Investigation: For American Hedge Funds, Puerto Rican Lives Don’t Matter

The Spanish discovered and ruled Puerto Rico from 1493 until 1898 and made good money as overlords. However, it took the American jackboot to really ratchet up the exploitation level.


[See note at bottom about this story, which is published here for the first time. With your financial support, it could be expanded and updated, or even turned into a short book.]

One evening in February 2019, a local political activist picked me up in San Juan and gave me a tour of the city before heading out to the Afro-Puerto Rican town of Loiza, which lies about twelve miles east. Loiza was settled by Yoruba slaves, who the Spanish crown shipped to Puerto Rico to harvest sugar cane, and named for an indigenous female chief who was powerful when the conquistadors arrived. 

In short order the Spanish exterminated the Tainos, the main tribe living in Loiza and elsewhere on the island at the time of its “discovery.” Today, about two-thirds of Loiza’s 30,000 residents live below the poverty line. I’d wanted to see the town because I was looking into how Loiza, and Puerto Rico more broadly, had been destroyed by both natural and unnatural causes. The first category includes Hurricane Maria, which in late-2017 killed approximately 2,975 people — just a slight corrective revision upward from the original US government estimate of sixty-four. 

All photos by the author. This one was taken a few days after my 2019 visit to Loiza described in this section.

The unnatural cause category includes very prominently US hedge funds and their owners, including Stephen Schwarzman’s Blackstone Group, Boston-based Baupost Group, owned by Seth Klarman, who a few years ago declared himself a Democrat after years of lavishly underwriting the GOP; George Soros, who also invests significantly in some excellent Puerto Rican NGOs; and Marcus Brodsky, an alumni of Elliott Management, whose CEO Paul Singer bankrupted Argentina and effected regime change there while netting $2 billion.

The hedge funds’ primary mechanism for pillaging Puerto Rico was recklessly promoting, peddling and buying tens of billions of dollars worth of bonds issued by the local government. These bonds were all but ensured to implode and, as everyone involved in their buying and selling knew from the start, could never be paid back. This didn’t matter a bit to the hedge funds because they knew that when Puerto Rico inevitably defaulted, the industry’s friends in the US and Puerto Rican governments would make sure the bondholders were protected. The hedge funds even subverted the process that was supposed to restructure the island’s debt to an amount that could be afforded by the people of Puerto Rico, who make an average income of $19,343 per year.  

Meanwhile, financial giants like Wells Fargo, the Spanish bank Santander and Goldman Sachs — the former firm of Trump administration Treasury Secretary Seth Mnuchin, who at the time of my visit was seeking to squeeze every last drop of blood out of Puerto Ricans to make sure their government repaid its debt to American firms — made a killing every step of the way. They netted about $1 billion in fees alone for underwriting and packaging the bonds.

There was almost no traffic on a highway that narrows to two lanes as it approaches Loiza, other than for a few scattered cars that passed us at staggering speed. “I’m doing twenty-five in a forty,” the activist, who asked to remain anonymous and who I’ll call Angel, explained as a black SUV shot past us in a blur. “He’s got to be a drug runner.” 

Colombian drug gangs move a good deal of cocaine into the oceanside town via small speed boats, and from there it’s shipped onward to Miami. There are only a few US coast guard patrol boats and cops have no presence in Loiza so the drug trade is effectively unmonitored here and in much of Puerto Rico. Manote, thirty miles in the opposite direction of San Juan, used to be known as the Athens of Puerto Rico and the nation’s most famous poets lived there. Now it was controlled by drug runners on gas-powered scooters, Angel explained.

Angel had picked me up at the Dream Inn, a hotel in the bohemian Ocean Park neighborhood. It’s a gentrifying area with a lot of professionals but still mostly poor. The hotel sat just a few minutes walk from one section of a vast housing project named  Llorens, which has 140 buildings and about 20,000 residents, and is another drug trade center. It also neighbors Condado, the neighborhood of the uber rich and home to the Condado Vanderbilt, Puerto Rico’s first luxury hotel and designed in 1917 by Warren and Wetmore, the architectural firm that drew up Grand Central Terminal in New York.

