Exceptionality and Colonial-State–Corporate Crimes in the Puerto Rican Fiscal and Economic Crisis

Manufacturing a Tax Haven

Puerto Rican colonial-capitalist development has been intertwined with the development of the conditions for state-corporate criminality. In other words, economic development there has been what Ruggiero (2013) has called “criminogenic.” As a result of the Spanish-American War, the United States invaded Puerto Rico on July 25, 1898, and after the signing of the Treaty of Paris ⁴ between the imperial powers Puerto Rico became a U.S. colony. Later it became a domain of the U.S. Congress under the territorial clause of the U.S. Constitution (Article IV-3, Clause 2), and three exceptional laws were passed to regulate the colonial legal-political and economic relationship.

The first of these laws was the Foraker Act of 1900 (Chap. 191, 31 Stat. 77). This law identified three aspects of colonial life: the political system, economic structures, and U.S.-Puerto Rican relations. Articles 2–5, 9, and 11–13 dealt with tax collection, the market economy, and the monetary system and the application of U.S. maritime and international trade laws. It did not provide for bond issuance, but it exempted Puerto Rico from federal income tax. In tandem with the Foraker Act, from 1898 to 1900 the United States imposed a series of monetary policies that led to the devaluation of the currency and real estate and the impoverishment of the local hacendados (Ayala and Bernabe, 2011) and facilitated extensive land purchases (and thus the dispossession of peasants) by U.S. corporations (Irizarry, 2011). These corporations’ control of the land was so massive that in 1900 the U.S. Congress passed the 500 Acres Law, which aimed to limit land concentration. As Dietz (1986) has shown, the law prohibited corporate land concentration but not individual holdings of more than 500 acres. Along with this, from 1898 to 1930 the United States enforced a radical transformation of agricultural production, changing the coffee-based and self-sustaining agriculture to a sugarcane monoculture. Consequently, Puerto Rico’s economic life “became increasingly tied to and dependent on the decisions of U.S. capitalists and on the U.S. economy” (Dietz, 1986: 99).

Simultaneously, from 1899 to 1922, in the Insular Cases, the U.S. Supreme Court issued what would become the legal definition of Puerto Rico (Rivera, 2001; Venator, 2006). A particular type of state of exception was imposed through the designation of Puerto Rico as belonging to but not part of the United States. This left Puerto Rico and Puerto Ricans in an area of legal-political indistinctness, sometimes within and sometimes outside the constitutional guarantees and procedures of U.S. law. That the Insular Cases dealt largely with tax and tariff issues is further evidence that the legal and political development of U.S. colonialism was intertwined with the economic interests of U.S. corporations and ruling classes.

In 1917, the second exceptional law, the Jones Act (Chap. 190, 39 Stat. 951, ¶2), came into force. This law partially replaced the Foraker Act and extended U.S. citizenship to Puerto Ricans. ⁵ While recognizing certain basic civil rights and guarantees, however, it still deprived Puerto Ricans living in Puerto Rico of benefiting from some of the inherent political rights and constitutional guarantees that come with U.S. citizenship (such as representation in Congress, participation in presidential elections, and access to certain social services). It did not affect the Foraker Act’s policies with regard to immigration, money, tariffs, commercial treaties, communications, the judicial system, or defense or the 500-acre restriction on corporate landholding (Dietz, 1986). At the same time, it imposed the cabotage laws, which regulated commerce and required that the shipping and trade of products to and from Puerto Rico take place on ships at least registered in the United States. In its Section 3 it provided that bonds issued by Puerto Rico and its authorized borrowers would be free of municipal, state, and federal taxes in any state (Hedge Clippers, 2015). This exemption made them very attractive to U.S. investors, who could normally claim it only for bonds issued within their home states.

In 1921 the U.S. Revenue Act (Section 262) exempted from taxation all U.S. citizens and corporations that received at least 80 percent of their income from U.S. possessions or territories if at least 50 percent came from active businesses. Also, it established that income was taxable on repatriation but liquidated distribution was tax-free (Puerto Rico Center, 2017). A similar exception was established in Section 931 of the Internal Revenue Code of 1921, which held that bona fide residents of a U.S. possession did not have to pay taxes on their overseas transactions until they repatriated their earnings to the United States. ⁶

In the 1930s, the New Deal and the social reforms advanced by the Roosevelt administration to reactivate the U.S. economy after the Great Depression were extended to Puerto Rico under various economic development plans (see Rodríguez, 2010). The policies promoted by the New Deal reflected a new dimension of the U.S. colonial state of exception in Puerto Rico. As Agamben (2005) has shown, Roosevelt developed the economic dimension of the state of exception by assuming plenary powers to manage the economic crisis and foster its normalization through exceptional laws.

