[Marxism] Inside the Billion-Dollar Battle for Puerto Rico’s Future
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Sun Dec 20 10:32:38 MST 2015
NY Times, Dec. 20 2015
Inside the Billion-Dollar Battle for Puerto Rico’s Future
By JONATHAN MAHLER and NICHOLAS CONFESSORE
The money poured in by the millions, then by the hundreds of millions,
and finally by the billions. Over weak coffee in a conference room in
Midtown Manhattan last year, a half-dozen Puerto Rican officials
exhaled: Their cash-starved island had persuaded some of the country’s
biggest hedge funds to lend them more than $3 billion to keep the
There were plenty of reasons for the hedge funds to like the deal: They
would be earning, in effect, a 20 percent return. And under the island’s
Constitution, Puerto Rico was required to pay back its debt before
almost any other bills, whether for retirees’ health care or teachers’
But within months, Puerto Rico was saying it had run out of money, and
the relationship between the impoverished United States territory and
its unlikely saviors fell apart, setting up an extraordinary political
and financial fight over Puerto Rico’s future.
On the surface, it is a battle over whether Puerto Rico should be
granted bankruptcy protections, putting at risk tens of billions of
dollars from investors around the country. But it is also testing the
power of an ascendant class of ultrarich Americans to steer the fate of
a territory that is home to more than three million fellow citizens.
The investors with a stake in the outcome are some of the wealthiest
people in America. Many of them have also taken on an outsize role in
financing political campaigns in the aftermath of the Supreme Court’s
2010 Citizens United decision. They have put millions of dollars behind
candidates of both parties, including Hillary Clinton and Jeb Bush. Some
belong to a small circle of 158 families that provided half of the early
money for the 2016 presidential race.
To block proposals that would put their investments at risk, a coalition
of hedge funds and financial firms has hired dozens of lobbyists, forged
alliances with Tea Party activists and recruited so-called AstroTurf
groups on the island to make their case. This approach — aggressive
legal maneuvering, lobbying and the deployment of prodigious wealth —
has proved successful overseas, in countries like Argentina and Greece,
yielding billions in profit amid economic collapse.
The pressure has been widely felt. Senator Marco Rubio, whose state,
Florida, has a large Puerto Rican population, expressed interest this
year in sponsoring bankruptcy legislation for the island, says Senator
Richard Blumenthal, Democrat of Connecticut. Mr. Rubio’s staff even
joined in drafting the bill. But this summer, three weeks after a
fund-raiser hosted by a hedge-fund founder, Mr. Rubio broke with those
backing the measure. Bankruptcy, he said, should be considered only as a
And this past week, House Republican leaders said any financial rescue
for Puerto Rico may not come until the end of March.
The fight over the island’s future is stretching from the oceanside
neighborhoods of San Juan, where a growing number of wealthy investors
and financial professionals have migrated in recent years to exploit
generous tax breaks, to Capitol Hill. Their efforts are being closely
watched by financial institutions, labor unions and policy makers on the
mainland, where many ordinary investors own Puerto Rican bonds through
Some warn that Puerto Rico could be a test case for the rest of the
country, paving the way for troubled states like Illinois to escape
Stephen J. Spencer, a restructuring expert representing Puerto Rico
bondholders including some hedge funds, said letting the government
renege on agreements with hedge funds and other investors would set a
dangerous precedent, undermining the integrity of the bond market.
“It’s really a wealth transfer from the bondholders to the
municipalities,” Mr. Spencer said.
Others fear a different precedent: A handful of wealthy investors, they
argue, are trying to rewrite the social contract of an entire United
States territory. Puerto Rican officials say they have already cut
public services and slashed central government spending by a fifth to
keep ahead of payments to the hedge funds and financiers.
“What they are doing, by getting all the resources for themselves, is
undermining the viability of Puerto Rico as a commonwealth,” said Joseph
E. Stiglitz, the Nobel Prize-winning economist. “They want their money
now, and they want to get the rules set so that they can make money for
the next 20 years.”
A Bet on Resurgence
Along Ashford Avenue in San Juan’s Condado district, newly renovated
hotels gleam beside shops like Gucci and Cartier. Slightly to the west
are new high-rise condominiums, known as WeCo, or West Condado, by an
enterprising real estate agent originally from Manhattan. Still farther
west, not far from the Capitol in Old San Juan, a new development named
the Paseo Caribe makes a more explicit pitch to potential buyers: “The
Puerto Rico Advantage: Sun, Sand and Zero Taxes,” the development’s
This was supposed to help solve Puerto Rico’s problems. The commonwealth
has been in a depression for over a decade. Pharmaceutical companies and
manufacturers have fled the island, followed by young Puerto Ricans
looking for jobs, draining the island’s work force and tax base. Forty
percent of the island’s residents live in poverty.