Wealth and poverty, black and white, are routinely separated in San Juan by only a highway or a street. So, as I saw that night in Angel’s car, a restaurant-and-bar filled alley in tourist-saturated, cobblestoned Old San Juan, sits directly across from La Perla, a poor barrio that overlooks the ocean and that drug traffickers dominated until federal police raided and occupied it in 2011. 

Old San Juan.

We drove along Avenida Ponce de Leon and crossed the mile-long Teodoro Moscoso Bridge over the bay. The Mall of San Juan, perhaps the most gauche and pretentious in all Puerto Rico, sits at one end of the bridge. “There’s a Saks Fifth Avenue and a Kona Grill there,” Angel said as we drove by. “Who the fuck can afford that stuff?” 

We paid a toll of $3.50 to cross the bridge — a staggering sum on an island where average annual income per family is less than half what it is in Mississippi, the poorest US state, and where the local economy had been in recession since 2006. Every penny of that was collected and paid to hedge funds and other holders of Highway Authority bond debt.

We passed a sparkling, glass enclosed subway station, where a homeless man was passed out on the street out front. Unlike a scrapped and cheap train system that used to ring the entire island, the scandal-plagued subway — built by a well-connected US firm — has few stations and is prohibitively expensive so virtually no one uses it. We strolled along the Paseo de Diego and passed Mondo Bizarro, a comic book store that shut down after Hurricane Maria, and a closed up Art Deco branch of Banco Popular, the country’s largest and oldest bank.

Graffiti near El Boriqua. The Street of the Impoverished.

When we reached the sprawling neighborhood of Rio Piedras, Angel parked the car and we went for a short walk. When he was a kid, Angel would spend the day in this then-bustling neighborhood. Now it’s a dark, dangerous area, but still a lot of fun. Among its more popular bars is El Boriqua, which is packed until late with students from the nearby University of Puerto Rico. There’s a red star on the wall on the front of the bar and murals and graffiti all around it. One huge street painting shows a businessman falling over in front of a fighting cock, UPR’s mascot.

Graffiti near El Boriqua.

For dinner we stopped at Mi Casita Sea Food in Piñones, just a few miles from Loiza. Mi Casita is one of dozens of roadside shacks called Chinchorros and Lechoneras, which serve food and have music, dancing and pool tables. You could smell the ocean and hear merengue the second we got out of the car. Old San Juan was charming but with the restored colonial buildings and white tourists, we could have been anywhere in Latin America. Here at Mi Casita, just ten miles away, we were very definitely in a Caribbean town.

Angel and I sat at a wood picnic table with blue plastic seats. He ordered a huge skirt steak with grilled fish on top while I ate a mountain of octopus and rice washed down by a cold beer. “These Chinchorros on the weekend are like a pub-crawl,” he told me. “You get a drink, something to eat, then you cross the street and get a fried fritter and then you go on to the next place.”

People think that the manner by which hedge funds robbed Puerto Rico is too opaque and complex to follow, but it’s really not,  Angel explained. The hedge funds shroud it with the contracts and all the numbers, but in the end “it’s all really, really easy to understand,” he said.

So how did the robbery happen? 

By the mid-2000s, Angel explained, Puerto Rico was facing a monumental debt crisis thanks to all the tax breaks and incentives it had lavished on foreign firms operating on the island. While the firms made huge profit margins, their operations generated little revenue for the island’s treasury. This, indeed, was something that the Congressional Budget Office had noted as early as 1990

But then, an economic crisis hit Puerto Rico and was compounded by the 2008 banking crisis. There is a saying in Puerto Rico, “When the US sneezes, Puerto Rico catches a cold.” In this case, the US caught a cold and Puerto Rico came down with a massive decade long economic flu. Between 2008 and 2013 the government “solved” the problem by selling $3.5 billion worth of bonds — which provided a short-term fix by bringing in cash infusions but did nothing to address underlying problems — and with mass firings of public employees, including 20,000 employees in a single day in 2009.  

