CHAPTER 7 Making Lemons into

Broke and feeling sorry for myself, I once again touched down on

Puerto Rican soil. I did not know if I had it in me to begin all

over again. The agency operation that I built into an insurance powerhouse

was now in shambles. I was starting almost from scratch, territory

that was no more comforting because it was familiar.

Somehow, once again, this drubbing became the best thing that

had ever happened to me. My failure taught me the most important

lesson in personal finance, which was learning to tell the difference

between real money and funny money. It was 1978, and I was 37

years old.

I could not have picked a worse time to start over again. The

United States was in a serious recession. The misery index, the sum

of the unemployment rate and the prime interest rate, was soaring.

Market lending rates were as high as 20%. Unemployment in the

U.S. was at 10% and in Puerto Rico it was at 24% (unemployment

peaked near 25 percent during the Great Depression). The great

industrial boom, which had begun in the late 1950s in Puerto Rico

and continued to the mid-1970s, had come to a screeching halt. The

tax breaks that had fueled Puerto Rico’s economic breakout two

decades earlier were powerless in the face of the Carter recession and

their job-producing capacities had been shown to be largely illusory.

Of course, when times are tough, they are not equally tough on

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everybody. I saw an opportunity. The Puerto Rican Treasury had

never recognized the concept of Non-Qualified Deferred

Compensation, and the maximum local income tax rate stood at a

hefty 67%. With the help of a pana, I sought and obtained a ruling

through the Puerto Rican Treasury that accepted the deferred

compensation concept. Next, I got licensed with a variable annuity

and mutual fund company and set up a broker-dealership to sell

securities. I bypassed the National Association of Securities

Dealers (NASD) and was regulated directly by the Securities and

Exchange Commission (SECO). I had more brass than brains,

because no one told me that it was good to seek the shade of the

NASD umbrella. I took the opportunity to hire every stockbroker in

town as a part-time producer for me, while each of them kept his

office with Merrill-Lynch or Paine-Webber. It was an offer they

couldn’t refuse.

My variable annuity had a 17 percent, four-year, front-end load

and paid the broker a first-year commission of 30 percent. I signed

up all the universities, hospitals and even the U.S. 936 companies

that were tax exempt. Non-Qualified Deferred Compensation was

an idea whose time had definitely come in Puerto Rico. The stockbrokers

were anxious to sell my product because they were starving.

It was the depth of a bear market and nobody was investing in

common stocks. The variable annuity sold itself because of the

system I put in place. Suppose, for example, a professor made

$30,000 per year and her spouse was a doctor or lawyer who made

$100,000. She would pay $20,000 in income taxes on her earnings

alone. By putting all her income into my plan, she saved $20,000 in

taxes and the broker made a $9,000 commission.

The stockbrokers were lining up at the front door to sell my

product. My life insurance agents would go with them to sell the

life insurance, too. Every stockbroker in town and every insurance

agent wanted to work for me.

Another great thing happened. After I returned to Puerto Rico in

1978, my former wife and I had a conversation and we decided it

might be a good idea if our two sons, Michael and Sasha, lived with

me for a while. Sasha was 14 and Michael was 10. We didn’t go to

court to arrange this, we just decided between the two of us and did

it. Julie and I settled most of our problems that way, without court

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interference. But that’s another story.

The best thing that ever happened to me was becoming both

mother and father to my kids for a time. It was poetic justice of a

sort that I took two roles where previously I had less than one.

When you are a Master of the Universe, but not the master of your

sons’ household, you are an orphan in reverse. It wasn’t as if Julie

disappeared from the boys’ lives. She was always there, but when

your kids live with you and you become a single parent, you create

a bond that is very difficult to duplicate. My return to Puerto Rico

was a second chance in more ways than one.

By 1982, I had one of the top three insurance/broker-dealer

operations in the Aetna system, which was 200 strong. It was both

the largest insurance and largest broker dealer operation in Puerto

Rico. Actually, my operation sold more life insurance than any

other within Aetna. A few operations did more securities business.

All told, I had half a floor in Banco Popular Center (10,000 square

feet) in San Juan, offices in two other Puerto Rican cities, and

offices in the Virgin Islands with more than 200 producers, sales

staff and clerical people.