The enforcement of the U.S. colonial state of exception in Puerto Rico continued in the 1940s with the imposition of a new series of exceptional laws that sought development through industrialization by invitation (corporate tax exemptions). The first of these policies, tax exemptions for U.S. corporations established in Puerto Rico (Operation Bootstrap), lasted until the 1960s. The Investment Company Act (Public Law 76-768), which regulated the investment industry and the exchange markets, excluded Puerto Rico, and so did the Securities and Exchange Commission (SEC) regulations. The latter exclusion was justified in terms of the travel costs that its inclusion would entail, and it made it possible for banks and investment firms to operate freely for more than 70 years.

A third exceptional law was the Public Law 600 of 1950, which allowed Puerto Ricans to draft their own constitution and led to the establishment of the Commonwealth of Puerto Rico in 1952. This new government recognized a certain degree of internal democracy and established a republican system of governance within the antidemocratic structures of the U.S. colonial state of exception. It did not, however, represent a substantial change in the U.S.-Puerto Rican political relationship—a telling example being that almost all of the areas related to trade, money, international agreements, immigration, and tariffs remained under U.S. control. Both the Jones Act and the Puerto Rican constitution established that the payment of the public debt had priority over any other payment. Given that many of the bondholders were U.S. citizens, it is no coincidence that the economic policy imposed by the United States on Puerto Rico aimed to guarantee their interests.

As a result of the oil crisis of 1973, the economic model of industrialization by invitation entered a recession, and this led to a new transformation of economic development policies. This transformation took place under Section 936 of the U.S. Internal Revenue Code of 1976 (26 U.S. Code, 1976), which sought to encourage U.S. corporations to establish themselves in the island with tax exemptions that would permit the repatriation of profits as soon as they were realized. These tax exemptions were particularly directed at banking and financial services and the pharmaceutical and electronics industries. Section 936 contributed to the current fiscal crisis by normalizing the colonial tax-haven economy. The 1980s marked a period of stagnation that culminated in a new transition of Puerto Rico’s economic model and of the economic and political legal discourses that I have called colonial neoliberalism. This transition materialized in the 1990s with the transformation of the Puerto Rican economy into a predominantly postindustrial economy based on consumption, tourism, and speculative markets.

An important development of the economic dimension of the colonial state of exception in Puerto Rico was that in 1984 the U.S. Congress adopted Section 903(1) of the Bankruptcy Code (Public Law 98-353) and introduced a new definition of “state” that excluded the Puerto Rican government and its public corporations from Chapter 9 (municipal bankruptcy). This exclusion made Puerto Rican bonds and public debt even more appealing to investors while leaving Puerto Rico without any sort of protection. In 2014 the Puerto Rican government passed Public Law 71, the Puerto Rico Public Corporation Debt Enforcement and Recovery Act, which was intended to address the exclusion of Puerto Rico from the U.S. Bankruptcy Code by creating a local bankruptcy law. This law was challenged in the courts by the bondholders and went all the way to the U.S. Supreme Court. In Puerto Rico v. Franklin California the court ruled that Puerto Rico had no sovereignty to legislate a local bankruptcy law, since that area had been preempted by Congress. Only Congress could pass a bankruptcy law for Puerto Rico, and this is in fact what happened with the passage of PROMESA in 2016. PROMESA was the final stage of the development of the economic dimension of the colonial state of exception in Puerto Rico, and it was structured to serve financial and colonial-capitalist interests. It did not suspend the local government and constitution but trivialized their functions.

Manufacturing the Crisis

Simultaneously with the United States’ imposition of its colonial state of exception in Puerto Rico, the local government developed various strategies for promoting economic growth, all based on the legal and political structures established by the United States. From 1952 on, the government and the political parties developed a series of policies that contributed to the economic and fiscal crisis. For example, the past three decades of Puerto Rico’s history have been characterized by (1) the intensification of neoliberal policies such as budget cuts, privatization, and the outsourcing of public services, implementation of austerity measures, low corporate taxation, and high dependence on the issuance of bonds and debt, (2) the passage of exceptional laws to deal with the economic crisis and every other aspect of political life, and (3) the exacerbation of the state-corporate criminality endemic to colonial-capitalist systems.