But it was not enough. In 2014, Fitch Group, Moody’s and Standard & Poor’s downgraded tens of billions of dollars worth of government-issued bonds to junk status. Swiftly American hedge funds and oligarchs, including Klarman, Schwarzman, Soros, Aurelius Management, Mason Capital Management, a New York hedge fund, swooped in like vultures to buy up the bonds. (For a full list of bondholders, click on this link from the invaluable group LittleSis.)

Hedge funds went on a new bond buying spree after Hurricane Maria when the price of these instruments plummeted. One of the best parts, for the funds, anyway, is that a 2016 Supreme Court decision written by Justice Clarence Thomas prevents Puerto Rico from seeking relief from creditors by filing  for bankruptcy. So unlike Argentina, Greece and other nations that were squeezed to bankruptcy by global banks and hedge funds, it can’t even beg for crumbs from the IMF or, like you or I when facing a cash crunch, negotiate loans from banks or payday lenders. It simply has to repay the money, or else.

Keep in mind that hedge funds bought Puerto Rican bonds through offshore vehicles in order to hide their purchases. Klarman’s Baupost, for example, snapped up its instruments  through ten Delaware-registered LLCs it named Decagon 1-10. Because of secrecy tactics used by Klarman and others, and because the US and Puerto Rican governments acted to keep buyers’ names confidential, it’s impossible to know exactly who owns all of Puerto Rico’s bonds, or how much they own individually. The only reason we have any information at all is that bondholders filed sued to get paid back as much as possible on the dollar and some ownership information was disclosed during the resulting litigation.

Angel emphasized that the bonds should never have been marketed in the first place given that Puerto Rico was already teetering on the edge of bankruptcy when they were issued. So why did the hedge funds buy them? Because, he explained, they carried high yields, were exempt from federal, state, and local taxes — or “triple tax exempt,” a term that makes a hedge fund man orgasm — and carried huge penalties for non-repayment.

The sum result of all this was that Puerto Rico owed bondholders $74 billion, roughly 70 percent of the island’s gross domestic product. However, the real debt was $124 billion if it was paid off over forty years, as was currently scheduled. Now hedge funds were seeking to force Puerto Rico to repay the bonds at face value. Already they had maneuvered to win a constitutional clause that obliges the island’s government — which truly is, to paraphrase Karl Marx, an executive committee for the bourgeoisie — to allocate to them all of an 11.5 percent sales tax for the next forty years. If there’s anything left after the hedge funds get paid off, the Puerto Rican government would be allowed to pay public employees and build roads, schools, health clinics and other such extravagances. 

In other words, Angel said, hedge funds bought Puerto Rican bonds knowing they were worth junk, but reckoned that when the time came to get paid off they would use their hold over the US government to force Puerto Rico to pay them something far closer to face value. They were right, of course, because the island is fundamentally controlled by the Financial Oversight And Management Board For Puerto Rico, which was created by congress in 2016 and is known by its Spanish acronym, PROMESA.

Hedge funds have retained a host of well-connected lobbying, public relations and dirty tricks outfits to assist them, including Washington, D.C.-based DCI Group, which is led and run by former government officials and congressional staffers. Their motto: “Where most see problems, we see opportunities.” Ryan Grillo runs DCI’s Puerto Rican operations from Washington, but frequently travels to the island, sources told me. He began his career working for former Senator Chuck Hagel and, reads his firm biography, “believes that facilitating successful outcomes for the private sector is key to bringing about increased living standards, creating new jobs and prosperity for the poor and middle class throughout the world.” 

A former hedge fund employee told me before that Hurricane Maria “was fucking Christmas” for hedge funds. “They all had a lot of money sunk into the electric agency, PREPA, and PREPA had infrastructure from the 1940s and 1950s,” he explained. “They didn’t want to pay to update the infrastructure. The hurricane gave them the best solution, which was to destroy the whole grid and privatize it. They got it rebuilt for free with US government and insurance money.” 

