Orwell in Puerto Rico: Congress ‘Promises’ a New Dictatorship

Orwell in Puerto Rico: Congress ‘Promises’ a New Dictatorship

Orwell in Puerto Rico: Congress ‘Promises’ a New Dictatorship

It says it’s going to resolve the island’s debt fairly, but the PROMESA bill establishes an authoritarian collection agency for hedge funders.


The spirit of George Orwell is preparing to visit, and take up residence, on the island of Puerto Rico. Appropriately enough, it all began in 1984… when the US Congress abruptly and quietly withdrew the territory from the coverage of US bankruptcy laws. In true Orwellian fashion, no one—not even the legislators themselves—knows how or why this exclusion took place.

Now, 32 years later, that same US Congress, the Puerto Rican government, and the island’s creditors are feverishly negotiating to resolve the public debt of Puerto Rico, which has risen to an unprecedented level of $72 billion. The Commonwealth government has offered its own debt restructuring plan, declared a state of fiscal emergency, and announced a debt-repayment moratorium—but all to no avail. Nothing has been settled.

To resolve this stalemate, a Financial Control Authority created in Washington and operated from Wall Street could soon become the de facto insular government—with unbridled powers that would turn most dictators green with envy. With a final Orwellian flourish, the congressional bill creating this authority is known as PROMESA, which is Spanish for “promise.”

But the promise of this bill can only be gauged through the cool prism of history.

The US Liberates Puerto Rico—Along With Its Land and Currency

The United States “liberated” Puerto Rico from Spain in 1898. Within 12 years, the United States had also liberated its farmland, with an agribusiness model that converted a diversified island harvest (coffee, sugarcane, tobacco, tropical fruit) into a one-crop, cash-cow economy… that of sugarcane. The US sugarcane plantations were rapidly consolidated into enormous centrales, and four centrales aloneUnited Porto Rico Sugar, Fajardo, Aguirre, South Porto Rico Sugar—controlled 160,000 acres of Puerto Rican farmland. As early as 1910, 45 centrales were already producing 98 percent of the island’s sugar. These centrales also owned the insular postal system, the entire coastal railroad, and the San Juan international seaport. The very first US-appointed governor of Puerto Rico, Charles Herbert Allen, leveraged his tenure on the island into the presidency of the American Sugar Refining Company, which today is known as Domino Sugar.

In 1900, the United States also devalued the island’s currency by 40 percent and paid such low wages that AFL-CIO President Samuel Gompers declared, after touring the island in 1904, “In all my life I have never witnessed such misery, sickness and suffering.”

In 1920, Section 27 of the US Merchant Marine Act (a.k.a. the Jones Act) rigged the entire shipping industry in Puerto Rico and raised the price of every import onto the island (food, oil, automobiles, clothing, electronics) by 15–20 percent. As recently as 2005, automobile prices were 30–40 percent higher in Puerto Rico than on the US mainland. Some products, particularly unprocessed food items, cost twice as much in Puerto Rico as in, for example, neighboring US Virgin Island. The price extortion continues to this day, and it is strangling the economy of Puerto Rico.

From the late 1940s onward, a red carpet stretched from San Juan to Wall Street. Tax-incentive schemes such as Operation Bootstrap, IRS 936, and Acts 20 and 22 all showered US corporations with 20-to-30-year tax abatements in exchange for low-wage “job creation.” All of these corporations repatriated their profits to the United States; none invested in Puerto Rican infrastructure. And when the tax abatements expired, the corporations abandoned the island, creating a deepening cycle of unemployment and economic dependency.

 In Confessions of an Economic Hit Man, John Perkins details how he promoted trillions of dollars of debt throughout Latin America—in Panama, Ecuador, and Colombia—thereby ensuring billion-dollar revenue streams from each country into the US banking system.

This is exactly what happened when the last major Puerto Rican “tax abatement” scheme from the US government, known as IRS 936, expired in 2006. After hundreds of 936 firms abandoned the island, a tidal wave of Wall Street traders inundated the Commonwealth, persuading the government to issue tens of billions of dollars in municipal bonds as a solution to its budget problems.

Many of these bonds were illegal. They violated Article VI, Section II of the Constitution of Puerto Rico, which places specific limits on the level of the Commonwealth’s allowable debt. But this did not deter the bond traders and hedge-fund managers, who continued to create even more illegal bonds and pushed them onto their clients (including pension funds nationwide) because they were triple-tax-exempt and extremely lucrative, with some of the highest yields in the entire industry.

Warning Signals Ignored

As Puerto Rico sank deeper into debt, the warning signals emerged. In February 2014, all three rating services downgraded Puerto Rico’s debt to junk-bond status. In June 2015, Governor Alejandro García Padilla announced that Puerto Rico’s debt was “not payable.” But the hedge funds ignored these warnings. They continued to scoop up Puerto Rico bonds for as low as 30 cents on the dollar. In October 2015, Bloomberg News reported “Puerto Rico Bond Yields Reach Record High as Default Risks Mount,” with some of them climbing to an astonishing 21.8 percent; last November, hedge funds were still buying Puerto Rico bonds.

