Commentary: Financial Plan Offered by Puerto Rico’s Governor Falls Short of Remedying Problems

Congress passed legislation this summer enabling Puerto Rico to restructure its debts under the auspices of a federal control board. Lame-duck Governor Alejandro García Padilla is now promising to make the commonwealth fiscally chaste — just not yet, according to a Wall Street Journal editorial today. Puerto Rico must propose a structurally balanced fiscal plan for the approval of the seven-member oversight board before it can seek to adjust its $72 billion of public debt in federal court. The plan García Padilla laid out to the board last Friday asks the feds for billions in aid while offering pennies on the dollar in change. Puerto Rico desperately needs to escape its debt-negative growth spiral, according to the editorial. The island has been in recession for a decade and its population has declined by 9 percent. Debt service consumes more than a third of its budget. Public pension funds are nearly broke with $44 billion in unfunded liabilities. These problems demand a structural reboot that includes spending reductions and changes to the island’s labor, education and tax laws, but García Padilla’s plan relies on band-aids, according to the commentary.

For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage. 

For a ABI podcast on the early work of the control board, please click here.

Bankrupt California City Seeks to Fix Politics and Finances

San Bernardino, Calif., is trying to become the first U.S. municipality to overhaul its political structure while in bankruptcy, asking voters to approve a new charter that strips the mayor and city council of day-to-day operational control, Bloomberg News reported yesterday. If the ballot measure wins in November, San Bernardino would join the majority of U.S. cities in which elected officials hire a professional manager to run operations, according to the National League of Cities. San Bernardino’s "charter doesn’t properly delegate responsibility between various city officials,” said bankruptcy attorney Marc Levinson, who led the California cities of Stockton and Vallejo through the bankruptcy process. The city filed for bankruptcy in 2012, blaming a loss of tax revenue, high-priced employee pensions, and a city charter that separated the cost of police and fire salaries from the city’s ability to pay. It’s now nearing the end of its time under court protection, having negotiated settlements with its biggest creditors, including pension bondholders owed about $90 million. Final approval on a plan to reduce debt by about $200 million could come as early as next month when the city is due back in court. In a hearing on Oct. 14, U.S. Bankruptcy Judge Meredith Jury praised the city’s progress and said that the plan is nearly ready for her approval. Once Judge Jury signs off, the city could exit court oversight. While that will straighten out the city’s finances, its politics depend on the ballot measure. San Bernardino now has both a city manager and a mayor, each employed full-time to oversee different aspects of the bureaucracy. The seven members of the elected city council also have a hand in managing the municipal workforce, from street workers to librarians, city manager Mark Scott said.

Commentary: Reining in Risky Bank Loans

U.S. bank regulators are going after risky lending, but they're having a tough time reining it in, according to a Bloomberg Gadfly commentary. The Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. have spent the last three-and-half years enforcing guidance designed to restrict banks within their purview from extending loans that lift a company's indebtedness into a territory that sets off alarms, according to the commentary. Although there is no bright line, regulators have said that a debt-to-EBITDA ratio above 6 raises concern for most industries. Plenty of deals are still getting done at these leverage levels with the help of alternative lenders. Regulators fear that without their intervention, a chunk of corporate America may be unable to repay excessive borrowings and could be forced into bankruptcy when interest rates eventually rise. A secondary fear is that, as happened during the global financial crisis, banks will be left on the hook for some of this debt if they're unable to sell it to investors. The increased scrutiny has been somewhat successful in deterring banks from risky lending — or, as in the case of the Fed's warning about Goldman Sachs's recent financing of the UFC buyout, has raised red flags when they do. But even when banks have retreated, borrowers have been able to find ready financing from alternative lenders.

Analysis: Ex-Wells Fargo Bankers Describe Abuses

Among the customers whom bankers at Wells Fargo targeted for unauthorized or unnecessary accounts to meet steep sales goals were Mexican immigrants who speak little English, older adults with memory problems and small-business owners with several lines of credit, according to the New York Times DealBook blog yesterday. “The analogy I use was that it was like lions hunting zebras,” said Kevin Pham, a former Wells Fargo employee in San Jose, Calif., who saw it happening at the branch where he worked. “They would look for the weakest, the ones that would put up the least resistance.” Wells Fargo would like to close the chapter on the sham account scandal, saying that it has changed its policies, replaced its chief executive and refunded $2.6 million to customers. But lawmakers and regulators say that they will not let it go that quickly, and emerging evidence that some victims were among the bank’s most vulnerable customers has given them fresh ammunition. This week, three members of the Board of Supervisors in San Francisco, Wells Fargo’s hometown, introduced a resolution calling on the city to cut all financial ties with the bank. They cited both the recent scandal and past cases — particularly the $175 million that Wells Fargo paid in 2012 to settle accusations that its mortgage brokers had discriminated against black and Hispanic borrowers. After the Senate Banking Committee held a blistering hearing last month with the bank’s chief executive, John G. Stumpf, who has since retired, it followed up with a letter containing 58 additional questions for the bank. Among them: What proportion of the harmed customers are old, members of ethnic minorities or military veterans? The committee is still waiting for a response. The Justice Department and California’s attorney general are also investigating the bank.

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