Three years ago, in a bid to lure financial services firms and other
employers, Puerto Rico’s governor at that time, Luis Fortuño, a
Republican, signed laws intended to turn the island into a domestic tax
haven. Americans who relocated to Puerto Rico, spent at least half a
year there and brought their company with them would pay no federal
income or capital gains taxes.
Private-equity magnates, hedge funds and investment advisers began
moving to the island. They settled in Condado and a handful of coastal
enclaves like the Dorado Beach Resort, where the billionaire investor
Toby Neugebauer, who provided $10 million to the presidential campaign
of Senator Ted Cruz of Texas, bought a home.
John Paulson, the hedge fund investor and leading Republican donor,
snapped up resort properties and fading resort hotels, betting on a
resurgence. Puerto Rico, Mr. Paulson told an investor conference last
year, would become “the Singapore of the Caribbean.” This spring, at his
urging, the island even rented a booth at the hedge fund industry’s
annual conference at the Bellagio casino in Las Vegas, where two
attractive women pitched Puerto Rico’s charms to guests.
It was not the first time that Puerto Rico had turned to Wall Street for
help. For decades, the island had been borrowing money to pay its bills.
Puerto Rico’s bonds were particularly attractive to mutual funds because
they were exempt from federal, state and local taxes in all 50 states.
But in 2013, after the island’s general obligation bonds were
downgraded, they caught the attention of a different sort of investor:
hedge funds specializing in distressed assets.
These funds began buying up the debt at a steep discount, confident that
this was a bet they could not lose. Not only were the bonds guaranteed
by the Puerto Rican Constitution, but under a wrinkle of federal law,
the island’s public corporations and municipalities — unlike those of
the 50 states — do not have bankruptcy as a recourse.
When the investment bank Lazard hosted a discussion for investors on
Puerto Rico in October 2013, so many people showed up that some had to
stand. By the next spring, as the island’s economic situation worsened,
virtually no one else was willing to lend to Puerto Rico.
A round of spending cuts and tax increases by Gov. Alejandro García
Padilla, the Democrat who succeeded Mr. Fortuño, had not produced enough
cash to keep up with the island’s earlier debts. A prospectus circulated
for the March 2014 bond offering — which raised the $3.5 billion that
Mr. García Padilla hoped would buy time for a recovery — warned in
boldface type of “significant risks.”
Nevertheless, some of the biggest hedge funds kept buying, drawn by the
promise of what was a 20 percent return, based on the interest rate
coupled with the tax exemption. Mr. Paulson’s firm purchased bonds in
March 2014, as did Appaloosa Management, founded by David Tepper;
Marathon Asset Management; BlueMountain Capital Management; and Monarch
Alternative Capital, said Puerto Rico officials involved in the sale.
The recovery never arrived. The $3.5 billion ran out. And Puerto Rico
now owes its creditors in excess of $70 billion, a bigger debt load than
all but two states. As much as a third of it is owed to hedge funds,
according to some estimates.
The Bankruptcy Option
Early this year, with Puerto Rico’s economic outlook darkening, the
island’s nonvoting member of the House of Representatives, Pedro R.
Pierluisi, made what he thought was a modest proposal.
He introduced a bill that would change federal law to allow Puerto
Rico’s struggling municipalities and public corporations, such as the
island’s power authority, to declare bankruptcy. It would affect only
about a third of the island’s debt, Mr. Pierluisi told Republican
colleagues in Congress. It would also give Puerto Rico the same right as
most states and leverage against creditors — so-called Chapter 9
bankruptcy protection. And it would cost taxpayers nothing.
Republicans in the House seemed receptive, as were some conservative
groups. Even some of Puerto Rico’s other creditors liked the idea: If
public corporations could shed some of their debt, it would free up more
money to repay other bondholders. (The power authority’s financial
troubles were being felt on the island, and not only by locals: Last
summer, one of Mr. Paulson’s luxury hotels lost electricity, briefly
forcing the use of a backup generator.)
Mr. Blumenthal was an enthusiastic supporter of the bill. Eager for a
Republican co-sponsor, his staff turned to Mr. Rubio. One of three
Latino members of the Senate, Mr. Rubio had won a large portion of
Florida’s Puerto Rican vote in his 2010 race, and he was now about to
announce his presidential campaign.
“We were given to understand by his staff that they were very interested
in the bill and in fact were going to co-sponsor it,” Mr. Blumenthal
said in an interview. Puerto Rico’s government officials also believed
Mr. Rubio intended to support the legislation.
In the weeks that followed, the staffs of the two senators worked
together on the legislation. “To give them credit, his team made
contributions to the substance of the bill,” Mr. Blumenthal said.