Angel told me that hedge funds and other bondholders should get back no more than four cents on the dollar of their holdings, but since US authorities would never accept such a low figure, local activists were prepared to go higher. “The debt was created illegally,” he said. “Sixteen cents is reasonable and fair.” 

After dinner, Angel and I got back in his car to make the short drive to Loiza. “Puerto Rico is going to be independent in 10 years, but it’s going to be like a used condom at that point,” he said when we were on the road. “The US will have used up everything by then.” 

Following Hurricane Maria, it took up to eight months for Puerto Rican communities to get back water, electric and cell phone service. Loiza was among the last to come back online and as we neared the town, I lost reception on my cell phone, which had worked fine in Piñones. “Loiza exists in a time warp,” Angel had explained on the ride out and now, as we drove into town, I understood exactly what he meant. 

The streets were dark and practically deserted. Every store and bar was closed. We passed a basketball court before dead-ending at a mango tree-laced swamp called El Bosque de Piñones. We turned around and went back the way we came. A black car with two young men lazily turned left in front of his car. 

There was nothing else to see. It was 9:30 p.m.

Door of women’s bathroom at gas station in Loiza. Picture taken a few days after my visit to the town described in this section.
A group of people interviewed at same gas station.

The Spanish discovered and ruled Puerto Rico from 1493 until 1898 and made good money as overlords. However, it took the American jackboot to really ratchet up the exploitation level. US rule came about when it stole Puerto Rico from Spain, a war advocated for by newspaper publisher William Randolph Hearst with the “Remember the Maine” campaign he launched as part of one of his periodic circulation wars with newspaper competitors. The staged bombing of the American battleship in Havana Harbor was all Hearst needed to prod William McKinley’s already eager administration to declare war on Spain, which ended with the US taking over all of Spain’s remaining New World possessions. Hence was born the modern era of Fake News. 

President McKinley turned the island  over to US sugar companies for management. The first governor, Charles Herbert Allen, served a year before resigning to take an executive position with Morgan Trust Company. While holding office, he helped create what eventually became Domino Sugar, the largest sugar syndicate in the world. Allen’s actions impoverished Puerto Ricans but were a goldmine for Morgan Trust and other Wall Street firms. Allen’s work amounts to “one of the most spectacular crimes of the 20th century,” the historian Nelson Denis has written

Sugar companies remained as the primary extractor of Puerto Rican blood, sweat and money until the early-1930s, when the arrival of light industry — much of it textiles and canned food for the American military occupiers — began to supplant them. The major companies paid slave wages and workers hated them with a red-hot passion. The barrios became hotbeds of Communist-led union organizing.

The island’s surging pro-independence Nationalist Party — it was not led by Communists but its discourse was nearly identical to that of the radical-led workers’ movements — reached its peak influence during this period. In 1932, workers unionized by the American Federation of Labor — this was prior to its merger with the Congress of Industrial Organizations — launched a national strike against the sugar companies. The workers detested Santiago Iglesias Pantine, a US citizen and supporter of statehood, and asked the new Nationalist Party leader, Pedro Albizu Campos, to lead the strike. 

An attorney, politician and World War I veteran, Albizu became the most popular and effective advocate for independence. In 1932, the year of the strike, he released to the press a letter written by Dr. Cornelius Rhoads of the Rockefeller Institute that appeared to show he had killed Puerto Rican patients as part of his medical research. “I can get a damn fine job here and am tempted to take it,” Rhoads wrote in the letter. “It would be ideal except for the Puerto Ricans. They are beyond doubt the dirtiest, laziest, most degenerate and thievish race of men ever inhabiting this sphere. It makes you sick to inhabit the same island with them…I have done my best to further the process of extermination by killing off 8 and transplanting cancer into several more.”