This billion-dollar brinksmanship rests on two assurances. The first is that the municipal bond market is “too big to fail.” That market is a $3.7 trillion industry, while the US gross domestic product is just over $17 trillion. So at any given time, 22 percent of the American economy is filtering through these municipal bond instruments.

If Chapter 9 bankruptcy powers were suddenly extended to Puerto Rico, all 50 states would immediately demand a comparable restructuring of their own debt portfolios. Wall Street traders are betting that neither President Obama nor the US Congress will want to implode the municipal bond market and destabilize the entire US economy.

The second assurance behind Wall Street’s investment brinksmanship is that the Financial Control Authority will probably soon represent their interests in Puerto Rico and act as their collection agency throughout the island.

Creating the Authority: Two Bills, One Agenda

On December 9, 2015, three Republican senators co-sponsored Senate Bill 2381, called the “Puerto Rico Assistance Act of 2015.” Four months later, Congress rebranded it as the “Puerto Rico Oversight, Management, and Economic Stability Act,” whose acronym is PROMESA.

The original Senate bill offered very minor assistance: a temporary reduction in payroll taxes and a “transition assistance” fund of $3 billion. But the real purpose of SB 2381 was the installation of a Financial Control Authority, which would rule over Puerto Rico. The House PROMESA bill does exactly the same. Here is the Senate bill, all 159 pages of it. And here is the latest version of the PROMESA bill. If you read both bills and compare them, you will notice they are virtually the same bill. After three months of hearings and “policy review,” Congress made only three legislative adjustments and one budget cut:

  • It required six of the seven Authority members to be nominated from lists provided by the Congress.
  • It created a toothless “bankruptcy” procedure, controlled by the Authority itself.
  • It lowered the minimum wage to $4.25 an hour for newly hired employees aged 20–24.
  • It cut the $3 billion “transition assistance” fund from SB 2381.

Other than this, they issued a nearly identical law.

The most astounding “good government” power of the Financial Control Authority will be its right to “accept, use, and dispose of gifts, bequests, or devises of services or property, both real and personal.” There is no explanation of how these gifts will “aid” or “facilitate” the work of the Authority. They just will. The chairperson of the Authority will deposit these gifts “in such account,” which will then be “available for disbursement” by the chairperson. This open invitation to bribery, influence peddling, and money laundering is on page 21 of the PROMESA bill.


Every member of the Authority (including the chairperson) will be appointed by the president. One of the few differences between SB 2381 and PROMESA is that the latter increases the number of members from six to seven. Neither the chairperson nor any of the Authority members will be accountable to the government of Puerto Rico.

The Authority will ensure the payment of debt obligations, restructure the workforce of the Commonwealth government, and reduce or freeze public pensions. It will also supervise the entire budget of the Commonwealth government, including its pension system, legislature, and public authorities; and all leases, union contracts, and collective-bargaining agreements.

The Authority will also make “recommendations” with respect to all the financial affairs of Puerto Rico. This will include the salaries of all personnel, firing of workers, reduction of pensions, elimination of services, and the use of “alternative service delivery mechanisms, including privatization and commercialization.”

If the governor or legislature of Puerto Rico resists any of these “recommendations,” the Authority can “take such action as it determines to be appropriate.” In other words, the Authority can implement any “recommendation” that it wants, regardless of the Puerto Rican government. Anyone (public official or otherwise) who defies or obstructs the Authority can be found guilty of “criminal misdemeanor” and can be subject to suspension without pay, removal from office, and even potential imprisonment.

The Authority can also encumber the physical infrastructure of Puerto Rico. It can issue debt—bonds, notes, or other obligations—and keep it in an escrow account, which it would make available to Puerto Rico “at such times as it considers appropriate.” Alternatively, these funds could be used for “any other purpose that the Authority considers appropriate.” [Emphasis added.]

In addition to issuing debt, and using this debt for any other purposes that it sees fit, the Authority will “pledge or grant a security interest in revenues to individuals or entities purchasing bonds, notes, or other obligations.” In other words, the physical infrastructure of Puerto Rico (highways, bridges, schools, prisons, electrical grid, water supply, public housing, prime coastal real estate) will all be available as “collateral” for the debt decisions of this Authority.

Senate Bill 2381 and PROMESA are careful to mention that “the United States is not responsible or liable for the payment of any principal of or interest on any bond, note, or other obligation” issued by the Authority. In addition, the PROMESA bill specifically exempts the Authority, and all its members and employees, from any liability for actions undertaken by the Authority. This means that Puerto Rico—its taxpayers and its physical infrastructure—will be solely and exclusively responsible for repayment of the Authority’s debt, including the debt which the Authority creates, for any other purposes that it sees fit.

The Authority will also have prosecutorial powers. It is authorized to “conduct necessary investigations” into the government of Puerto Rico. It will be empowered to hold hearings, secure government records, demand evidence, take testimony, subpoena witnesses, and administer oaths (under penalty of perjury) to all witnesses. Anyone who fails to appear, refuses to testify, or withholds evidence can be held in contempt of court.