Puerto Rico’s crisis began in 2006 as a result of the elimination of Section 936, the high level of indebtedness, and the implementation of colonial-neoliberal policies. Aníbal Acevedo Vilá’s Partido Popular Democrático (Popular Democratic Party—PPD) administration (2004–2008) was the first to employ the state of exception as a strategy for economic crisis management. In May 2006 Acevedo decreed a partial shutdown of the government, given that it had no money. Later he created the Corporación del Fondo de Interés Apremiante (Urgent Interest Fund or Sales Tax Financing Corporation—COFINA), which was key in the rapid increase in indebtedness.

In 2009 Luis Fortuño of the Partido Nuevo Progresista (New Progressive Party—PNP) took office and continued to implement neoliberal policies and the state of exception. It was assumed that to maintain a good credit rating the state and the society had to move to the rhythm of transnational investment and the credit-rating agencies. To do so, the administration declared a state of fiscal emergency and passed Law 7, which allowed it to undertake a violent campaign of austerity that produced (1) the dismissal of 20,000 public employees, (2) the privatization of public services, (3) the development of public-private partnerships, and (4) the removal of protections against Wall Street’s predatory practices (e.g., the elimination of the restriction of issuance fees to 2 percent). Fortuño lost the 2012 elections, paving the way for a new PPD administration under the leadership of Alejandro García Padilla.

García’s administration implemented the same neoliberal and exceptional practices developed over the preceding decade. For example, on January 3, 2013, just two days after his taking office, an executive order established a policy of fiscal control and reduction of administrative expenditure. When this proved insufficient, in 2014 Moody’s, Fitch Rating, and Standard & Poor’s reduced the credit ratings of the government and its instrumentalities and public corporations to the lowest possible level. In response, a Fiscal Stability Act (Public Law 66 of June 17, 2014) officially declared a state of fiscal exception, and the aforementioned Public Corporation Debt Enforcement and Recovery Act was passed to address the exclusion of the government and its corporations from Chapter 9 of the Bankruptcy Code. On April 6, 2016, the passage of the Emergency Moratorium and Financial Rehabilitation Act (Public Law 21) gave the governor the power to declare the nonpayment of the public debt, and in May Puerto Rico defaulted on the payment of its public debt for the first time in its history.

Ricardo Rosselló Nevares of the PNP followed the lead of his predecessors. For example, in his first days in office, on January 2, 2017, he issued six executive orders aimed at managing the economic crisis. Executive Order OE-001-2017 declared a state of fiscal emergency and introduced a new set of exceptional measures to be applied to the benefit of economic and financial interests. Rosselló’s administration also created (by Act 2 of January 18, 2017) the Fiscal Agency and Financial Advisory Authority to develop and implement a fiscal plan and austerity measures that would guarantee the payment of the public debt. Simultaneously, it eliminated the Commission for the Comprehensive Audit of Public Credit established by García’s administration, thus revealing its connivance with the financial, economic, and political interests that had brought on the crisis.

One of the many factors that led to the “Puerto Rican Summer” of 2019—the sociopolitical mobilizations that ousted Rosselló—was the corrupt practices mentioned above. Rosselló’s resignation on the evening of July 24, 2019, came after more than two consecutive weeks of popular uprising in which hundreds of thousands of Puerto Ricans protested, marched, and rallied in Puerto Rico, the United States, and around the world demanding the end to his corrupt administration and a different kind of politics. This uprising was catalyzed by the leak of a now infamous chat, multiple corruption scandals, the negligent and criminogenic (mis)management of the aftermath of Hurricanes Irma and Maria, and the violent austerity measures imposed by the government and the Fiscal Oversight and Management Board (henceforth FOMB).