But opponents were organizing against the measure, led by firms that
owned debt from Puerto Rico’s power authority, according to federal
lobbying records and other documents. Among them were two mutual funds —
Oppenheimer Funds and Franklin Templeton — and hedge funds, some
specializing in distressed debt: the D.E. Shaw Group and Angelo Gordon,
along with Marathon and BlueMountain.
The hedge funds were among the largest in the world, with a combined
tens of billions of dollars under management. Some of their founders and
principals were also donating large sums in the presidential campaign.
David E. Shaw of D.E. Shaw has given more than $800,000 to Mrs. Clinton
and groups supporting her campaign. (Mrs. Clinton has called on Congress
to pass the bill.) John Angelo of Angelo Gordon has put a quarter of a
million dollars behind Gov. Chris Christie of New Jersey. And Richard
Ronzetti, a partner at Marathon, has given $30,000 to groups linked to
Proponents of the bill mounted their own campaign, recruiting island
businesses, bankruptcy experts and groups like Americans for Tax Reform,
which argued that forgiving some of the debts would be better than
plowing additional federal money into the island. Mr. García Padilla’s
government hired SKD Knickerbocker, a public-affairs firm with close
ties to the White House.
But the hedge funds hit upon a novel lobbying strategy: Mobilize
conservative opposition by attacking Mr. Pierluisi’s bill — and by
implication any broader bankruptcy attempt by the island — as a
“bailout.” Because allowing the island to restructure its debt would
cost their investors money, the funds argued, it was no different from
the much-reviled taxpayer-funded bailout of the big banks after the
financial crisis in 2008.
Puerto Rico could not now gain access to bankruptcy protections that it
had not been entitled to when it borrowed the money, the funds argued.
And, they suspected, there was still revenue hiding within the island’s
opaque books, as well as cuts to be made to its oversize bureaucracy.
In a letter circulated to Republican staff members in February and
obtained by The New York Times, representatives for BlueMountain, a $22
billion firm headquartered on New York’s Park Avenue, warned that the
bill would put the bondholders at a disadvantage in any fight over
Puerto Rico’s debt. Bankruptcy, they said, would inevitably prioritize
those with pension claims over the island’s creditors, as had been the
case when Detroit declared bankruptcy in 2013.
“Chapter 9 proceedings bail out Puerto Rico on the backs of the very
bondholders Congress incentivized to invest in Puerto Rican municipal
bonds,” they wrote.
Reaching out to lawmakers and to Republican presidential candidates, the
financial firms quickly recruited allies. Tea Party groups, usually the
harshest critics of Wall Street lobbyists, joined the fray.
The bill was “nothing but a backdoor, taxpayer-funded bailout for Puerto
Rico,” Jenny Beth Martin, the national coordinator of the Tea Party
Patriots, wrote in a March letter to the House Judiciary Committee.
(Asked in an interview to identify the taxpayer funds at risk in the
bill, Ms. Martin said, “I don’t know that I can answer that.” She added:
“It’s more bailouts for bad decisions, expecting us to help take care of
things that we should not be responsible for.”)
The pressure put Mr. Rubio in an awkward position. Tea Party activists
had helped elect him in 2010, wealthy Wall Street donors had embraced
him as a rising star in the years since, and he was now entering an
intense Republican presidential primary campaign against
When it came time to introduce the legislation on the Senate floor in
July, Mr. Rubio held off. “We delayed the actual formal introduction of
the bill while we were waiting for a final answer from Senator Rubio,
and at some point, we said: ‘We need to go. Does he want to be a part of
it, or does he want us to go ahead without him?’” Mr. Blumenthal
recalled. “The answer we got was, go ahead without him. We never learned
In September, on the eve of a campaign visit to Puerto Rico, Mr. Rubio
abandoned the idea entirely In an essay on the website Medium and in
Puerto Rico’s largest daily newspaper, he wrote that bankruptcy should
be considered only as a “last resort” if the island first took
“significant steps to fix its budget and economic mess,” echoing a
refrain among Republicans in Congress.
Mr. Rubio’s move was welcome news for bondholders, some of whom have
supported his presidential campaign. Monarch’s founder, Andrew
Herenstein, co-hosted two fund-raisers for Mr. Rubio’s presidential bid,
one over the summer in the Hamptons, the other in Manhattan in October.
A spokesman for Mr. Herenstein declined to comment.
A spokesman for Mr. Rubio said his views on the legislation were
unrelated to campaign donations. "Given Marco’s interest in Puerto Rico
issues, our office did the due diligence of reviewing the bankruptcy
bill, as well as other possible solutions, and meeting with
stakeholders," he said. "Marco ultimately decided not to support it,
because he believes Puerto Rico’s leaders should first pursue other
fiscal reforms with Chapter 9 being a last resort."
