Inside the Billion-Dollar
Battle for Puerto Rico’s Future
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 government afloat.
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’ salaries.
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.
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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.”
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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.
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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.
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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.
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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.
Supporters of the bankruptcy bill clung to the hope that congressional leaders would insert a provision in its end-of-year spending bill allowing Puerto Rico to restructure at least some of its debt. But when the bill was unveiled on Tuesday, it contained no such language.
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 of March.
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.
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11-20-2015, 05:29 PM
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