.org/profile/andrew-g-biggs/

  51. https://periodismoinvestigativo.com/2018/06/andrew-biggs-integrante-de-la-junta-de-control-fiscal-niega-senalamiento-de-conflicto-etico/

  52. https://theintercept.com/2017/10/03/we-can-finally-identify-one-of-the-largest-holders-of-puerto-rican-debt/

  53. https://twitter.com/biggsag/status/1002211063843172353

  54. https://hedgeclippers.org/pain-and-profit-after-maria/

  55. https://cb.pr/trump-propone-nuevos-nombres-para-la-junta-de-control-fiscal/?print=print

  56. https://juntasupervision.pr.gov/arthur-j-gonzalez/

  57. http://its.law.nyu.edu/facultyprofiles/index.cfm?fuseaction=profile.biography&personid=30020

  58. https://www.nytimes.com/2009/05/01/business/01judge.html

  59. https://www.elnuevodia.com/corresponsalias/washington-dc/notas/oficial-la-salida-de-arthur-gonzalez-de-la-junta-de-supervision-fiscal/

  60. https://cb.pr/trump-propone-nuevos-nombres-para-la-junta-de-control-fiscal/