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Home#ForeclosurepediaNationFEMA's Puerto Rican Problem: Vulture Hedge Funds and NAMFS

FEMA’s Puerto Rican Problem: Vulture Hedge Funds and NAMFS

Puerto Rico was ceded to the United States after the Spanish-American War in 1898. And the reality is that the last, borderline democracy that the Nation has seen was probably in 1809. Napoleon had taken over Madrid and axed King Ferdinand VII and appointed Joseph, his brother, King of Spain. During that process, Ramón Power y Giralt, a Puerto Rican, was elected as the island’s representative. He was the first and last Puerto Rican to ever participate in democracy. With that said, Giralt helped to write the Constitution of 1812. After Waterloo, though, any hope of being anything other than a Slave State, came to an end. The rest, as we say, was history — kinda.

The Jones Act. In 1920, Congress passed the Jones Act. The Jones Act requires shipping between U.S. states or possessions only be carried by US vessels with American crews. If you want to ensure default on debt, the Jones Act is the way to go especially when you are dealing with a faux sovereign nation. A University of Puerto Rico study pegs the costs at half a billion dollars a year. And whom gets that half a billion? You got it, US firms.

Enter the Vulture Hedge Funds (VHF). VHF buy up sovereign debt, to what many may argue, the detriment of all involved and most assuredly the People themselves. Firms like ML Capital, a subsidiary of Elliot Management, Aurelius Capital Management, Dart Management, Blue Angel Capital, Bracebridge Capital, Olifant Fund, and Montreux Partners are all involved and most infamously remembered for buying the Argentine defaulted bonds for pennies on the dollar. And it was that Argentine purchase and the legal ramifications which unfolded in — wait for it — sovereign, US Federal Courts, that laid the groundwork for destroying Puerto Rico long before Hurricanes #Irma and #Maria were ever even a twinkle in the meteorological eye.

The trigger for the crisis in Argentina was a run on the banking system as people realized that there were not enough dollars in the system to cover all the deposits. As the run intensified, the Argentine government was forced to introduce a so-called “fence” to control the outflow of deposits. Under this system, people could only transfer funds within the banking system but they were not allowed to get cash, except in small amounts. This measure resulted in a monetary crunch and led to a collapse of economic activity—especially in the informal sector which mainly works on cash — and to widespread social unrest.

Sounding familiar? The only way to do business in Puerto Rico, right now, is with cash.

That wasn’t the part of the story, though, that was important. Here is how the NY Times put it,

In late 2001, Argentina defaulted on $132 billion in loans during its disastrous depression. Gross domestic product dropped by 28 percent, 57.5 percent of Argentines were living in poverty, and the unemployment rate skyrocketed to above 20 percent, leading to riots and clashes that resulted in 39 deaths.

Unable to pay its creditors, Argentina restructured its debt in two rounds of negotiations. The package discounted the bonds by two-thirds but provided a mechanism for more payments when the country’s economy recovered, which it did. A vast majority of the bondholders — 93 percent — accepted the deal.

The saga of how VHF entities began a pillaging tour, which looked much like Blackbeard arriving on Wall Street, culminated in a 2012 ruling by Judge Thomas Griesa of the United States District Court for the Southern District of New York. VHF’s sued Argentina and Griesa ruled that Argentina had to cough up the cash, at full value — $4.65 Billion. Some of the Returns on Investment (RoI) hit 1,500 percent when combined with an interest rate of 9 percent mandatory under New York law. To rub salt in the wounds, Griesa also forced Argentina to pay the VHF’s in full, before anyone else was allowed to come to the trough.

Argentina became the poster child of the pornography which vulture hedge funds have become. It was like a shoot entitled, VHF Does The World, except the World was the one getting financially gangbanged.

More often than not, sovereign debt restructurings does absolutely nothing to restore economic growth. For governments in a desperate situations, VHFs are often the only end of the road options available. Many will imply that situations like these are moral hazards which refers to the idea that allowing countries to renegotiate and lower their debts only reinforces the malfeasance and behavior that put them in debt from the beginning. In the case of Puerto Rico, the irony is that the moral hazard was reversed by rewarding investors for making small bets and reaping huge rewards. Even more sickening, as you will continue to read, is the fact that the United States set Puerto Rico up to fail, brought in the VHFs to make a killing, and then left Puerto Ricans to die in the streets.

Puerto Rico attempted to convince the US to extend the bankruptcy law to include itself, but it fell upon deaf ears. Not surprising, as the VHFs have lined the pockets of countless Democrats and Republicans to ensure that Puerto Rico remained a Slave Colony whose only purpose was to provide a cash cow to the VHFs and a bombing range for the US Navy in Vieques.  Oppenheimer Funds and Franklin Templeton Investments landed a final nail in the Slave Colony’s coffin when the Federal Court in Puerto Rico and the US Court of Appeals for the First Circuit declared that no way in hell was Puerto Rico going to be able to file bankruptcy. They called it — and wait for this — unconstitutional.

It is a bitter irony. The US won Puerto Rico as a reward for kicking Spain’s ass over a century ago. This is the same Spain that is kicking the shit out of their citizens in the Catalonia Region for even daring to vote for freedom! Passed from one Master to another, Puerto Ricans have been screwed since the start. Puerto Rico’s Electric Power Authority (PREPA) is $9 billion in debt and missed an interest payment in July. Today, post Hurricanes #Irma and #Maria, the infrastructure looks like an excerpt from Iraq in 2003. And while federal agencies including FEMA, the Environmental Protection Agency, and the Department of Energy are all gathered round attempting to put Humpty Dumpty back together again, it isn’t simply to turn on the air conditioning. You see, financial institutions are missing out on boatloads of revenue because Puerto Rico is now a Cash Only transaction environment.

Pirates of the Caribbean isn’t simply a Johnny Depp movie. When the Puerto Rico Fiscal Control Board (FCB) was put together, after Congress became involved in Puerto Rico’s debt crisis earlier this year, José Ramon Gonzalez and Carlos Garcia were placed on it.

Before they were appointed to the control board, Gonzalez and Garcia moved between top positions in Puerto Rico’s Government Development Bank (GDB), which issues the island’s government bonds, and Banco Santander, the Spanish-owned mega-bank that was buying and structuring the vast majority of those same obligations.

Gonzalez and Garcia are front men for Santander. And like all movies, including the financial porn gangbang where Puerto Rico plays the lead role, Gonzalez and Garcia were getting the biggest bang for the buck. In fact, according to a recently released report entitled, Pirates of the Caribbean, a 2009 bond issue that Santander underwrote netted Puerto Rico $139 million, but required it to pay back $730 million ― five times the value of the loan ― according to the report.

Gonzalez, who had been president of the GDB from 1986 to 1989, became head of Santander Securities, the arm of the bank that underwrote Puerto Rican debt, in 1996. In 2002, he moved up to CEO of Santander’s Puerto Rican holding company, a job he held until 2008.

Garcia similarly began working in Santander’s Puerto Rican operations in the late 1990s and held a number of leadership roles. He left the bank in 2009 to become president of the GDB and returned to Santander in 2011 for another top executive job.

Between 2010 and 2015, Puerto Rico lost nearly seven percent of its population. That means fewer people to pay the debt, at the end of the day. Almost half of Puerto Ricans live in poverty, 37% of children live in extreme poverty, and unemployment is over 12%. Six hundred of the island’s 1,400 schools are expected to be closed in the next few years. Hospitals are struggling to staff operations and pay utility bills, and over a quarter of the population is expected to be infected with the Zika virus by the end of 2016. These statistics were before Hurricanes #Irma and #Maria ever made landfall.

During the administration of Luis Fortuño, Puerto Rico’s governor from 2009 until 2012, Carlos Garcia and a group of former Santander executives were appointed to run the GDB and instituted a massive bond issuance program that lies at the root of the solvency crisis facing Puerto Rico today. This group also facilitated the creation and distribution of bond deals that contained features such as capital appreciation bonds and interest rate swaps that some experts have termed “predatory” and which Santander profited from as an underwriter and broker-dealer.

When looking at the debt issued where Santander played an underwriting role it came in at around $61.2 Billion. That figure is nearly the ENTIRETY of the Commonwealth’s total debt of more than $70 billion. More than $1 Billion went to fees paid to Santander and other banks. Read — Gonzalez and Garcia lined their pockets in such a manner worthy of having them hung on a flagpole, in San Juan, and beaten like a piñata.

Santander helped underwrite a bond issue in 2011 to raise money to pay a $400 million interest rate swap termination, which could have been used to fund healthcare or infrastructure. In another example, Santander and other banks earned at least $35.7 million in underwriting fees in three Employee Retirement System (ERS) debt deals worth $2.9 billion that used employers’ contributions as collateral, virtually unheard of for public pension funds. This debt added to the pension fund’s liability and it is forecasted to run out of money in two years.

Puerto Rico is the largest unincorporated territory in the U.S. subject to federal law, yet citizens lack full voting rights and democratic representation in Congress.

Where did Puerto Rico’s debt crisis originate? Well, there are many reasons, including the axing of IRS Section 936. And how did that turn out? Glad you asked,

This crisis is the culmination of decades of ill-advised public policy – both in San Juan and in Washington – coupled with a persistent stagnating economy, seemingly unlimited access to easy credit, and a market willing to lend.” — GDB President Melba Acosta-Febo

It wasn’t just Santander, though, whom raped the Puerto Ricans. These included global banks such as Citigroup, Goldman Sachs, and Merrill Lynch, but also local banks such as Popular and Oriental. Everyone was in on the gangbang and Washington stood by collecting the lobbying fees like pimps at the whorehouse. And by 2009, Garcia was moving hot and heavy, like the financial fluffer this rat fink is, to create new and questionable financial offerings.

In order to maintain Puerto Rico’s credit ratings, Garcia relied on issuance of a new category of municipal debt, secured by regressive Puerto Rican sales and use tax receipts. These “safe” bonds, known by their Spanish language acronym, COFINA, were issued mainly to refund outstanding interest and principal on previously issued government debt, and also provide deficit financing for the Commonwealth. The legality of COFINA as a separate governmental structure with a dedicated revenue stream to exclusively to pay bondholders has never been determined by a court, although it is the subject of an ongoing federal lawsuit between rival groups of COFINA and General Obligation (GO) bondholders.

Enter Law 7. In March, 2009, as austerity was hitting full swing, Garcia’s GDB began issuing debt — without considering whether it would actually save Puerto Rico money! Debt deals began to be made to simply cover the interest and all of this with king’s ransoms in payments to Santander, Juan Carlos Batlle, and Garcia. Today, those bonds have been downgraded to Junk and are not even worth the paper they are written upon.

When the recession hit Puerto Rico, the underfunded Employee Retirement System (ERS) pension plan issued its own bonds at the direction of the governor, Acevedo Vila, involving Santander and other banks. In 2008 Santander helped underwrite three bond issues using employer contributions as collateral — virtually unheard of for a public pension plan.

The ERS deals allowed pension holders to hold the debt and bondholders to be paid before those owed their pensions! In fact, ERS and Puerto Rico’s Teachers’ Retirement System, covering 330,000 workers and retirees, have liabilities totaling $43.2 billion, while their assets are worth $1.8 billion — a 96% shortfall, reportedly the largest ever for a U.S. state pension.

The financial rape of Puerto Rico was a premeditated slaughter. And by the end of 2012, Banco Santander along with Gonzalez and Garcia, had financially fisted every man, woman, and child in Puerto Rico. VHF’s and their predatory behavior destroys countries and their population, but they also threaten the entire world! In 2014, the United Nations began pushing reforms, but both the United States and the UK, the two largest Nations with the highests concentration of VHFs, did not support the process.

After WWII, Puerto Rico began specializing in production for export which was predominately financed and controlled by US firms. The flipside of this has been that Puerto Rico began importing most of their consumer goods needed. In essence, this has created a typical colonial economy. As an example, Puerto Rico imports more than 85% of their food, today. To really put this into perspective, around $35 Billion leaves every year, lining the VHF pockets. This is around 35% of Puerto Rico’s Gross Domestic Product. Fact of the matter is that Puerto Rico has never been able to provide sufficient employment for its workforce. At present, Puerto Rico has a 40% labor participation rate. The official unemployment rate pre #Irma and #Maria, was around 14%. Puerto Rico’s per capita income is a third of the U.S. figure and a half the per capita income of the poorest state in the United States! Around 45% of the people in Puerto Rico live under the poverty level. The corresponding figure in the United States is 15%.

Puerto Rico is facing one of the greatest financial crises of our time, where the island is beyond the point of bankruptcy after accumulating $72 billion in debt, more than its Gross National Product (GNP). The island is home to 3.5 million residents and the homeland of roughly 5 million Puerto Ricans in the diaspora who are watching intently as the island tries to prevent its nation’s collapse. The debt is not only unpayable, as Governor Alejandro Garcia Padilla declared in 2015; it is also arguably the result of unscrupulous business practices largely on the part of hedge funds who bought junk-rated municipal bonds at extremely low prices and then charged excessively high interest rates.

The jig may be up, though. The Berkeley Journal of International Law has a great paper from 2012 entitled, No Complicity Liability for Funding Gross Human Rights Violation, and has a great statement,

The doctrine of odious debt argues that debt accumulated by an odious regime that burdens, rather than benefits, the people of that nation should not be repaid.

This is the first part in a multi-part series on Puerto Rico. If you are a resident of Puerto Rico, Foreclosurepedia would love to interview you with respect to your treatment by the United States before, during, and after Hurricanes #Irma and #Maria.

COVID Interview With Industry Veteran

Paul Williams
Linux addict buried deep in the mountains of East Tennessee.
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