Politics

Vulture Hedge Funds, The Race For 2016, And The Uncertain Future Of Puerto Rico

CREDIT: Dylan Petrohilos/ThinkProgress

When Democratic presidential candidate Hillary Clinton arrives in Puerto Rico on Friday, she will call on Congress to grant the deeply-indebted island the right to declare bankruptcy — which U.S. states and cities already have. “We’re not talking about a bailout, we’re talking about a fair shot at success,” Clinton said earlier this year. “Congress and the Obama Administration need to partner with Puerto Rico by providing real support and tools so that Puerto Rico can do the hard work it will take to get on a path toward stability and prosperity.”

This stance has earned Clinton quite a bit of financial and political support from Puerto Ricans on the island and the mainland — including hundreds of thousands of dollars in campaign and super PAC donations and endorsements from prominent local officials.

Former Florida Governor and Republican presidential candidate Jeb Bush, like Clinton, has publicly supported the island’s right to declare bankruptcy, saying during an April visit to San Juan, “Puerto Rico should be given the same rights as the states. In order for Puerto Rico to eventually become a state, it must begin by being treated as a state.” Both say it will be nearly impossible for the island to tackle its $72 billion debt without such a tool.

But as these two prominent candidates lament the debt crisis and call for its resolution through bankruptcy, a ThinkProgress analysis of federal campaign finance documents found they have both benefited from honorarium fees, donations to their super PACs, and contributions to their campaigns from the executives of Puerto Rico’s hedge funds creditors — investment funds which contributed to and are profiting from the island’s financial crisis and inability to declare bankruptcy.

Hedge fund executives with significant Puerto Rican holdings — which stand to lose billions if the Commonwealth declares bankruptcy — have contributed more than half a million dollars to Clinton’s bid, and more than a million dollars to Bush and his “Right to Rise” super PAC.

Hedging Their Bets

U.S. hedge funds have a long tradition of making major donations to the campaigns of Democrats and Republicans alike, and have spent big on lobbying in recent years to defeat regulations and taxes that would have impacted their bottom line.

This year, hedge fund manager Paul Tudor Jones gave Jeb Bush’s “Right to Rise” super PAC, which works closely with his campaign but is technically independent, at least $25,000. It received $500,000 from hedge fund manager Dan Loeb, $250,000 from hedge fund manager David Tepper, and $50,000 from hedge fund manager John Paulson. Leon Black, the head of Apollo Global Management, gave Bush’s super PAC $100,000 and his hedge fund paid Bush himself $42,500 for a speech in May, according to his personal financial disclosure report.

Bush also has as much as $615,000 personally invested in two different hedge funds connected to the Puerto Rican crisis, Fortress Investment Group and Oppenheimer, which earned him up to $2,500 2014, according to his financial disclosure.

Hillary Clinton’s campaign, meanwhile, has received the legal maximum donation of $2,700 from bankers at Fortress Investment Group and four-figure contributions from bankers at Perry Capital, Blue Mountain Capital, and Angelo, Gordon & Co., according to Federal Election Commission filings.

A banker with Apollo Global Management also donated the legal limit to Clinton, and that hedge fund paid her $250,000 for a speech in May, according to her personal finance disclosure.

All of these hedge funds have been deeply involved in the Puerto Rican debt crisis. Several of them, including Blue Mountain Capital, the Managed Funds Association, and Angelo, Gordon & Co., have spent big this year lobbying Congress not to give the island bankruptcy protections.

For example: Marathon Asset Management, whose banker Richard Ronzetti gave $30,000 to Bush’s super PAC, spent at least $10,000 this year alone on four lobbyists. And Blue Mountain Capital, whose managing partner James Staley is a Clinton donor, has spent more than six figures lobbying Congress against the bankruptcy bill.

At the same time, a group of 34 hedge funds presented reports to the Puerto Rican government saying that instead of declaring bankruptcy, they should implement a regime of austerity that eliminates the minimum wage, sells off public buildings and assets, lays off teachers and shutters schools, and cuts workers’ vacation and benefits.