That year Aetna decided to transform its distribution system

into company-owned offices, rather than independent franchisees or

general agents. They bought me out. As part of the deal, I stayed on

for three years, but no longer, because being an employee was of no

more interest to me than it had been a quarter century earlier.

By 1985, I was out of the insurance and securities business and

had enough real money (not funny money, like stock options) to

live modestly for the rest of my life. I was 44 years old.

What now? Business no longer beckoned to me, despite the

many offers I was getting in the financial services industry. Piling

millions on top of more millions was an irresistible summons for

many business people my age, but those sirens were not singing to

me. I had no desire to live lavishly. I was comfortable, with no

financial pressures. Even so, there was a vacuum in my existence. It

was time for a new career, a career that was about something more

than the next brass ring on tomorrow’s carousel.

I started writing a newspaper column, did some consulting,

bought a house in Vail, Colorado, and started spending four or

five months a year there. Hearkening back to my days in the Army

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in Alaska, I became a ski instructor. As long as I earned enough to

maintain my lifestyle and preserve my capital, I would be fine. I

realized that working six months per year was more than enough

to accomplish my goals. If I had continued to build my fortune in

business, instead of eventually leaving this world with a net worth

of a few million dollars, it might have been a few hundred million.

I have friends who took this, the road more traveled by. They have

had heart attacks, strokes, and other health crises. Some of them

are my age and they don’t see the light of day during their 60-hour

workweeks. What does it profit them? And for whom? We kid

ourselves and say we are “doing it for our families.” Nonsense. It

is our great grandchildren’s ex-husbands and ex-wives that will

reap the benefit.

My column became quite popular because there were two

things that I could contribute. Having spent over 20 years in the

insurance and securities business, I had learned all the inside baseball

and could advise my readers on how to keep them from being

hoodwinked by the industry. Every insurance agent and stockbroker

now hated me. The other thing was that I was financially independent,

unlike many finance gurus and self-help advisors whose work

is designed to end their own financial dependence by tapping that of

their audience.

Since Scripps-Howard owned the local newspaper, I was asked if

I wanted to have the column syndicated. I said yes, and within a

couple of years my prose was going out to roughly 350 newspapers

nationwide. It was very rewarding to get dozens of letters every week

from people all over the country thanking me for the insights they got

from my column. That prompted me to write a book and launch a

newsletter, “Money Mastery,” which I published for seven years.

All this occurred in the 1980s, the “decade of greed” as the

Democratic Party christened it. Republicans called it the Reagan

Revolution. In a crucial way it was neither of those things. It was,

instead, a decade of rediscovery of first principles, for which

Ronald Reagan could justly take credit. The power of free enterprise,

grounded in a system of personal and political freedom, has

been demonstrated time and again. As for greed, certainly there are

men and women motivated by the power of gold in every era, as the

history of Section 936 shows, but the engines of economic growth

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in the 1980s and 1990s only proved how mysterious a process real

economic progress is.

In the 1990s, political figures discovered Silicon Valley – as a

source of campaign contributions. With that discovery came all the

speeches and the talk of government subsidies and public-private

partnerships to identify and support the next generation of cuttingedge

industries. It’s not a matter of the chicken and the egg.

Government can neither predict nor produce creative genius. Given

a chance to pick economic winners and losers, Leviathan is rarely

going to choose a Stephen Jobs, a high school dropout tinkering

with computer circuits in his garage. Ten years later, after the inventor-

geniuses have rewritten the rules and helped develop businesses

the world has never seen before, government can sit up and take

notice. Ask Puerto Ricans if Columbus discovered their island. Like

government in most eras, the Admiral of the Ocean Sea did not

create the places where he landed, but rather he passed through

them, with mixed consequences.

The dogmas of central economic planning played themselves

out to their inevitable conclusion in the Soviet Union in the early

1990s. The seeds of that collapse were present at the beginning, and

people like me who were able to flee the planting were fortunate. In

the West, the distortions of well intentioned central government

policy are more subtle, but no less real. They are at their worst

when they lead not to collapse, where renewal can finally take

place, but to a deadlocked status quo, where a powerful minority

benefits at the expense of the majority and blocks all reform. This

happens daily under the communist system, where the minority is

composed of personal and family networks masquerading as

ideologies. It happens in a quite different way in democracies,

where, as in the case of Puerto Rico, the minority is a group that

benefits from programs or tax breaks that are not available to everyone

and that favor a select few.

