U.S. Treasury Secretary Jack Lew discusses Puerto Rico’s debt crisis and corporate inversion deals in an exclusive interview with Bloomberg’s Erik Schatzker at the Milken Institute Global Conference.
Lew on the need for urgent action in Puerto Rico: “Puerto Rico doesn’t have decades. Puerto Rico has a crisis today. Right now, today in Puerto Rico, you have hospitals that have laid off hundreds of workers, closed beds, closed wings. You have a Zika problem developing without the funds to come in and prevent the disease from spreading. You have schools that are closing. You have broad economic stress that’s leading people to leave the island. Almost 100,000 people left Puerto Rico last year. Let’s just be clear, there’s three and a half million American citizens, many veterans — American citizens living in Puerto Rico. If Puerto Rico doesn’t have a solution, that’s three and a half million Americans who are plunged into chaos. That’s why the need for action is so urgent.”
Lew Full Transcript:
ALIX STEEL, HOST: I’m Alix Steel.
WHAT’D YOU MISS?
Treasury Secretary Jack Lew says he is confident a deal can be reached on Puerto Rico. He does not see a spillover effect from the island commonwealth.
In an exclusive interview at the Milken Institute Global Conference just moments ago in Los Angeles, Bloomberg’s Erik Schatzker asked the Secretary about how the island would restructure its debt given recent legislative efforts in the House.
JACK LEW, TREASURY SECRETARY: Well, we have been working on a bipartisan basis between the — the Treasury Department and members of Congress trying to come up with technical approaches that work.
My standard is simple. It has to work. The restructuring has to be able to take effect. There ought to not be the ability for holdouts to stop that from taking effect. And that means it has to be a process where you put in an oversight board, you have a restructuring plan. And if a voluntary restructuring doesn’t work, there’s the ability to require a restructuring.
ERIK SCHATZKER, HOST: Of course, the devil is always in the details.
Let’s begin with the holdouts.
Have — what kind of a cram down provision would work for you?
LEW: Look, we have been clear that if there can be a voluntary agreement that everyone signs onto, that would be great.
SCHATZKER: Of course.
LEW: But the reason we have bankruptcy rules in general is that it’s really hard to have all parties agree.
We’ve seen what happens when there’s not that kind of required participation.
SCHATZKER: Look at Argentina.
LEW: Look at Argentina. It takes decades to work it through the courts. Puerto Rico doesn’t have decades. Puerto Rico has a crisis today. Right now, today in Puerto Rico, you have hospitals that have laid off hundreds of workers, closed beds, closed wings. You have a Zika problem developing without the funds to come in and prevent the disease from spreading.
You have schools that are closing. You have broad economic stress that’s leading people to leave the island. Almost 100,000 people left Puerto Rico last year.
Let’s just be clear, there’s three and a half million American citizens, many veterans — American citizens living in Puerto Rico. If Puerto Rico doesn’t have a solution, that’s three and a half million Americans who are plunged into chaos.
That’s why the need for action is so urgent.
SCHATZKER: Going back to the cram down, is one that’s common in corporate restructurings, two thirds, an appropriate level in your mind?
LEW: I’m not going to get into the specifics in — in a conversation today. We have been very clear that we are looking to have a workable approach. But it cannot be an approach where at the end of the day, as — there is not the ability to put a restructuring in place.
There are different ways to design how voluntary a process dovetails with, at the back end, something that is mandatory.
SCHATZKER: What about…
LEW: I think this can be resolved. I think that there are a number of issues out there that are hard issues. They’re not all equal. Some have to be addressed.
And I’ve been clear, I was clear in the letter that treating patients fairly is one of those issues. We’ve never said that it — it should be treated above all other obligations, but it also can’t be treated as if there’s not a need to maintain a retirement payment.
Just think about the economy of Puerto Rico. If you have a shutdown of retirement income in Puerto Rico, the macroeconomic effects are terrible for an island that’s already under stress.
Also, who’s going to keep working, paying into a retirement system when there are no benefits coming out?
It’s not a tenable outcome.
SCHATZKER: Does fair treatment of the pensions outside of the seniority include a haircut, as we saw in Detroit?
LEW: Look, a lot of the pensioners have taken a haircut already. So this is not the first round for many of the — the — the — the stakeholders.
SCHATZKER: But some people would say that the current (INAUDIBLE).
LEW: I think that there is a need to have a sustainable system. The oversight authority is being set up to balance the competing demands, the competing, you know, credit rights, the competing needs to get the economy moving.