The PROMESA bill adds to these contempt penalties: Any failure to cooperate shall be a misdemeanor punishable by a $1,000 fine, one year in prison, or both. The outcome of any Authority investigation can lead to criminal and civil penalties—including, but not limited to, getting fired from your job.


Section 302 of PROMESA contains the one substantial difference from SB 2381. If Puerto Rico or one of its instrumentalities (e.g., PREPA, the island’s electric-power authority, or PRASA, the water and sewer authority) is insolvent, and has provided audited financials to the Authority, and has tried and failed to negotiate a voluntary restructuring, then the Authority might authorize the filing of a bankruptcy petition. In its sole and exclusive discretion, the Authority may also authorize a petition, even if the above conditions have not been met.

Since the Authority is a collection agency for the hedge funds, this “bankruptcy relief” from the Authority—at the sole discretion of the Authority—is all smoke and mirrors. It is the equivalent of a loan shark who gives you a one-week extension before breaking your legs.

The final proof of this smoke and mirrors is that the PROMESA bill omitted $3 billion that was originally allocated in SB 2381 for the “economic and health care stability” of the island. PROMESA is playing hardball… it will negotiate and rule with an iron fist.

How a Coward Cuts Your Wages—and a Hail Mary

The cowardly low point of the PROMESA bill occurs in Section 403. It mandates a change in Section (6)(g)(4) of the Fair Labor Standards Act of 1938, but the effect of this change is unclear. In order to understand this change, you have to read Section (6)(g)(4) itself. Only then do you realize that PROMESA will cut the minimum wage of newly hired young workers from $7.25 to $4.25 an hour throughout the island. This will apply to everyone aged 20-24, whenever they start a new job. In a 122-page bill that so carefully enunciates and protects the rights of billionaire hedge-fund owners, Congress could easily have added one line saying “if you are aged 20–24, your minimum wage is reduced to $4.25 an hour during the first three months of your job.” Instead, they took the cowardly approach. Over 200,000 young people, many of them paying student loans, could soon be working for $4.25 an hour in Puerto Rico. This is what the US Congress calls a PROMESA.

With a Financial Control Authority just several weeks away, Governor García Padilla threw a Hail Mary pass, drew a line in the sand, rearranged the deck chairs on the Titanic. Choose your metaphor, because it all amounts to the same thing: The governor and the entire government of Puerto Rico have lost their last shred of dignity and self-rule. On April 6, García Padilla signed a “debt moratorium” bill that allows him to declare a state of emergency and empowers him to halt payments on the island’s debt, during a “moratorium period” that will last until January 31, 2017.

This is toothless political posturing during a gubernatorial election year, in the hope that his entire political party (Partido Popular Democrático, or PPD) will not be run off the island when the Grim Reaper, a.ka. the Financial Control Authority, starts chopping heads, cutting budgets, and handing out pink slips.

The governor knows full well that Puerto Rico is under the plenary jurisdiction of the US Congress, and that any bill he signs can be vetoed at will. The only thing that saves him from an immediate and humiliating veto is that the Commonwealth budget is roughly $9.5 billion per year. Since the Government Development Bank has only $562 million in cash left, the government of Puerto Rico has enough money to run for another three weeks.

No government—not even the niggardly US Congress—will begrudge the governor his last three weeks of solvency. This would be nakedly colonialist… and as everyone knows, Puerto Rico is not a colony.

Orwell in the Caribbean

The PROMESA Authority will be the governor, banker, judge, jury, and pawnbroker of Puerto Rico. It will manage the entire Puerto Rican economy, and be accountable to no one on the island. It will tell the Puerto Rican government when to jump, and how high. It will issue debt, spend the money in any manner it sees fit, and leave Puerto Ricans to pay the bill.

It will do nothing about the Jones Act, the loss of pensions, the privatization of public schools, or the hedge funds that will own the physical infrastructure of Puerto Rico—its schools, prisons, highways, electrical grid, and water supply.

This is where our Commonwealth relationship to the United States has gotten us: an island of beggars and billionaires, owned by absentee landlords, fought over by lawyers, and clerked by politicians. A dictatorship in the Caribbean, owned and operated from Wall Street, and disguised as a “management assistance authority.”

The branding, however, is very fetching. Congress took “lobbying” money from the hedge funds for four full months, from last December to March. Then they slapped some lipstick and high heels on Senate Bill 2381 and, taking a page from Orwell, they called it PROMESA for Puerto Rico.

This is perversely appropriate, and historically consistent. Back in 1948, the United States forced the Puerto Rican legislature to pass Public Law 53, a gag law that made it a felony to own a Puerto Rican flag, sing “La Borinqueña” (the Puerto Rican national anthem), utter one word against the US government, or say anything in favor of Puerto Rican independence. The punishment was 10 years imprisonment.

That same year—in 1948—Orwell wrote his totalitarian classic 1984.


Editor’s note: This article was updated soon after posting to correct an error. The section of the PROMESA bill that deals with the Fair Labor Standards Act is Section 403, not Section 409.

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