As I made my own fortune in New York and Puerto Rico, I was

dimly aware of the havoc public policy wreaks when it preys upon

the worst in human nature. Only when I had the time to write my

column and examine U.S. economic policy toward Puerto Rico did

I clearly see just how much damage the dogmas of the stormy past

could do. Once again, my path, formerly as an entrepreneur, now as

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an analyst and advocate, pointed me back to the island territory

whose quiet present belied the bands of steel that held it captive.

I was now 48 years old. Part of my consulting practice was

giving personal finance seminars to groups of top corporate executives.

My contacts for this enterprise came from my days selling

Non-Qualified Deferred Compensation programs to the Fortune

500 companies that operated in Puerto Rico under that targeted tax

provision we discussed in previous chapters called Section 936.

This part of the story begins with my meeting a brilliant young

lady. Inez was in her late twenties and was the head of human

resources for a mid-sized company in Boston that hired my

services. We started dating, and she introduced me to a friend of

hers who was a tenured professor of international law at

Northeastern University. Since my column appeared in the Boston

Globe from time to time, he had been a reader of mine and wanted

to meet me. We became instant friends.

Manuel Rodriguez Orellana was and is a Puerto Rican independence

party leader. This fact led to very vivid political discussions.

Manuel is one of the most brilliant individuals I have ever met. Our

discussions have always been enjoyable and challenging.

Up to the point of our meeting, I was just a businessman, totally

oblivious to the political situation in Puerto Rico. No one should

underestimate the tunnel vision of the average citizen meeting the

travails of daily life, and business people may have the narrowest

tunnel vision of all. I was all but clueless about the impact of Puerto

Rico’s status on the island’s economy and on U.S. taxpayers.

Manuel opened my eyes and showed me how totally out of whack

Puerto Rico’s current status really is. In a nutshell, the island is an

impoverished U.S. colony whose maintenance requires our nation’s

taxpayers to fork over billions of dollars. As the previous chapters

examined this issue in some detail, much of this goes to support a

welfare system that only reinforces this poverty and dependency.

As we stated previously, the real reason for this tragedy, the

tragedy of the last American colony, is grotesquely simple: Puerto

Rico is what it is and not what it could be because of the influence

of a select few U.S. companies that pocket billions of dollars

through such targeted tax breaks as Sec. 936. This fact is as simple

as an oak tree, but its roots and branches now radiate in all direc-

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tions. One way or another, a portion of the excessive profits generated

for these companies by this tax preference makes its way back

into the political system, as gifts not only to the Puerto Rican political

parties but also to U.S. members of Congress and the

Republican and Democratic parties. Money has been called the

“mother’s milk of politics.” That money has been the fuel of Puerto

Rican servitude as well.

The corollary of being a man without a country is to be a man of

many countries.

Since I was both an American taxpayer (I had properties and

other investments on the mainland on which I paid federal taxes)

and a Puerto Rico resident (where I paid local Puerto Rican taxes),

not to mention a European immigrant who had lived under repressions

of both the right and left, this subtle tyranny by tax gimmickry

riled my Russian soul.

My friend Manuel was an “independentista” and I loved

America. His arguments at first provoked me, because I was a

believer in the ability of the individual to rise above his circumstances.

America had been good to me. It became clear to me,

however, with my friend’s persistence, that a nation can be yoked,

even if some or even many of its citizens toss off that yoke. It was

some point like this that Gerald Ford was grasping for when he

made his gaffe in the 1976 presidential debates about Eastern

Europe being free. Puerto Rico is not a Captive Nation in the sense

that Hungary and Romania were, but it does occupy a halfway

house of freedom and conditions there are deplorable.

My friend and I shared ideas as to how Puerto Rico’s status

could be changed and it could achieve some form of sovereignty.