In proposed deals with Puerto Rico’s indebted water, sewer, and electric companies, the banker bond holders have tentatively agreed to an extension on their multi-billion dollar loans, on the condition that they get between a 4 and 10 percent interest rate. Some of these charges will be passed on to Puerto Rican citizens, who will have to pay more for these basic utilities, which essentially hold a monopoly on the island. Residents already pay two to three times what mainland U.S. residents pay for electricity, even though a far higher percentage of people are unemployed and living in poverty. Puerto Ricans also already pay a higher sales tax than any U.S. state, rising from 7 percent to 11.5 percent this July.

“The bondholders are interested in getting as much as possible from the corporation even if that includes a significant increase in electricity rates,” Puerto Rican economist Vicente Feliciano told ThinkProgress, “which is bad for the PR economy because it depresses tax revenues, and hurts tourist economy.”

The creditors are also demanding a hike in water rates, which already increased 60 percent in 2013, during one of the worst droughts in the island’s history, hitting its low-income residents especially hard. Other creditors are demanding a hike in the fuel tax.

Feliciano stressed that not all hedge funds are behaving equally badly. While some bought up the debt for pennies on the dollar, others like Oppenheimer paid full price, and are thus trying more to recover their funds than make a killer profit. But the track record of some of the hedge funds suggests a more predatory nature. Third Point, Fortress, and some of the other funds donating to Bush and Clinton were involved in buying up Argentina’s debt during the country’s economic crisis — reaping up to a 1300 percent profit as the nation struggled. Others involved in Puerto Rico have profited from the debt crises in Greece and Detroit.

“These guys play hard ball and are willing to do what they need to to get their money,” said Michael Kink with the Strong Economy For All Coalition, a New York-based group advocating for Puerto Rico. “They could make hundreds of millions, billions of dollars. The exploitative speculative investors are not going to change the way they do business, so it’s up to President Hillary or President Jeb or whoever we get to show the American people that they can look out for regular working people and families.”

Dollars And Votes

Because Puerto Rico is a commonwealth, not a state, its residents can vote in presidential primaries but not general elections. Still, the trips Clinton, Bush, former Maryland Gov. Martin O’Malley (D) and other candidates have made to the island this year show the political importance of not only winning over the island’s party delegates but appealing also to the five million voters in the Puerto Rican diaspora, which holds major political power Florida, New York, and Chicago.

In testament to that importance, both Sen. Marco Rubio (R-FL) and Gov. Andrew Cuomo (D-NY) will also visit the island this week. Rubio announced this week that he does not support granting bankruptcy protections to help solve island’s debt crisis, calling it an unrealistic “silver bullet solution.” But he also blasted the “scores of new tax increases” that the government is using to try to pay down the debt. Rubio has not received much in the way of donations from the hedge funds in question. Other Republican presidential candidates, including Wisconsin Gov. Scott Walker, former Texas Gov. Rick Perry, and former Hewlett-Packard CEO Carly Fiorina have received donations from the hedge funds, but have not yet made the Puerto Rican debt crisis a part of their campaign.

Cuomo, on the other hand, has received at least $1,279,635 from 47 donors associated with 17 vulture hedge funds that have purchased and speculated on Puerto Rico’s debt — money that New York activists are demanding he return. Like Clinton, Cuomo’s close ties to Wall Street are no surprise for a New York politician.

But conflict between the Hillary Clinton and Jeb Bush’s public statements and their cozy relationships with the hedge funds is raising eyebrows. Kink, who just released a report detailing hedge fund involvement in Puerto Rico’s crisis, told ThinkProgress the candidates owe voters an explanation.

“Puerto Ricans and mainland voters need to demand answers from the candidates about the extent to which they’re influenced by this money,” he said. “If they’re for bankruptcy rights, they need to explain how they’ll get it through a Congress that doesn’t seem to care about regular people but cares a lot about hedge fund billionaires.”