My friend Rohit Rajendran had shared this long piece from ‘The New Yorker’ on the work of McKinsey in Puerto Rico, a state with restricted ties to the United States mainland.
While it is tempting to conclude that there are plenty of crosshairs and conflict of interest in McKinseys’ work, in this particular instance, the mess that brings McKinsey in, in the first place, was not created by McKinsey or its advice. One has to record that.
The article is full of innuendoes on McKinsey’s real and perceived conflicts of interest but it also gives considerable newsprint to the McKinsey pointman in Puerto Rico. That said, Mckinsey Investment Office and its consulting arm need to be far more than legally separate for the allegations of conflicts of interest to be dismissed.
The real requirements for any resolution of a problem as challenging as restructuring an economy are these: reciprocity, restraint and respect. Reciprocity – all sides share in the pain; restraint: it cannot be ‘business as usual’ and belt-tightening is inevitable, at least for a while; respect – for local knowledge, history, customs and culture (school closures, for example, must be handled sensitively and the University – local intellectual body – has to be your partner).
Reciprocity, it appears, is missing:
When Puerto Rico made a desperate issue of $3.5 billion in junk bonds in 2014, warnings in the prospectus suggested a default was imminent. But hedge funds snapped up the bonds anyway, enticed by a loophole in U.S. law that seemed to prevent Puerto Rico from declaring bankruptcy. It looked as if the bondholders could seize tax revenues or assets belonging to the island and no one could stop them.
The group of creditors with the strongest legal claim — many of them hedge funds — were set to get around 93 percent of their money back, less a haircut than a slight trim. (Meanwhile, a weaker group of creditors, who are mainly Puerto Rican, were likely to lose about half of their investment.)
These don’t pass the smell test or fairness test even if they are legally in the clear. No wonder these financial types are aptly called vultures and they earn capitalism a bad name.
This is where the challenge for McKinsey’s bona fide comes in. On whose side, is it, eventually?
Then, of course, the question of its own fees is there:
The projected overall fees are more than five times what Detroit spent on its $20 billion bankruptcy, previously the largest local-government default in U.S. history, and higher even than the bill for Lehman Brothers, the $613 billion corporate liquidation that nearly destroyed the world economy.
All those fees are being footed by the taxpayers of Puerto Rico, which is far poorer than any U.S. state, with a median household income of less than $20,000 a year.
Reciprocity, respect and restraint?