Colonial-State–Corporate Crimes

At the same time that the United States imposed the colonial state of exception, by not regulating banks, investment firms, and the Puerto Rican government it allowed the development of a series of criminogenic practices that led to the economic crisis. My analysis of the role played by banks and the U.S. and Puerto Rican governments in the current crisis is informed by the literature on the crimes of the powerful (Pearce, 1976; Whyte, 2009) and on state-corporate crimes (Green and Ward, 2004; Michalowski and Kramer, 2006) and intended to contribute a colonial case to that literature. In previous work I have proposed the concepts of colonial-state crimes and colonial-state terrorism (Atiles, 2019) and examined the colonial dimension of the crimes of the powerful (Atiles, 2018b). Here I shall propose the concept of colonial- state–corporate crimes.

Following the work of Tombs and Whyte (2015) and Lasslett (2012), I argue that U.S. government involvement in Puerto Rico’s crisis falls into the categories of state-initiated and state-facilitated crimes. Tombs and Whyte (2015: 64–65) define state-initiated crimes as crimes in which “government agencies play the leading and organising role and are assisted by corporations” and state-facilitated crimes as “crimes arising not from a positive engagement or encouragement to commit crimes, but [from] negative forms of complicity (failure to adequately regulate, wilful blindness).” I will show that the imposition of the colonial state of exception in Puerto Rico created the conditions for and even normalized financial and state-corporate crimes. Secondly, I suggest that Puerto Rican banks played a central role in what Tombs and Whyte (2015: 65) call corporate-initiated and corporate-facilitated state crimes, situations in which corporations (1) directly employ their economic power to coerce states into taking deviant action or (2) “provide the means for the state’s criminality” or “fail to alert the domestic/international community to the state’s criminality, because these deviant practices directly/indirectly benefit the corporation concerned.” The discussion here relies heavily on the research conducted by the ReFund America Project of the Action Center on Race and the Economy (see Bhatti and Sloan, 2016a, 2016b; 2017a, 2017b, 2017c, 2017d), but my aim is to deepen the theoretical analysis conducted by these organizations by introducing the concept of colonial-state–corporate crimes.

The Puerto Rican public debt amounted to US$72 billion in 2016, when the government defaulted for the first time. After that there was another default and with it a process of bankruptcy under Chapter 3 of PROMESA. What this history of defaults and bankruptcy does not tell us is that US$33.5 billion out of the US$72 billion in outstanding debt was not debt but the accumulation of interest on US$4.3 billion in capital appreciation bonds (Bhatti and Sloan, 2016a). In other words, nearly half of the debt was not money that the government and its public corporations had borrowed but interest (at 785 percent) owed to investors on bonds underwritten by Wall Street firms. In short, the Puerto Rican debt is the result of toxic deals with Wall Street—the normalization of colonial-state–corporate crimes. For example, Wells Fargo, one of the most important underwriters of Puerto Rico’s capital appreciation bonds, underwrote seven issues to Puerto Rico of these bonds that have an outstanding debt of US$21.5 billion, of which the principal is US$2.6 billion and the remaining US$18.9 billion is interest at an effective rate of 734 percent (Bhatti and Sloan, 2017b). Again, Goldman Sachs underwrote six issues of capital appreciation bonds amounting to US$2.5 billion, for which Puerto Rico will pay US$18.8 billion in interest (at an effective interest rate of 746 percent) (Bhatti and Sloan, 2017c).

The capital appreciation bond is the municipal version of the payday loan (see Soederberg, 2014), “a long-term bond with compounding interest in which the borrower does not make any principal or interest payments for the first several years and, in some cases, until the final maturity of the bond” (Bhatti and Sloan, 2017d: 5). Thus it is similar to a negative amortization mortgage, in which the outstanding principal actually grows over time because the unpaid interest get tacked onto the amount owed (Bhatti and Sloan, 2016a). Because of this structure, borrowers often end up paying extraordinarily high interest rates. In addition, most of the debt is in interest that has not even accrued yet. By excluding Puerto Rico from regulation by the SEC in the early 1940s, the U.S. government had paved the way for the legitimization of what would not be allowed in any other U.S. state.

