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From the Brink

Antonio Weiss (MBA 1994), Adam Chepenik (MBA 2010), Sebastián Negrón-Reichard (JD/MBA 2024)
As the senior top official in the US Treasury Department on domestic finance issues, Antonio Weiss (MBA 1994) could see Puerto Rico’s financial meltdown coming, like watching a train wreck in slow motion.
Weiss knew that the island, an unincorporated US territory whose residents are American citizens, was drowning in $70 billion of debt. Hampered by legal limitations on the remedies it could pursue, and desperate for ready cash to meet its obligations, the Puerto Rican government had stopped making payments to its pension fund and drawn down all the fund’s cash until there was nothing left but a $50 billion unfunded liability. Capital markets had deemed the island an unacceptable risk.
“They had lost access to traditional capital, and it was really only a question of when they would run out of money,” says Weiss, whose career included serving as head of investment banking for Lazard, the global financial advisory and asset management firm, and as publisher and editor of the Paris Review. “It was clear that this was turning into real financial distress and that the consequences for the people of Puerto Rico were potentially grave.”
Looming ahead was a major payment due for the island’s general obligation bonds, which, by law, would have to be paid even if it meant cuts to essential services such as police and emergency medicine. The result, Weiss says, would’ve been default, litigation, and almost certainly a chaotic unwinding of the economy. In the spring of 2015, Weiss convened a team to address the situation in Puerto Rico, drawing on staff from across the Treasury. The group was tasked with evaluating the island’s level of fiscal distress, estimating when the Puerto Rican government was going to run out of money, and coming up with policy solutions. “We had a cross-functional team. We had experts on sovereign restructurings from the international division. We drew in the economic team, the legislative affairs team, the public affairs team,” Weiss says. “By bringing together people with different expertise, you have different perspectives on a particular problem.”
For the core of the team, Weiss turned to Adam Chepenik (MBA 2010). Chepenik had worked at Blackstone in the investment giant’s restructuring practice following graduation from HBS, but after learning about an opening at the Treasury Department from the HBS Career and Professional Development Office, he became a senior policy advisor for state and local government finance. At Treasury, Chepenik earned a reputation as not only a detail-oriented analyst but also as someone who was able to forge strong relationships with local officials. He began by working on Detroit’s bankruptcy, but then quickly picked up the task of monitoring the looming crisis in Puerto Rico as well. (Unlike Detroit, Puerto Rico was not legally eligible for the Chapter 9 bankruptcy protection commonly available to US municipalities.)
“Adam had been following Puerto Rico within the state and local team at Treasury pretty much since his arrival,” Weiss says. “He was such a deep student of all things Puerto Rico.”
As they tried to get their heads around the scope of Puerto Rico’s fiscal distress, it became clear to Weiss, Chepenik, and other team members that the normal fiscal tools deployed by the Federal Reserve and the Treasury Department would be inadequate. An infusion of cash, for example, might provide short-term relief but it wouldn’t solve the underlying issue of excessive debt. “The only real path forward was a kind of a bankruptcy,” Weiss says, “one that would allow the government to continue to use the funds that the island had to pay for essential services, put debt payments for the most part on pause, and force a restructuring of all the debts to a level that the economy of Puerto Rico could support. The only sustainable economic policy path was legislative.”
Preparing their pitch to Congress, the team released a white paper in late October of 2015 outlining a plan with four components: a holistic bankruptcy regime that would restructure all of the island’s debt; an independent financial oversight authority to take the politics out of the recovery effort; a boost in Medicaid coverage to shore up the health sector; and a fiscal stimulus, through the earned income tax credit, to move workers into the formal labor sector and boost tax revenue.
The package fell flat in a divided Washington, DC. At the time, GOP fiscal hawks controlled the House and the Senate while the Democrats and President Barack Obama held the White House and the executive branch. Negotiations with the Republican Senate officially stalled in December, and Weiss told the team to take the holidays off so they could regroup in January. Yet Weiss never lost confidence, Chepenik says. “His view was that Congress would eventually have to act because there were three-and-a-half million Americans whose lives were at stake.”
When negotiations resumed, the Treasury team brokered a deal: Republicans would agree to necessary changes to the part of the US Bankruptcy Code that specifically prohibited Puerto Rico from filing for Chapter 9 bankruptcy in return for shelving the Medicaid and economic stimulus spending components of the plan. The bill, which had become known as PROMESA (Puerto Rico Oversight, Management, and Economic Stability Act), would be a compromise.
The centerpiece of PROMESA was a hugely complex bankruptcy, involving 18 different issuers of debt to Puerto Rico. One piece of the plan, the central government’s Commonwealth Debt Restructuring, would become by itself the largest bankruptcy in the history of the municipal bond market. But the most controversial aspect of the plan was the fiscal oversight board, which would be appointed by the US government and would have the authority to sign off on and approve all the budgets and fiscal plans created by the elected government in Puerto Rico. Weiss says there were precedents for oversight boards in large US municipal bankruptcies, including Detroit’s, but the idea would be an especially tough sell in Puerto Rico, where issues of sovereignty and representation are particularly sensitive. (He has since called for the dissolution of the board following resolution of the final bankruptcy proceeding.)