I think you put in place an oversight structure that works, you have at the back end a restructuring. Then Puerto Rico comes back into a place where it can grow again.
Ultimately, all stakeholders, creditors included, have an interest in Puerto Rico’s economy working.
If the Puerto Rico economy continues to decline, if people continue to leave, they’re not going to have money to pay back creditors at all in some cases.
SCHATZKER: There have been difference of — differences of opinion, shall we say, about who should sit on the oversight board, what powers it should have, the building requirements, what resolutions to move forward.
What do you object to?
LEW: I think that the oversight board has to be one that is fair, that has to balance interests. There are a number of different approaches that are being discussed. I think that there are solutions to this that can be found.
If there is, in fact, as I believe there is, a desire, on a bipartisan basis, to do this in a way that’s effective, we can find a pathway there.
SCHATZKER: How do you keep it independent enough?
That board is going to have to make some awfully tough decisions.
LEW: It — look, the — we’ve seen oversight boards like this in the past. They do have an awful lot of authority, you know, and the truth is, Puerto Rico needs to have a sustainable economic future. This oversight authority can help lay the foundation for that. It can do so in a way that’s respectful of the fact that there is a governance in the commonwealth that takes — has to take the initiative.
Having that combination of a local government that takes initiative with an oversight is a package that doesn’t work.
SCHATZKER: As I understand it, the oversight panel would have the power or the authority to restructure general obligation bonds…
SCHATZKER: — and the senior cofina (ph) debt.
SCHATZKER: — know what people say about that, right?
That’s going to destroy the municipal bond market as we know it, because those are constitutionally protected payments.
LEW: Look, I think what would just — would potentially do great harm to the municipal market is an uncontrolled chaotic unwinding in Puerto Rico. Puerto Rico’s debt has been treated on its own and different from all of the municipal debt for some time now. I don’t think there is any reason to look at the data that we’ve seen and see any spillover.
But what we don’t know is what the chaotic unwinding produces. That is not a path that we’ve ever taken.
SCHATZKER: But if Congress can decide on its own to unilaterally rewrite the rules around certain classes of geo bonds, why would anybody want to buy into geo bonds in the future?
LEW: You know, I think that…
SCHATZKER: Because you just don’t know.
LEW: — I think that the — the process of bankruptcy is well known to investors. It’s not a new issue that in — in restructuring, that there is a balancing of interests. As long as it’s done fairly, as long as it is not a case where you have a one size fits all and it treats all rights in an equal basis, there’s a lot of history. We’re not reinventing the wheel here. There’s a lot of history to restructuring.
SCHATZKER: Well, except for the fact that, you know, Puerto Rico is in a class unto itself.
LEW: It is in a class unto itself.
SCHATZKER: And what you’re contemplating, rewriting the rules for general obligation bonds, is virgin territory…
SCHATZKER: — what’s to stop Illinois from seeking the same relief?
LEW: Well, you know, you just said it yourself, it’s in a class of its own. It — it is not, I think, the case that states and territories are the same. States have options available to them that a territory does not.
SCHATZKER: Surely, the governor of Illinois would say what about me?
LEW: No, I — I don’t — I don’t think that any governor would choose to go through what Puerto Rico is going to be going through if this legislation passes. This is not something that any — any jurisdiction would choose if they have other choices. And states have other choices.
SCHATZKER: Mr. Secretary, just yesterday, as you know, a group of hedge funds agreed to a 44 cent haircut on $900 million of Government Development Bank bonds. CREPA (ph) has a deal with its creditors.
Why can’t this be resolved privately…
LEW: You know, the pro…
SCHATZKER: — the way it is in, say, the U.K., Europe…
LEW: Yes, they…
SCHATZKER: — they even resolved it in Iceland.
LEW: Yes, the — the problem is that these agreements are very much one-off agreements and in the case of yesterday’s agreement, as I understand it, it doesn’t take effect unless all creditors agree.
This is a puzzle that either gets solved as a whole or it doesn’t get solved. It’s going to have to involve a comprehensive review and restructuring. And I think it’s a mistake to think that you can do it a little piece here and a little piece there.
You know, the numbers just don’t work that way.
SCHATZKER: Mr. Secretary, moving on from Puerto Rico, if we may, last week, the Treasury Department put China, Japan, Korea and Taiwan on a currency watch.
What specifically concerns you about their practices and policies?
LEW: So if this report that we put out last week is the first report we put out since then enactment of new requirements as part of passing trade legislation to provide new tools for us to really put a monitoring system in place that has objective criteria to look at currency practices.