An important contributor to Puerto Rico’s debt is COFINA. COFINA was established to refinance extraconstitutional debt, but by issuing high levels of debt and making toxic deals it generated US$36.9 billion of Puerto Rico’s debt. Some US$23.9 billion of the COFINA debt is in capital appreciation bonds, and “the underlying principal on the COFINA bonds is just US$3.3 billion. The remaining US$20.6 billion are interest at the effective interest rate of 614 percent” (Bhatti and Sloan, 2016a). Whereas the constitution (Article VI, Section 2) establishes that the annual debt payment shall not exceed 15 percent of annual revenues, COFINA was the Puerto Rican way of continuing to govern by debt. A key problem with this scheme was that, up to 2016, Puerto Rico’s capital appreciation bonds were traded on Wall Street’s secondary market at 5 cents on the dollar, which means that the vulture/hedge funds and bondholders who bought them were expecting to make a 95-cent profit for every 5 cents they invested (a 1,900 percent return on their investment) (Bhatti and Sloan, 2016a). In other words, they were expecting that the debt would not be paid at all and they would be able to go through a debt restructuring process. As a result, the profit for hedge funds was guaranteed, since Puerto Rican bonds were tax-exempt and Puerto Rico could not go bankrupt. Banks have also profited by underwriting payday loans. For example, on the COFINA’s capital appreciation bonds alone, banks charged Puerto Rico US$221 million in issuance fees (Bhatti and Sloan, 2016a). This was possible because of the exclusion of Puerto Rico from SEC regulations, the creation of a tax-haven-like economy in Puerto Rico, and the failure of a corrupt local political class to tax corporations doing business in the island.

Another dimension of these colonial-state–corporate crimes is the refunding of bonds and scooping-and-tossing. Refunding bonds and notes is the municipal version of refinancing and applies to older debt, while scoop-and-toss financing is “issuing new bonds to refinance older ones in order to push current debt payments into the future” (Bhatti and Sloan, 2017d: 6). Although these practices are not illegal, their use in the context of Puerto Rico’s exclusion from SEC regulations created the conditions that generated state-corporate crimes. Excessive issuance fees and capitalized interest produced skyrocketing profits for Wall Street firms while increasing Puerto Rico’s indebtedness. Because of its tax exemptions and the fact that its constitution guarantees the payment of the debt, every financial transaction attracts high demand from investors. In fact, “many of the Commonwealth’s bonds were oversubscribed over the years. . . . In order to close more deals and collect more fees, Wall Street banks began pitching scoop and toss deals so that they could make money off the same underlying debt multiple times” (Bhatti and Sloan, 2016b: 3).

As a result, the Puerto Rican government kept refunding its bonds to pay off old bonds, generating long-term indebtedness. “Nearly half of the US$134 billion in debt that the Commonwealth of Puerto Rico and its public corporations have issued or remarketed since 2000 has been refunding debt” (Bhatti and Sloan, 2017d: 6). Many of Puerto Rico’s scoop-and-toss deals “were structured in a way that simply pushed payments into the future and, in some cases, actually increased overall indebtedness as issuance fees and capitalized interest got tacked onto the outstanding principal” (Bhatti and Sloan, 2017d: 6). These deals raise legal and constitutional issues given that Puerto Rico’s constitution prohibits both the issuance of loans for more than 30 years and borrowing to fill budget gaps. Puerto Rico has often used scoop-and-toss to extend the maturity date of bonds passing the 30-year mark, and filling budget gaps with debt was common. Nevertheless, because the government eliminated the audit commission and at least two of the members of the FOMB were Santander executives, it is probable that these corporate-facilitated state crimes will never be prosecuted or even investigated.

ReFund America estimates that Wall Street firms such as UBS, Citigroup, Goldman Sachs, and Barclays have raked in US$1.6 billion in fees on Puerto Rico’s scoop-and-toss deals since 2000—an amount that is now part of Puerto Rico’s outstanding debt. “The largest portion of these fees, an estimated US$323 million, was for scoop and toss deals in which UBS was the lead underwriter” (Bhatti and Sloan, 2016b: 1). Although borrowers usually pay 1.02 percent in issuance fees, since 2000 Puerto Rico has paid an average of 2.86 percent and in one 2011 case 9.02 percent. These predatory practices have made the Puerto Rican government pay US$1.6 billion in total issuance fees for its US$61.5 billion in refunding debt since 2000 (Bhatti and Sloan, 2016b). All of this was possible thanks to the repeal of the prohibition of paying more than 2 percent in issuance fees under Law 7 of 2009, ⁷ a telling example of state-initiated crime. Furthermore, some banks underwriting these deals profited in other ways. For example, the UBS branch in Puerto Rico, which served as an adviser to the Commonwealth’s Employees’ Retirement System, led the underwriting of a US$2.9 billion bond issue for the pension agency in 2008 and then stuffed half of those bonds into a family of closed-end mutual funds sold exclusively to customers on the island (see Pavlo, 2017). Again, this was possible because of the exclusion of Puerto Rico from the regulations of the SEC.