My friend was committed to independence, and he persuaded me

that this status would be better for both Puerto Ricans and mainland

Americans. Statehood would be better as well, and the common

enemy of both statehood and independence was the status quo.

At about the same time as I was making the acquaintance of

Rodriguez Orellana, I was on a flight from Newark to San Juan

where I sat next to the vice president of finance of a New Jerseybased

pharmaceutical firm. He had attended one of my seminars

and began to tell me how much he enjoyed the presentation. We

started talking about Section 936. By this time, he had had a couple

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of drinks, and he confessed to me that his firm didn’t need this tax

break to operate in Puerto Rico. Tax break or no tax break, the

company would still be there. He told me that their operation was

capital intensive and they hired mostly engineers. The same engineer

who earned $50 an hour in New Jersey got paid $25 an hour in

Puerto Rico, so that their productivity (cost per unit of production)

in Puerto Rico was much higher than on the mainland. As to the

question of going elsewhere in the world, that might be an option

for such things as garments and shoes, but not for pharmaceuticals.

FDA rules all but guarantee that drugs made for the U.S. market are

manufactured domestically. Puerto Rico is under the U.S. flag.

South Korea and India are not.

This was fascinating because this same company was publicly

claiming that if Sec. 936 were phased out, it would leave the island

and thus create long unemployment lines in Puerto Rico. I asked

him about those public claims and he assured me that they were

“pure bullshit. We just want the tax credits for as long as we can get

them. It’s just good business, and we will say anything we need to

say to keep them.”

As a devout capitalist, that made all the sense in the world to

me. Logic and ethics are two different branches of knowledge and,

all too often, two divergent courses of action. As a U.S. taxpayer,

however, this logic really angered me. “Why should I and other

Americans subsidize a Fortune 500 company just because it has the

political influence to make me do it?” My sense of justice impelled

me to ponder ways to counter that political influence.

First, it occurred to me that one man’s tax break is another

man’s tax burden. I counted among my friends and clients in Puerto

Rico some very wealthy people. Those whose capital was generated

and maintained in Puerto Rico had every reason to desire more

control over the destiny of that capital. They might be fierce allies

in a fight to change Puerto Rico’s status. If nothing else, it would be

clear to them that the tax preferences enjoyed by U.S. companies

doing business on the island were reflected in excessive taxes on

locally owned businesses.

As motivation for local capital to get involved in the debate over

status change, status had to be positioned as a drain on local capital.

Fortunately for the argument, and unfortunately for the island, this

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is the reality. In essence, economically, if the present status continues,

the divergence, which began in the mid-seventies, between the

U.S. economy and the Puerto Rican economy will make assets on

the island worth cumulatively less than the comparable assets on

the mainland. If Puerto Rico were to be fully integrated into the

U.S. economy and have political self-determination through representation

in Congress, capital assets in Puerto Rico should grow at

the same rate as those in the average state.

This analysis made good financial sense as a means to encourage

local capitalists to weigh in on the status issues. To do so they

would have to buck the local political parties and what they were

proposing. This required both an intellectual and a social leap,

grounded in the recognition that the local party interests were

financed by U.S. capital, which resisted change in order to continue

pocketing billions in tax credits every year.

We formed a small and loosely knit network and started getting

together and planning strategies. We were total neophytes when it

came to the political hunt and chase. One of the Washington lobbyists

who gave us a presentation framed the issue in the starkest

terms. “Here is how it works,” he said. “You find yourself a member

of congress and you give his campaign some money. Then you give

the campaign some more money and he starts to listen to you. Then

when he sees that you are helping him, he becomes a champion for

your cause, provided it does not hurt him politically with his

voters.” This was a jaded view of the American political system, but

sadly it has proved to be all too accurate in many cases.

The first objective was to kill the tax boondoggle that was keeping

the island a captive “welfare territory.” The new effort at Puerto

Rican status change of which I was a part took its first shot not at a

physical place like Concord Bridge but at a place in the Internal

Revenue Code called Section 936. That is where I first saw this

lobbyist’s axioms about campaign cash in action, at the White

House and among many members of Congress, and it was not a

pretty sight.

