House Natural Resources Committee Democratic Report Finds Hedge Funds Manipulating Puerto Rican Crisis, Hurting Working Families

Tucson, Ariz. – The House Natural Resources Committee Democratic staff, led by Ranking Member Raúl M. Grijalva, released a report today examining how certain hedge funds are damaging the Puerto Rican economy in the midst of the territory’s ongoing financial crisis. As the report makes clear, some hedge funds have spent the past several years buying Puerto Rico bonds because their well-known potential for default meant higher potential profits. Those same funds now are disingenuously calling for deep social service cuts for Puerto Rican families as a means of increasing the payments they receive.

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.

A bill from Puerto Rico Resident Commissioner Pedro Pierluisi, HR 870, would extend Chapter 9 to the territory. It enjoys broad support among the vast majority of Puerto Rico’s creditors and other stakeholders in the financial community. The so-called Ad Hoc group made up of 32 hedge funds endorsed the bill in February of this year, putting the handful of hedge funds that oppose it in the extreme minority. FCO Advisors, a respected investment firm, surveyed approximately two dozen financial institutions, investment advisory firms, mutual funds, hedge funds and others market participants earlier this year and found that “there is nearly unanimous agreement that application of the Chapter 9 regime to Puerto Rico’s agencies, instrumentalities and political subdivisions is a reasonable approach and would not impair the normal functioning of the marketplace.” Fitch Ratings issued a special comment, entitled “Chapter 9 Extension Would Be a Positive for Puerto Rico,” stating that HR 870 “would be a positive and important development for Puerto Rico and holders of debt of its public utilities and public instrumentalities.”

Despite this widespread support, some hedge funds continue to oppose Chapter 9 protection for Puerto Rico. Other highlights of the report’s findings include:

- Financial rating agencies had warned since at least 2012 that certain Puerto Rico municipal bonds faced a high likelihood of default.
- Despite these warnings, some hedge funds continued to buy the bonds in high volume based on their assessment that they would ultimately be repaid at a higher rate than experts predicted.
- After losing that bet, rather than accepting their losses, some hedge funds began pressuring the Puerto Rican government to cut social services in favor of higher bond repayments.
- Puerto Rico’s economy, with an approximately 12 percent unemployment rate, cannot sustain the kinds of economic demands some hedge funds are now making.
- After intense pressure from some investors, Puerto Rico cut funding for education and other important programs in this year’s budget from 2015 levels.
- By filing suit against Puerto Rico’s attempt to establish an orderly local bankruptcy process, and by lobbying against federal legislation to extend Chapter 9 to the territory, a handful of firms have made it harder for Puerto Rican institutions to restructure their debts more sustainably.

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