Bhatti and Sloan (2016b) have shown that a significant number of Puerto Rico’s refunding bonds were issued to make interest payments on older debt. This practice, known as capitalizing interest, turns the interest on older debt into principal and forces taxpayers to pay interest on interest. Some US$1.6 billion of Puerto Rico’s debt represent capitalized interest. In other words, Puerto Rico borrowed not to build infrastructure or provide services for residents but to pay investors profits backed by the full faith and credit of the government. If we add the US$1.6 billion in issuance fees and the US$1.6 billion in capitalized interest, we can identify at least another US$3.2 billion of the Puerto Rican debt as illegal, given the fact that they were contracted through a series of state-corporate crimes. Bhatti and Sloan (2016b:2) continue:

Wall Street banks and wealthy investors pushed much of this refunding debt onto Puerto Rico to safeguard their own profits. They knew that Puerto Rico’s debt load was unsustainable, but they convinced public officials to borrow even more money to enable them to pay interest and fees. This has the combined effect of extracting billions of dollars out of the island and putting it in the hands of wealthy investors and big banks.

Banks employed the same practices that led the U.S. economy to the 2008 crash, profiting from deal volume with no consideration of Puerto Rico’s ability to repay and refinancing the same debt over and over again and collecting hefty fees as a result (Bhatti and Sloan, 2016b). In the end, Puerto Rico borrowed money to pay for bank and investor profit and turned this payment into debt that it would eventually have to pay back with more interest. As a result of these practices, US$36.7 billion of its US$72 billion debt are illegal and illegitimate, and, not surprisingly, the U.S. government has done nothing to prevent these practices or even to hold accountable those who profited from these colonial-state–corporate crimes.

As the financial situation in Puerto Rico worsened, Wall Street firms also accumulated wealth by dispossessing Puerto Rican taxpayers through variable-rate debt, toxic swaps, and auction-rate securities. These techniques were touted as saving alternatives for Puerto Rico at a point when access to markets was limited and money was much needed. They were in fact forms of predatory lending “structured in a way that would protect the banks even if Puerto Rico were unable to pay the bondholders. They were . . . designed to enrich Wall Street while draining millions out of Puerto Rico” (Bhatti and Sloan, 2017a: 3).

Starting in 2000, banks persuaded the Puerto Rican government to refinance much of its debt in the form of new variable-rate structures to take advantage of historically low interest rates (Bhatti and Sloan, 2017d). These new instruments were similar to adjustable-rate mortgages, the same kind of toxic financial products that generated the 2008 foreclosure crisis in the United States. The logic behind the adjustable-rate mortgage involves banks’ promising lower interest rates at the beginning when there is the risk that, given changes in the market, there could be significant higher interest rates and balloon payments in the future (Bhatti and Sloan, 2017d). Wall Street promoted this variable-rate debt as a way to get better deals and save money, and as a result more than half of the refunding bonds that Puerto Rico issued or remarketed from 2002 to 2008 had variable interest rates.

Moreover, given that variable-rate-debt products were not as good for borrowers as they were for Wall Street, banks developed expensive add-ons that helped avoid their risk. In other words, “Wall Street banks started aggressively pushing government borrowers like Puerto Rico toward riskier variable-rate debts so that they could sell them these expensive add-ons and collect millions more in fees” (Bhatti and Sloan, 2017d: 7). These deceptive practices worsened to the point that “the money that borrowers saved in interest from lower variable rates was completely offset by the higher fees they paid for add-on products like toxic interest rate swaps and letters of credit” (Bhatti and Sloan, 2017d: 7). In short, the same banks that created the risky products developed and sold insurance against their effects. At the same time, these add-ons had their own risks. Perhaps the biggest one was its outrageous termination clauses. Puerto Rico was forced to pay at least US$780 million in termination penalties to get out of costly toxic swap deals and to issue new bonds to pay many of these penalties through the same banks that had underwritten the original ones (Bhatti and Sloan, 2017d). Again, the US$780 million that Puerto Rico paid was not money that the banks had lent to the government but money that represented the future profits of the banks, and therefore those banks got to collect swap penalties and underwriting fees from the same transactions.