On April 3, 1936, a federal grand jury submitted an indictment against Albizu. To make a long story short, he was imprisoned on and off for decades for attempting to overthrow the US government in Puerto Rico. Albizu claimed that during his imprisonment he was the subject of human radiation experiments. American authorities dismissed the accusations and said Albizu was mentally ill, but other prisoners said his allegations were true. He died on April 21, 1965, soon after being pardoned. More than 75,000 people accompanied his body for burial in San Juan. Albizu is one of countless people, most unknown to history, who were directly or indirectly murdered by US authorities and their local servants due to their support for Puerto Rican independence.

By 1976, American factories in Puerto Rico were losing their competitive edge to cheaper overseas labor in Africa and Asia and elsewhere in latin America. That’s the year then-New Jersey Senator Bill Bradley slipped Section 936 into the IRS tax code, which gave vast financial incentives and tax breaks to multinational pharmaceutical firms that built factories in Puerto Rico. That created a huge industry in Puerto Rico, which didn’t benefit the locals much but was a boon to the drug lords. “A pharmaceutical company would develop a drug in its US research facilities and transfer the drug patent to its wholly owned subsidiary operating in Puerto Rico,” explained a 1992 report by the General Accounting Office. “The subsidiary would produce the patented drug and claim the income obtained from the drug sales as tax-free income.” For every dollar they paid a worker, the drug firms saved $2.67 in taxes.”

Congress put an end to Section 936 in 2005 and the drug industry slowly began flickering out. Less than a decade later, the hedge funds came swooping in. Puerto Rico is one of the United States’ “properties” in the Caribbean and it uses the island to make money, in ways that have changed since 1898 as capitalism has changed, Xiomara Caro-Díaz, project director of a Hurricane Maria relief fund, told me. “Hedge funds are the dominant players in this phase of capitalism and that’s why they have become the dominant players robbing Puerto Rico.”

As with sugar and other predecessor industries, hedge funds could not rob Puerto Rico’s people without the help of the local comprador class. These Puerto Ricans are part of the global 1 percent who carry passports issued by the Republic of Davos and are strangers in their own land.

Roberto Pagan, vice president of the local Service Employees International Union, and Manuel Natal, then a rare leftist in the House of Representatives, explained the foreign-domestic synergy to me during an interview at the local headquarters of the SEIU. “The key to the whole story,” Pagan said, “is the hedge funds’ infiltration and manipulation of the highest levels of government to favor their interests.”

Hedge funds, Natal explained, own somewhere between twenty and fifty percent of Puerto Rico’s debt. They are demanding highly favorable settlement terms and further austerity — for example, wage and service cuts, privatizations, utility rate hikes — to ensure they get paid. 

The funds have spent lavishly on campaign donations and lobbying the U.S. government in Washington, and exercised ruthless control over PROMESA, which has seven members appointed by the American president and one ex officio member designated by Puerto Rico’s governor. “The Board is tasked with working with the people and Government of Puerto Rico to create the necessary foundation for economic growth and to restore opportunity to the people of Puerto Rico,” says the group’s neo-Orwellian website. 

PROMESA has the power to make “binding policy choices” for Puerto Rico. Five of its seven members have direct ties to hedge funds and the two others have also been highly responsive to their desires. “PROMESA closes the loop,” Natal told me. “It was the perfect way to commit the perfect crime.” 

[Note: This is roughly the first third of a story I wrote in mid-2019, with support from the Intrepid News Fund, which pays for research for independent journalists working in Latin America and the Caribbean. For reasons too complicated to go into here, but which I don’t believe primarily involved the quality of the draft I submitted — to two media outlets, one which accepted it — the story was never published. Please check it out. This version is obviously outdated but the core thesis, namely that American hedge funds beggared Puerto Rico, with tragic consequences for the island’s people, stands. For more current information, see this report, The New Oversight Lords, from the fantastic group Hedge Clippers. You should also follow the brilliant work of the Centro de Periodismo Investigativo, which Soros’ Open Society Foundations has supported, to his credit. If you’d like to read the rest of this story, updated to reflect changes during the past two years, please support Washington Babylon. To make a monthly donation, click here for Patreon. To make a one-time donation, click here for PayPal. Muchas gracias.]

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