“It required not just building internal consensus around the legislative path but also creating a coalition externally that thought this was the best—or maybe the least bad—option,” Weiss says. “And that included everyone from religious leaders to labor advocates, to people on the island, to business leaders.” For Weiss, that meant 35 meetings on Capitol Hill, 5 trips to the island, 20 meetings with Puerto Rico governor Alejandro Garcia Padilla and testifying at three congressional hearings. “In the end, it was the facts and the presentation of the facts that carried the day,” he says.
Weiss and Chepenik were in the Oval Office when PROMESA was finally signed into law by President Obama in June 2016. The Treasury team then began working to support Puerto Rico’s restructuring process and the White House began vetting members nominated to the new oversight and management board.
Meanwhile, Sebastián Negrón-Reichard (JD/MBA 2024) was watching the rescue effort with a keen eye. A Puerto Rico native, he had graduated from the University of Pennsylvania right before PROMESA went into effect and had written his senior thesis about the debt crisis. A few months later, his thesis advisor, who had been appointed to the new Financial Oversight and Management Board for Puerto Rico, introduced him to Natalie Jaresko, the Ukrainian-American former US State Department official and finance minister of Ukraine, who had just been named the board’s executive director.
Jaresko offered Negrón-Reichard a job, so he left his analyst job in New York and moved home to San Juan. It wasn’t an easy decision. “Frankly, as a Puerto Rican, I didn’t like that the board was anti-democratic,” he says. “But I wanted to be part of this solution. We can have a philosophical debate about that for hours, but for me I guess it came down to: If someone’s going to do this, I’d rather it be me.”
Negrón-Reichard soon became Jaresko’s deputy chief of staff, then chief of staff, while Weiss and Chepenik both left the Treasury during to the transition to the incoming Trump administration. For his work on PROMESA, alongside other responsibilities, Weiss received the Alexander Hamilton Award, the department’s highest honor. Chepenik went on to lead Ernst & Young’s public-sector turnaround and restructuring practice, which had been contracted to consult for the oversight board, assisting governments in fiscal distress around the world.
In addition to starting on the debt restructuring, the board also began helping the Puerto Rico government get its financial house in order. Staffers scoured the budget for waste, says Negrón-Reichard, including spending on consultants and other items they deemed nonessential; such funds were then diverted to salaries for teachers and public safety workers and to investments in health care. They also worked to integrate various agencies’ financial management systems, none of which could talk to each other, and started to require that the government should issue monthly budget reports to increase transparency.
Puerto Rico has now restructured the vast majority of its debt, lowering total liabilities to a more sustainable $37 billion, which will save the commonwealth more than $50 billion in debt-service payments. Debt-service payments have gone from consuming 25 percent of government revenue to about 6 percent. Negrón-Reichard, who left to attend HBS and Harvard Law School, credits Jaresko with making sure members of her staff were prepared to succeed. “She made sure we were the experts, and that gave us a lot of credibility in the court with stakeholders. That’s helped me at HBS a lot. If I’m going to say something, I’d better be prepared and know the numbers.”
All three alumni say it would have been nice if PROMESA and the successful debt restructuring had been a happy ending for the island. Fate, however, refused to cooperate: Less than a year after PROMESA was signed, Puerto Rico was hit with a succession of natural and man-made disasters. In the fall of 2017, two enormous storms killed nearly 3,000 people; first Hurricane Irma, which also caused $1 billion in damage, followed less than two weeks later by Hurricane Maria, which caused an estimated $90 billion in damage and knocked out the island’s power grid. Then a series of earthquakes in 2020 killed four people and caused another $3 billion in damages. The pandemic also had a devastating effect on the island’s economy (though the board, with Negrón-Reichard playing a key role, was quick to respond, making Puerto Rico the first jurisdiction to launch a local rescue package, and earmarking $787 million in federal relief funds). Meanwhile, a series of scandals rocked the government, including one that involved an exchange of homophobic and racist messages between top government officials that sent a million protesters to the streets and forced the resignation of then-governor Ricardo Rosselló. The oversight board, known colloquially as “La Junta de Control” among critics on the island, has also been unpopular—once drawing as many as 100,000 protesters to the streets of San Juan. Jaresko left her post in February 2022 after the debt restructuring was 80 percent completed.
The board’s work continues, though, and Chepenik says he hopes that the opportunities created by the debt restructuring, the recent infusion of federal funds, and the rebuilding effort underway collectively afford Puerto Rico’s government the breathing room to “focus on investing in the island's future, to improve the education system, and create jobs and economic growth.” Negrón-Reichard says he’s excited “to see Puerto Rico starting to shine again.” There is still much to do, he says, but notes he sees “opportunity and regained vigor of Puerto Ricans to live in a place that’s prospering.”
Weiss says he’s proud of “the brilliant and dedicated minds within the Treasury that came up with a solution against the odds,” even if that solution was a temporary and controversial one. The underlying problem, he adds, is one that’s been unresolved since Puerto Rico became a US territory in 1898: its colonial-era relationship to the rest of America, in which its citizens have neither real independence nor representation.
“I think this is the core issue that led, over decades, to this set of circumstances,” he says. “I think we really owe it to Puerto Rico to resolve that status.”
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