Sunday, May 21, 2017


By Franklin D. Lopez
May 20, 2017

On December 11,1973, James Tobin released THE TOBIN REPORT, a comprehensive study on Puerto Rico’s economic development, fiscal and budget policies. The report expressed that “the trends of government spending, the deficits of the government agencies, public debt, and production costs cannot be sustained even if the external economic conditions are favorable.” 

The report strongly recommended “a serious austerity
program and a long list of substantive measures cutting governmental operations and costs”. Tobin predicted with extraordinary precision that if the recommendations were not implemented “the government of Puerto Rico will face the hard realities of running for desperate solutions.”

The Tobin Report predicted in December 1973, forty three years ago, that Puerto Rico would face serious financial and economic consequences if no measures to cut costs and austerity programs were implemented. All of this was ignored after the report was made public by the Hernández Colón government, which instead chose the path of borrowing and spending. Subsequent colonial governments followed the same policy.

1977 – PRESIDENT CARTER, PUERTO RICOOn March 2, 1977, President Jimmy Carter ordered a comprehensive study by a Federal task force chaired by U.S. Department of Commerce Secretary, Juanita Kreps. The Kreps Report reaffirmed and reiterated Tobin’s 1973 recommendations. Both studies were totally ignored by ALL governors from 1975 through 2016. On the contrary, they continued with a fiscal policy of spending and borrowing. (See graphic below.)

1984 –SEN STROM THURMOND & PUERTO RICOOn March 21, 1984, South Carolina’s Senator Strom Thurmond introduced amendments to the Federal Bankruptcy law and one of the amendments eliminated Puerto Rico’s right of bankruptcy. This initiative was conceived in secrecy and darkness.
Despite the fact that Thurmond addressed the Senate on multiple amendments to the bill, there was not one word regarding the reason for repealing the right of bankruptcy for the territory. But this action must be scrutinized within the state of the politics in Puerto Rico.

The reason for Senator Thurmond’s mysterious action was that both major territorial political parties from Puerto Rico lobbied for the elimination of the right of bankruptcy of the territory because it provided a persuasive argument for investment bakers and investors that “Puerto Rico’s bonds were to be honored because the Island had no bankruptcy protection, therefore it was compelled to pay them.


The rule of law has been challenged by man’s greed since it was created by the Magna Carta, a charter of liberties to which the English barons forced King John to give his assent in June 1215 at Runnymede. During the administration of Bill Clinton and subsequent presidential administrations up to Donald J. Trump, the rule of law has been brutally challenged and neutralized by two forces: the force of money and the force of raw governmental power.
Brooksley E. Born, a Stanford University law graduate, was appointed by President Clinton to be the president of the Commodity Futures Trading Commission in 1996. With a strong commitment to protect the citizens of the United States and the rule of law she began to investigate the unregulated trading of derivatives. She lobbied Congress and the President to give her agency, the CFTC, oversight of off-exchange markets for derivatives in addition to its role with respect to exchange-traded derivatives, but her warnings were ignored or dismissed, and her calls for reforms were resisted by other regulators. 
Allan Greenspan, “the Maestro”, invited her for lunch and wasted no time in requesting that she drop any investigation of fraud in the trading of financial instruments in Wall Street and “to let the market deal with it.” She refused and was forced to resign. Instead, Wall Street

Lobbied Congress and legislation was enacted enabling an unregulated derivatives trading that led to the bankruptcy of commercial banks, investment banks, and insurance companies.
The financial collapse of 2008, predicted by Ms. Born with extraordinary precision, was the result of corrupt politicians and investment bankers in Washington and in the Nation whose loyalty was centered in political contributions and corruption rather than the rule of law. Only one investment banker out of the thousands who caused the losses that led to a bail out of $4.7 trillion dollars has been prosecuted. An emblematic instance when greed and corruption killed the rule of law.