I think that you have to look at the reason for that legislation. The reason for that legislation is it could help American workers and businesses expand and grow into markets internationally. What we need is to have trade agreements that protect the right of all parties. That means that we have to have high standards in terms of things like currency practices.
This report gives us the ability to make sure that that’s the case. You know, we know that sustained imbalances, trade imbalances, particularly against the U.S. and intervention on a one-sided regular basis are issues that give rise to concern about unfair currency practices.
I think it’s important that this monitoring has been put in place. It’s also important to note that none of the countries triggered all of the criterias — criterion. So this is now something that is going to be an ongoing monitoring process.
SCHATZKER: Mr. Secretary, the Japanese have gone further than any other central bank with unconventional monetary policy. The latest effort, negative interest rates, didn’t work. The yen strengthened and stocks tanked.
Given what you’ve seen and how the market responded, are you perhaps less concerned about what the Japanese might do to per — to create persistent imbalances among currencies?
LEW: I’ve been very clear. I think what Japan needs to do is use all of its policy levers and not real so — rely excessively on one lever such as monetary policy.
They need to have fiscal policy that works. They need restructuring, structural reform that works. And they’ve had an aggressive monetary policy.
We have not criticized the monetary policy because it has stayed within the international agreements. As a member of the G-7 and the G-20, Japan has lived by the agreements it’s made to refrain from — from competitive devaluation, to refrain from exchange rate targeting.
We’ve made it clear, we think it’s important for all parties to agreements to continue to live by them.
SCHATZKER: Mr. Secretary, you and your department have been very forceful and decisive when it comes to curbing tax inversion deals.
Are you satisfied with the efforts — with the effects, excuse me — of your latest effort in that regard and might you be considering even further action?
LEW: Look, I’ve been clear for several years now that the only way to really solve the inversion problem is to do tax reform, fix our tax code and stop — shut the door to inversions once and for all.
Without legislation, we have to use the administrative tools we have, and we’ve taken three actions. They’ve had increasing impact. We are continuing to look at what options we have.
SCHATZKER: There might be more.
LEW: But I’ve been clear, I’ve been clear, we are going to use whatever tools we have to try and stop something that we think is bad for the American economy and we think it’s wrong.
Now, let’s just remember what an inversion is. An inversion is a company that takes all the benefits of being in the United States, our workforce, our R&D, our rule of law, all of the investment we make as a people, and think I’m going to make my home address overseas to avoid U.S. taxpayers and not pay my fair share.
That shouldn’t be — that shouldn’t be the way businesses operate.
SCHATZKER: Mr. Secretary, you’ve made it clear that you’re unhappy with the court ruling that overturned the too big to fail designation for MetLife, the insurance company.
If your appeal, which the Treasury Department has said it will make, is unsuccessful, would you consider taking it to the Supreme Court?
LEW: Well, look, we have already made clear we’re going to appeal. I think we have a very strong case on appeal, because I think if you look at the logic, some things in this decision, I think they’re just backward.
The idea that you should have to prove that there’s a likelihood that a company will fail and cause a crisis misses the point.
The real risk — the real risk is that we have to make sure we see the things that if a company fails, could have that effect.
Nobody ever saw something like AIG coming down the pike. Nobody would have predicted that’s likely to happen.
SCHATZKER: Does the ruling, as it stands now, mean that you’ll be less likely to designated other firms as systematically important, at least until the appeal is resolved?
LEW: You know, it’s interesting, we’ve had a — we’ve only designated a few firms as non-bank…
SCHATZKER: Four, I believe, right?
LEW: — (INAUDIBLE). Yes, and we are using this authority in a very careful way. Each one is reviewed on the merits. It’s analytically driven. And there has been this sense that there’s, in the wings, an enormous inventory of cases about to be brought and I’ve been very clear, that’s not, in fact, the case.
We are taking these actions as they’re needed and we don’t look to take actions for the sake of taking actions.
SCHATZKER: Do you expect to name asset managers as systematically important…
SCHATZKER: — given where your review stands?
LEW: — we just about two weeks ago issued an — a stock statement on asset management concerns. It’s put in place some ongoing work that will mostly increase our transmissivity, the transparency, so that we can see whether there are risks there that require additional action.
I think that it was a very well thought through statement that we put out and that work is now underway to implement that.
But it’s premature to talk about any kind of designations because what we put in that statement reflected what we really need right now, which is visibility.
(END VIDEO TAPE)
STEEL: That was an exclusive interview between Bloomberg’s Erik Schatzker and U.S. Treasury Secretary Jack Lew.