My first move was to send a letter to all the pharmaceutical

companies that benefited from the provision, inviting them to a

seminar where we would discuss the importance of Section 936 in

keeping their operation in Puerto Rico. This was nothing new

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because I often held seminars, either on my own or sponsored by

financial institutions or law firms, that dealt with a mix of personal

finance and general business and economic conditions. I even

invited Peter Holmes to attend. He was the head of the pharmaceutical

industry lobbying office in Washington. The idea was that

since many of these companies were my clients anyway, and since

they knew who I was and they all read my column, we might examine,

objectively, what Section 936 meant to the drug companies. If

there was a good economic case for these preferences, I wanted to

know what it was.

It is not difficult for an active consultant to find his potential

conflicts of interest multiplying in such a context. Section 936 was

of disproportionate importance to a modest-sized island economy.

To make matters more intricate, I had become involved, as an

employee benefits consultant, in helping relocate labor-intensive

portions of the Puerto Rican economy to other nations in the region,

like Haiti and the Dominican Republic, where education levels

were far lower and economic conditions far poorer. The bottom line

for the pharmaceutical companies was this: as long as a certain

portion of their manufacturing process was done in Puerto Rico,

they still qualified for the Section 936 tax credit and the CFC, even

if 90 percent of the product assembly was done by workers bringing

home wages of $1 per day (in those days) on nearby islands.

At first, some of my colleagues considered me a “traitor”

because I was perceived to be taking jobs away from Puerto Rico.

When President Reagan established his Caribbean Basin Initiative,

it required U.S. companies to make certain investments in the

Caribbean if they were to continue enjoying the benefits of Section

936. Job creation among Puerto Rico’s poorer neighbors qualified

for this purpose. Overnight, I became the savior of Section 936 for

some of these companies and an agent in helping them reduce their

labor costs and boost productivity.

Having an enlightening discussion about the value of tax preferences

to Puerto Rico’s economy during my seminar would have

afforded me an opportunity to write about the subject. As it turned

out, my seminar was totally ignored. Perhaps the invitees thought it

would become some kind of “gotcha,” but I believe the reality was

that these pharmaceutical giants felt very confident in their position

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because of their inroads into the two main political parties locally

and their influence with members of Congress in Washington. They

had no need to explain or defend their position publicly. They were

over-confident to the point of arrogance.

What was most important for me was that I had found a new

windmill to charge against.

Given my reputation and existing work relationship with these

companies, and believing in the public spiritedness of the topic we

had proposed, I took this rejection hard. Had the pharmaceutical

companies merely sent a lowly clerk or bureaucrat to sit-in on our

seminar to offer reasons why Section 936 was vital to their presence

in Puerto Rico, I might have been less zealous about this

issue. Instead, this rebuff gave me a clear green light to hit them

with both barrels.

About the same time, a Puerto Rican economics professor, Dr.

Rivera Ruiz of Interamerican University, did a study of the effect of

Section 936 on the island economy. The results were eye opening.

The study showed not only that Section 936 was doing nothing

positive for our economy, but also that it was actually causing it

harm. Prof. Ruiz presented the study in an academic forum, but the

orchestrated voices of the pharmaceutical firms drowned out his

core message. The local papers made it appear as if the study

proved that Section 936 was good for the Puerto Rican economy.

Of course, local media were dependent upon paid advertising from

these companies and their suppliers and distributors, so they did

everything they could to please “the hands that fed them.”

We had our work cut out for us.

I then wrote a column in the San Juan Star that summarized the

negative effects of Section 936. The furor that this piece produced

was incredible. No one had ever spoken out publicly against

Section 936 for fear of what the pharmaceutical lions would do to

them and their livelihoods. The editor of the paper invited me to

lunch and showed me a file of dozens of letters that had been sent to

the paper threatening to pull all their advertising if they continued

to run such articles.

My next step was to produce a special section of my newsletter

that delved into the subject in depth. Essentially, I offered my readers

a detailed analysis of the Ruiz report. Dozens of letters went to

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the local newspaper asking it to run a more detailed article than the

one they had already published. The editor took a chance and had

me produce a special, two-full-page section with graphs and charts,

based on my newsletter piece, which detailed the effect of Section

936 on the Puerto Rico economy.