2015 – 2017 (Present)

The policy of obtaining loans and issuing bonds to cover deficits and to build failed mega projects continued until the bubble exploded in 2015. The rule of law was killed again! It was killed by greedy politicians, bankers, lawyers, and consultants who knew that, eventually, Puerto Rico would not be able to pay. But, more than $1.4 billion in fees were paid to bond traders, lawyers and consultants who were relatives of governors who were senior executives at UBS and RBC Capital. That was enough reason to violate the rule of law for Wall Street to stampede to offer flawed financial products and bonds because “greed was good!”
After the 2008 financial collapse only one banker was prosecuted during. During the savings and loan scandal, 839 were prosecuted. Iceland prosecuted 26 bankers responsible for their financial collapse of 2008. The legal policy memorandum of Assistant A.G. of the Criminal Division, Larry Thompson, and followed to the letter by his successor Lenny Brewer, allowed the U.S. Department of Justice to make deals using extraordinary fines as the main tool of punishment.

The Securities and Exchange Commission issued last week dozens of Wells letters notifying the receivers that they were under investigation by the regulatory agency. The SEC has been investigating public financing bond issues of Puerto Rico during the past three years, beginning with the Aníbal Acevedo Vilá administration that created COFINA. This entity was formed to bypass the 15% maximum debt limitation of the total income of the territory by the local Constitution. Billions were issued by COFINA using the newly enacted 7% consumer tax. Both, the Acevedo Vilá and the Luis Fortuño administrations went into an orgy of bond issues to pay debt and cover deficits with more loans.

After proclaiming in the front page of El Nuevo Día that the financial mess of Puerto Rico “was solved”, Governor García Padilla went to the markets with a $3.5 billion bond issue. On March 11, 2014, $3.5 billion in bonds were sold yielding 8.73%. Government senior executives as well as the investment bankers knew that Puerto Rico was going to default.

In fact, Melba Acosta, who left the Treasury Department to head the Government Development Bank, retained a firm to prepare and advise the Government on a possible default. The SEC began delivering Wells letters last week to investment bankers, law firms O’Neill and Borges (The Puerto Rico’s Supervisory Fiscal Board legal counsel) and Pietrantoni, Méndez and Alvarez. Will the SEC follow the same path it did with the city of Miami and its budget director that were criminally prosecuted? That remains to be seen. But if the SEC doesn’t refer to the U.S. Justice Department what everybody knows in Puerto Rico that the last bond issue was structured with false financial statements and projections, the rule of law will be killed once more.

Judge Laura Taylor Swain, besides presiding the historical bankruptcy proceedings, has the duty to open it up to the point of obtaining valuable information about the true state of Puerto Rico’s bankruptcy, debt and its culprits. She should ask why more than 260 days have gone by without the Puerto Rico’s Supervisory Fiscal Board complying with the Federal Ethics law in making public their detailed personal financial statements of the members? And whether the Fiscal Board should retain a law firm that is under investigation by the Securities and Exchange Commission and that received a Well’s letter! Her track record and reputation of strict integrity will be her shield against those who pretend to use technicalities of the law to hide corruption and fraud.

The people of Puerto Rico are paying with new taxes, austerity and pain caused by the corrupt behavior of former gubernatorial administrations beginning with Rafael Hernández Colón. But, above all, Puerto Rico’s family structure is being dismembered by economic policies in Congress, the White House and the U.S. Courts system that has resulted in a massive population exodus where 5.2 million Puerto Ricans now live in the United States and the archipelago is losing inhabitants at the rate of 120,000 a year.

The austerity and cuts to be implemented beginning July 1, 2017 will promote the biggest population exodus in the Island’s history. This will further deteriorate government revenues and a dying economy. Is this a crime against humanity? The International Criminal Court in the Hague considers it a crime against humanity when coercive economic policies achieves that result. During the last 119 years of colonialism American citizens have been subjected with segregation, discrimination and second class citizenship. Is it the American version of apartheid? Yes!

What we expect in the proceedings chaired by Judge Taylor Swain is that the rule of law prevails and not the rule of political power and money! The biggest threat to democracy is the triumph of men or women with power committing crimes with total impunity and no consequences! As she said in her opening statement, “failure is not an option!.” After all, if we fail again the archipelago’s citizens will move to the mainland and the Puerto Rico we once knew will cease to exist!


Franklin D. Lopez is a Journalist, Writer, Entrepreneur
Former United Press International & Associated Press Writer
@trueblue51 -