Puerto Rico was still recovering from Hurricane Maria when a magnitude 6.4 earthquake struck on Jan. 7, leveling buildings along its southern coast and damaging power plants that provide electricity throughout the territory. Rebuilding from the earthquake could cost as much as $3 billion for the island, which is already more than $70 billion in debt.
Despite the financial crisis Puerto Rico is facing, a group of hedge funds and Wall Street firms that have invested Puerto Rican debt recently struck a deal with the Washington-appointed Financial Oversight and Management Board to help them extract massive profits from the island. The deal, which was agreed to on Feb. 9 and must still be approved by the Legislative Assembly, would require Puerto Rico to make immediate cash payments to the bondholders and to pay back the rest of the debt at a higher rate and more quickly than what the parties had previously been agreed upon.
While a portion of the debt would be discharged under the new agreement, the bondholders would be entitled to collect up to 77 cents on the dollar for debt that many of them purchased for pennies in the wake of Hurricane Maria. The agreement could also jeopardize lawsuits brought by activists from Puerto Rico and the United States contending that a portion of the debt may be illegal because it violates Puerto Rico’s constitutional debt limit or because of how its sale was initially negotiated.
“This agreement is a bailout for Wall Street hedge funds that puts a heavy burden on the people of Puerto Rico and will inevitably lead to a second bankruptcy,” a coalition of 50 activist groups wote in a letter to Congress organized by the Center for Popular Democracy. “Hedge funds that bought this illegal debt for cents on the dollar are positioned to make a killing on their predatory investments while the people of Puerto Rico, still reeling from hurricane Maria and ongoing earthquakes, are going to continue to face austerity measures and crippling sales taxes for decades to come.”
Puerto Rico Gov. Wanda Vázquez opposes the agreement because it would not prevent pension cuts and her government has filed a motion in court to challenge it. Vasquez is a member of the pro-statehood New Progressive Party, which has a majority in both legislative chambers.
As the Democrats running for president seek support from Puerto Ricans, both those who will vote in the island’s primary election on March 29 and those who may vote in the states, three of them—Joe Biden, Amy Klobuchar, and Pete Buttigieg—have taken large contributions from executives and senior employees of the firms, according to a Sludge review of Federal Election Commission records.
Biden, for example, has taken more than $20,000 in large contributions from employees of firms involved in this deal. His donors include Frank Brosens, the co-founder and owner of Taconic Capital Advisors, which owns at least $191 million worth of Cofina bonds; $2,000 from Clinton Biondo, managing partner at Puerto Rico bondholder Fir Tree Partners, and $2,800 from Kenneth Eberts, a partner and portfolio manager at Goldman Sachs Asset Management, the division of the Wall Street banking giant that specializes in so-called vulture investing in the distressed debt of places like Puerto Rico.
In a December 2019 opinion piece for the Orlando Sentinel, Biden criticized President Trump’s treatment of Puerto Rico and said that as president he would direct more federal support to the island. “We must rebuild the island, and rebuild trust — to make sure that Puerto Ricans have sound homes, schools and hospitals, real opportunities and a path to the middle class,” Biden wrote.
“Any time a candidate says they are with Puerto Rico but at the same time are receiving money from companies and hedge funds that are profiting from Puerto Rico, that shows either that they are not clear about how to support Puerto Rico or that they are not being forthright about their intentions,” Julio López Varona, co-director of community dignity campaigns with the Center for Popular Democracy told Sludge.
“What we hope that candidates that are talking about supporting PR and its recovery understand is, one, that cancellation of the debt has to be part of that, and two, that they can’t be getting money from the people that are making the recovery impossible,” López Varona said.
Pete Buttigieg, who is struggling to get support from non-white voters, recently released his “El Pueblo Unido” plan to drum up support among Latinos. The plan would offer political representation to Puerto Rico and establish a commission on disaster relief to focus on island and coastal regions including Puerto Rico and Florida.
But Buttigieg is also taking big bucks from executives of hedge funds that are looking to extract profit from Puerto Rico’s economic crisis under the recent deal. His donors include Michael Stern ($1,000), partner and investment manager at Stonehill Capital Management, a New York hedge fund that is party to the agreement; Brian Pennington ($2,800), director of risk and quantitative resources at Goldentree Asset Management, a top Puerto Rico bondholder; and Conor Barnstable ($2,800), partner at hedge fund Davidson Kempner Capital Management.
Another Buttigieg donor is Aristeia Capital partner Robert Lynch, who gave the maximum of $2,800. Lynch is listed as a bundler for Buttigieg, meaning that he collected at least $25,000 worth of checks for Buttigieg’s campaign. Buttigieg also has another bundler who is an executive as a Puerto Rican bondholder firm, though not one that is party to the recent deal. William Rahm, senior managing director at Centerbridge Partners, was among the more than 20 bundlers that the Buttigieg campaign omitted from its original disclosure, as The American Prospect reported. Centerbridge is one of the funds that attempted to conceal its Puerto Rico debt holdings through shell companies.
Klobuchar, who visited Puerto Rican leaders in May 2019 to, in her words, “listen to their needs, and find ways to help,” has also received large contributions from companies that stand to benefit from the deal, including from executives of Taconic Capital, Goldman Sachs Asset Management, and Davidson Kempner. Klobuchar’s total haul from executives from firms signing the agreements is $14,900.
Executives at other hedge funds invested in Puerto Rican debt that were not part of the Feb. 9 deal have made donations to the candidates, as The American Prospect has outlined. These other funds, including Baupost Group, BlueMountain Capital, and Oaktree Capital, are likely to negotiate a separate deal to secure profitable returns from Puerto Rico.
Candidates Elizabeth Warren and Bernie Sanders last year refunded contributions from executives at Taconic Capital Cand BlueMountain Capital after activists raised questions about them. Sludge asked the Biden, Buttigieg and Klobuchar campaigns if they oppose the new agreement between the bondholders and the oversight board and whether they would return the bondholders’ contributions, but none responded.
Last year, a book by journalist Ryan Grim published revelations on how DNC Chair Tom Perez edged out a victory over his progressive challenger Keith Ellison after a backroom deal for the DNC to support Puerto Rico statehood secured the votes of Puerto Rico’s five DNC delegates. Perez’s win was sealed with a shift in support to his camp by the New York DNC delegation, which has ties to Puerto Rico bondholders that have contributed heavily to the campaign of Democratic Gov. Andrew Cuomo.
Read more 2020 coverage from Sludge:
