Puerto Rican Crisis: A Product of US Hedge Funds

Right now Puerto Rico is facing a terrible economic crisis. The country is in $72 billion dollars in debt.[1] To make matters worse, they’ve already defaulted on millions of dollars in loan payments. In order to pay back this debt, they’ve enacted austerity measures for the last several years. Poverty is currently standing at 46%.[2] Unemployment is around 12%.[3] In addition, tens of thousands of public employees have been laid off due to budget cuts.[4] 10% of schools have also been closed.[5] As a result, increasing numbers of Puerto Ricans are leaving the island for the United States. This lack of population is also having a negative effect on the tax base.

What’s behind this crisis? Why isn’t Puerto Rico recovering? Why is there so much unrest in the country? The answer can be found in the role played by US hedge funds.

Hedge funds are typically understood as, “aggressive risk-seeking investment funds that typically use leverage to magnify returns.”This leverage is borrowing money to use for investment porpoises.  Their primary focus is on high returns with variable amounts, but usually high risk. Different styles of investment strategies can be used by the funds. Different types allow investors to use a particular strategy that they like to use. Essentially, it provides a market choice in strategic investment. The hedge fund format allows for a great deal of flexibility. Investors are given a choice in a wide range of investment attributes.

Hedge funds require a great deal of money in order to operate. This places them outside the grasp of middle-class individuals. They typically require initial capital investments in the millions or billions. Because of this, the wealth is concentrated near the very top of the economic ladder, most commonly known as “the 99%.”

The hedge funds used to exploit Puerto Rico are known as distressed securities. This means they purchase debt and the equity of a company that is in, or near a state of bankruptcy. It’s typically seen as a good move as the investment means shifting the default, or risk of default to another investor. because of the distressed situation, the funds are not very liquid. This means the cash or profits are not available quickly. So investors engage in such hedge funds for a long-term investment.

Investors take on this long-term, high-risk debt because it means a greater reward if it pans out. The Higher the risk, higher the return. Distressed debt sells at a lower percentage of its par value, meaning the stock value in the corporate charter. If a stock was offered at $10 when it was first publicly listed, in the distressed state it may be obtained for only $3. If the investment manages to survive the distressing time, that same stock can be sold for its original issuing value, or higher if possible. The returns on hedge funds on distressed debt are astronomically high because the risk is so great.

The situation in Puerto Rico involves investing in distressed firms. This involves working on behalf of the company to extend it the necessary credit in order for it to keep functioning. This usually occurs in the form of bond creation. Essentially the firm that is struggling to survive is given the infusion of cash necessary to get it back into profitable operation again. This risk of default is usually spread over several hedge fund companies to avoid a total liability by one fund. The one true advantage in case of a total bankruptcy is the ownership of its equity. This equity is used to pay off the debt owned, which does not necessarily include a profit.

The best example of this is the hedge fund investments in the Puerto Rico Electric Power Authority (PREPA). As the debt crisis in Puerto Rico proceeded, the profits of the state energy company began to dwindle. Given the necessity of power in any modern society, the public company was prepared to take on a hedge fund from a company called Blue Mountain Capital management. Blue Mountain infused a ton of cash into the state energy company in the hopes that it will recover along with the rest of the economy. As the national debt crisis worsened, PREPA began to fail again. They attempted to restructure their debt in order to make it more affordable next to operational costs. Blue Mountain instead took them to court in order to force them to pay them back before engaging in any spending to continue operations. What PREPA wanted to do was make smaller payments so that they could carry on operations with a larger (and needed) budget. The lawsuit stopped them from doing that and instead demanded more payments per month to Blue Mountain. This has hindered the ability of PREPA to function. It’s essentially squeezing them harder for more profits.

This same practice is being done to the public health system. As tax revenues are falling due to a lack of a tax base (high unemployment) they also turned to investors to make up the shortfall. Vulture hedge funds have sunk their claws into the health care as well. Currently, they are demanding a 244% profit before the Puerto Rican government is allowed to fund public health services. This is placing an incredible strain on the system itself which is consistently failing people in need. Mass amounts of people are going without the care they need. Hospitals are shutting down whole wings because they don’t have the operational budget for them. It has even been reported that a doctor a day is being lost to this crisis.[6] As of now, people are dying in the streets because the health care needed is literally unavailable.

The worst part of all this is that none of it is necessary, even forms a capitalist perspective. Blue Mountain and other hedge funds can receive $15 billion in profits no matter how long it takes to pay that money back. But, they’re demanding the money as soon as possible.  Even to the detriment of the ability to pay the money or any cost to human life. They’re buying up debt at 29¢ on the dollar and demanding 2.5 times that in returns.

The global capitalist system is literally murdering people in Puerto Rico for the profits of Wall Street. This devastation of the public health system comes at a time when the Zika Virus is causing havoc among the population.[7] The essential services need to deal with it are being cut as hedge funds are trying to squeeze more blood out of a system in crisis. On no grounds can anyone claim that capitalism is a humane and just system. It is time to place it where it belongs – in the dustbin of history.


Sources:

[1] “How Puerto Rico Debt Is Grappling With a Debt Crisis”, The New York Times

[2] “Puerto Rico Economy Worsens With Crisis”, Most Anywhere You Look, Bloomburg
http://www.bloomberg.com/politics/articles/2016-04-25/puerto-rico-economy-worsens-with-crisis-most-anywhere-you-look

[3] “Here’s why Puerto Rico’s broke”, CNBC US Economy
http://www.cnbc.com/2015/08/04/heres-why-puerto-ricos-broke.html

[4] “Fear and uncertainty after government layoffs in Puerto Rico”, CNN
http://www.cnn.com/2009/US/10/22/puerto.rico.economy/index.html?_s=PM:US

[5] “Puerto Rico’s School Crisis”, The Progressive
http://www.progressive.org/news/2015/11/188428/puerto-ricos-school-crisis

[6] “Puerto Rico is losing a doctor a day”, CNN Money
http://money.cnn.com/2016/04/13/investing/puerto-rico-debt-medicare/

[7] “Zika Cases in Puerto Rico Are Skyrocketing”, The New York Times
http://www.nytimes.com/2016/07/31/health/zika-virus-puerto-rico.html

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