In June, 16 months after the hedge funds had come to Puerto Rico’s
rescue, Governor García Padilla rattled trading floors around the
country. Puerto Rico, he said, was in a “death spiral.” It could no
longer pay its debts.
Only weeks earlier, his administration had hired as an adviser the
retired judge who had overseen Detroit’s bankruptcy. Puerto Rico had
also released a report by a former chief economist of the World Bank,
warning that its debt load was unsustainable.
In October, amid the impasse over Mr. Pierluisi’s bill, the Obama
administration weighed in with an even more ambitious plan. It proposed
to create a new form of bankruptcy for United States territories, which
would restructure all of the island’s debt — and put all of the
financial firms’ investments at risk.
Relations between Mr. García Padilla and the hedge funds he had once
courted soured, and the investors intensified their fight. Several more
hedge funds hired Washington lobbyists. Puerto Rico, now looming as
potentially the biggest government bankruptcy in American history, the
lobbyists warned, could carve a path for cities and states around the
country to escape their debts without reforming their governments.
Hedge funds commissioned their own economic study of the island’s
finances, which concluded that further cuts to public spending, in
particular to education and health care, would allow the island to keep up.
Some of the investors also tapped into an existing network of
conservative nonprofit groups that in recent years has become a major
conduit for moving large, anonymous contributions into lobbying and
This fall, a conservative group called the 60 Plus Association, based in
Alexandria, Va., unleashed a wide-ranging media and lobbying effort
against a restructuring and Governor García Padilla, whom it accused of
“manufacturing a crisis” and trying to “extort” money from Congress.
The group cast the victims of a bankruptcy as ordinary Puerto Ricans and
retirees who owned government-issued bonds. In November, 60 Plus
recruited a group of these individuals, calling them “Main Street
Bondholders,” for a news conference in San Juan.
“Do these folks look like vultures to you?” asked Matthew Kandrach, the
vice president of 60 Plus, who apologized for not speaking Spanish. “I
want the governor to see these faces.”
Exactly who the group was speaking for was unclear. Puerto Ricans own
less than a fifth of the island’s debt, according to government
officials. And while 60 Plus claims to represent millions of seniors,
most of the group’s revenue comes from a few large, anonymous
contributions, according to its most recent tax return.
Two Republicans briefed on the arrangement said 60 Plus had been
recruited by the DCI Group, a Republican public relations firm that
specializes in “AstroTurfing” — orchestrated lobbying campaigns designed
to look like grass-roots efforts. DCI’s clients include the hedge fund
BlueMountain Capital, which has been one of the most aggressive
opponents of federal intervention in Puerto Rico.
DCI declined to comment. Asked about the arrangement, Mr. Kandrach
responded: “When it helps us better serve and represent our seniors, we
are proud to partner with firms such as DCI who offer valuable
logistical support to getting our message out.”
Hedge fund executives and their allies also pressed their case in
private meetings with key members of Congress and their staffs. The
chairman of the Senate Finance Committee, Utah’s Orrin G. Hatch, met
with a representative for funds owning general obligation bonds, as well
as with Puerto Rico officials. Several firms with investments in Puerto
Rico have been among the leading sources of donations to Mr. Hatch’s
campaign and leadership PAC in recent years.
In early December, Governor García Padilla made a final plea to Mr.
Hatch’s panel for bankruptcy relief. “This is a distress call from a
ship of 3.5 million American citizens that have been lost at sea,” the
Mr. Hatch was unmoved, reading a long statement raising doubts about the
wisdom of bankruptcy. He suggested that broader changes to Puerto Rico’s
government were necessary.
A little more than a week later, Mr. Hatch blocked an effort to bring
Mr. Pierluisi’s bankruptcy legislation to a vote. He soon offered his
own proposal: To respond to the island’s humanitarian needs, Congress
would provide $3 billion to Puerto Rico if it submitted to federal
financial oversight. It was the approach favored by bondholders. It was
also, in effect, a bailout.
The island remains in negotiations with the financial firms that own its
debt. Without the possibility of bankruptcy, its only leverage is the
threat of default.
The House speaker, Paul D. Ryan, Republican of Wisconsin, said on
Wednesday that lawmakers would try to come up with a solution by the end
A reckoning could come sooner: On Jan. 1, bond payments of $1.4 billion
will be due. No one is quite sure if the island can pay.
Correction: December 19, 2015
An earlier version of this article omitted part of the surname of Gov.
Alejandro García Padilla of Puerto Rico in some references. His full
surname is García Padilla, not Padilla.
Michael Corkery and Mary Williams Walsh contributed reporting.
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