Once again there was a flood of threatening letters to the editor,

but there were also many letters that praised the article. Many

prominent local people began writing special columns in other

newspapers as well, claiming that my articles had challenged their

assumptions and that they, too, were re-examining the benefits of

Section 936. For a tax provision, this one was treated as mighty

personal. My answering machine was filled with threatening phone

calls to the point where I no longer answered the phone.

I was undeterred and wanted to keep the buzz on the issue

going. Next I produced an eight-page insert in the San Juan Star in

the summer of 1995 that promoted my newsletter locally, offering

as a sample a complete reprint of the back-issue that had dealt with

Section 936. It was called “Puerto Rico at the Crossroads.” Again,

there were more phone calls, letters, editorials, and opinion pieces

by local business, civic and political leaders. I had overcome the

first round of the battle, indeed the first round of any policy battle. I

had spoken the unspeakable and surmounted the barrier of isolation,

and I was still standing. The threats to cut off advertising to

newspapers were no longer effective, because everyone was talking

about the issue, and such a cut-off would only have been a selfinflicted

wound for the advertisers.

Emboldened, I converted “Puerto Rico at the Crossroads” into

booklet form in 1996, had it translated into Spanish, and saw to it

that thousands of copies were circulated locally in both languages,

even sending a few thousand copies to Washington for members

and staff of the U.S. Congress to digest. I was relishing my

newfound career as a pamphleteer, with all its resonance of Tom

Paine and “Common Sense.” We had begun to reach around the

gatekeepers of information, the “official sources” who dominate

what most of us read and hear. We had a subject with a life of its

own, and we had something more: a movement.

The issue gained such notoriety that even the then-current

governor of Puerto Rico, Pedro Rossello, had to take a position

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against Section 936 (despite the heavy support he enjoyed from

Section 936 companies). By this time our ad hoc coalition had

found and established our champions in Congress, and soon there

were hearings in the tax-writing bodies of both chambers of

Congress, the House Ways and Means Committee and the Senate

Finance Committee.

That year, Congress decided to phase-out Section 936 over a

10-year period. Attempts to phase-out the Puerto Rico counterpart

to the credit had been made, though unsuccessfully, in the past, as

the government kept adding extensions and exceptions. The

biggest tax giveaway, the income approach to tax credits, was now

to be eliminated within two years. As time wore on during the

phase-out, more and more of the firms losing Section 936 would

abandon it for CFC status, which would allow them to defer their

tax liability as if they were operating in a foreign land. For now, we

had won the first leg of our battle and were now ready for the

second. The heart of the injustice wrought by Section 936 was not

just the economically futile benefits it conferred on a handful of

companies that did not need them. The essence of the problem

remained the long-standing and unresolved nature of Puerto Rico’s

status within the U. S. legal system. Section 936 was a gourd growing

on the tree of a false doctrine.

In the near-century that Puerto Rico had been a U.S. territory,

Congress had never passed a bill to authorize its people to hold a

referendum on their preferred political status. Wave after wave of

national liberation movements had passed over the modern world,

releasing long-time colonies in South America, Africa and Asia.

The ideological gods of fascism and communism had come and

gone, though a few convulsive outposts of these dogmas

remained. Tyrannies of personality had risen and fallen. The path

of the modern world was toward greater freedom and self-determination.

Moreover, the epicenter of this change was the political

West and, in particular, the United States. One prominent political

scientist even optimistically proclaimed this evolutionary progress

“the end of history.”

By some means, however, each of these waves passed through

the Caribbean and left untouched two near neighbors. One, of

course, is Cuba, the last vestige of communist hegemony in the

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hemisphere. The other is the last American colony, Puerto Rico.

The hollow excuse of the apologists for the status quo was that

Puerto Rico somehow had it better than a nation or a mere state. It

was a Commonwealth and no bill of improvement was needed.

Tying the future of nearly 4,000,000 people to the survival of their

tax haven, the pharmaceutical companies and other Section 936 and

CFC beneficiaries spent millions of dollars to promote this misconception.

The reality of Puerto Rican life under the U.S. territorial

clause was never allowed to come to the surface. Events nonetheless

have a way of lifting the truth before our eyes.

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