Auction-rate securities are variable-rate bonds the interest rates of which are set at auctions. If “no investors submit a bid at an auction, then the municipal borrower that issued the debt could be forced to pay double-digit penalty interest rate to the bondholders that are unable to sell” (Bhatti and Sloan, 2017a: 6). This was what happened to Puerto Rico in 2008, when the auction-rate securities market froze and Puerto Rico had to pay US$630 million in outstanding auction-rate-securities debt ”by either converting or refinancing its [auction-rate securities] into different debt structures that required even more add-on products like standby purchase agreements and letters of credit. As a result, Puerto Rico had to pay millions in additional fees to various financial actors for services like underwriting and remarketing bonds and providing credit enhancements” (Bhatti and Sloan, 2017a: 6). A key problem with auction-rate securities was that Wall Street banks misrepresented the risks that this product represented. Therefore, the fact that Puerto Rico had to pay US$631 million was not the result of bad luck but rather the result of colonial-state–corporate crime. In fact (Bhatti and Sloan, 2017a: 6),

the underwriters that misrepresented how risky these deals were likely broke federal security law. Many municipal borrowers have successfully taken legal actions and recovered their losses stemming from [auction-rate securities] deals. The lead underwriters on Puerto Rican [auction-rate securities] included banks like Goldman Sachs, Morgan Stanley, UBS, and Lehman Brothers. These are the Wall Street firms that targeted Puerto Rico with these predatory loans.

Even though these toxic products and these techniques of dispossession are illegal, neither the bankers nor the Puerto Rican government have been held accountable for their involvement in them. This is further evidence that the colonial state of exception imposed on Puerto Rico promotes and normalizes colonial-state–corporate crime and guarantees impunity.

Conclusion

The Puerto Rican debt is the result of colonial predatory capitalism, toxic deals, and colonial-state–corporate crime. More than half of it is illegal or has been contracted through criminogenic practices. Furthermore, none of these practices would have been possible without the imposition of a colonial state of exception in Puerto Rico. In other words, this crisis is political, and the efforts to manage it are also political. The colonial state of exception created a tax-haven-like economy that led Puerto Rico to the current crisis. Therefore, contrary to the neoliberal rationale, efforts at resolving the Puerto Rican crisis cannot continue to rely on supposedly technical strategies that end up legitimizing the exceptional measures and laws that generated it; they have to stop doing precisely what PROMESA and the FOMB have done. The U.S. government, rather than holding the financial predators and the political class that generated the crisis accountable and transforming the exceptional structure that defined Puerto Rico as a tax haven, has decided to punish the Puerto Rican people by generalizing the violence of austerity and making the same people who generated the crisis the crisis managers. It is in this context that we can clearly see exceptionality, colonialism, and state-corporate crimes interacting to shape the colonial economy and the ways in which every sector profits except the people.

I have shown that state-corporate crimes in a colonial context take place with the support of the colonial state of exception. Therefore, it is not enough to argue that Puerto Rico’s crisis was generated by state-facilitated or state-initiated crimes or by corporate-initiated or corporate-facilitated state crimes without considering the criminogenic practices that took place at the same time under colonial exceptional structures. The analysis presented here aims to contribute to the concept of state-corporate crimes by adding the colonial dimension.

Puerto Rico needs to hold those who generated the crisis accountable both politically and legally. As we saw during the Puerto Rican Summer of 2019, Puerto Ricans can do this, but it is also essential that the debt be audited. Since neither the U.S. and Puerto Rican governments nor the FOMB can fairly audit a debt that they themselves created, it is important to refund and reestablish the abandoned Puerto Rico Commission for Comprehensive Audit of Public Credit. Only an independent audit can show that colonial-state–corporate crimes were key in generating the current crisis.

Finally, the Puerto Rican people need to continue mobilizing and promoting the repoliticization of the recovery efforts by not paying the public debt, taking legal action against financial predators and corrupt politicians, clawing back fees and refusing to pay any additional fees, giving more importance to the human rights of Puerto Ricans than to the rights of the bondholders and vulture funds, and initiating a decolonization process that allows Puerto Ricans to decide about their political and economic future.