A report from the Democratic staff of the House Committee on Natural Resources examines the role of hedge funds in Puerto Rico’s financial crisis, concluding that “certain hedge funds are attempting to rewrite recent financial and political history in order to capitalize on the island’s financial difficulties at the expense of the residents of Puerto Rico.”
The report – “Profit at Any Cost: How Some Hedge Funds Win by Making Sure Puerto Rico Loses” – was released September 4, 2015 under the direction of Committee Ranking Member Raúl M. Grijalva (D-AZ).
An accompanying press release explains that the report “shows how certain hedge funds are using extraordinary leverage to force Puerto Rico into enacting deep budget cuts and mandating higher bond repayments even as the territory faces 12 percent unemployment and an uncertain economic future. Puerto Rico’s municipal entities are not eligible for federal Chapter 9 bankruptcy protection, and some hedge funds have spent millions of dollars lobbying against efforts to extend that protection to the territory. Hedge funds with extensive Puerto Rico investments stand to profit more if the territory’s municipal institutions cannot follow an orderly Chapter 9 bankruptcy proceeding.”
The House Judiciary Committee held a hearing on federal legislation (H.R. 870/Pierluisi (D-PR)) to examine extending bankruptcy protection to Puerto Rico under Chapter 9 of the U.S. Bankruptcy Code, but the proposal has not progressed through the House of Representatives. A Senate version of the bill (S. 1774/Blumenthal (D-CT)) was introduced on July 15, 2015 and has fourteen Democratic cosponsors.
The report explains how various Puerto Rican government-issued bonds were downgraded to junk or near-junk status over the course of several years leading up to Governor Garcia Padilla’s June announcement that Puerto Rico’s bonds are “unpayable,” and, during that time, certain hedge funds bought these risky bonds at reduced price. Those same funds now are, according to the report, “disingenuously calling for deep social service cuts for Puerto Rican families as a means of increasing the payments they receive.”
The Natural Resources Committee Democrats argue that the hedge funds that purchased Puerto Rican junk bonds knew of their risk and that “[r]ather than absorbing the occasional investment losses that are expected as a matter of course when assessments are wrong…these hedge funds are now working to pad their profits by cutting off relief options for families in the territory.” The report elaborates:
The unfortunate reality is that hedge funds that are heavily invested in Puerto Rico bonds will get higher returns if the government of Puerto Rico imposes dramatic budget cuts on its population and if the territory remains barred from Chapter 9 bankruptcy protection. Some hedge funds have taken aggressive action to prevent Puerto Rico municipalities from being able to declare bankruptcy, and have attempted to impose a radical agenda that will further harm Puerto Rico’s economy. They are now pushing teacher layoffs, pension cuts and other quality-of-life reductions for Puerto Ricans as the “solution” to the crisis in a self-serving attempt to enlarge their profits.
Review related documents:
September 2015 letter from Ranking Member Grijalva to Chairman Bishop (R-UT) requesting Natural Resources Committee hearing on the role hedge funds play in the Puerto Rico debt crisis.
PROMESA Amicus Brief from Rep. Grijalva (D-AZ) and Rep. Velazquez (D-NY) arguing that PROMESA did not intend for Puerto Rico’s Creditors to have special protections that other municipal creditors do not have.