100 Years of Colonialism: How Puerto Rico Became Easy Prey for Profiteers

From U.S. policies to cronyism to vulture finance, the real disaster is human made.

Centro de Periodismo Investigativo, In These Times

A house is destroyed in the aftermath of Hurricane Maria in Naguabo, Puerto Rico, on October 2. (Ricardo Aduengo/AFP)

White men in dark suits stand and fall silent when a black woman enters hear­ing room No. 3 of the U.S. Dis­trict Court in San Juan. Fed­er­al judge Lau­ra Tay­lor Swain greets them in Span­ish, and the hear­ing begins, in English.

To understand how the island fell so deeply into debt, one must follow a century of colonialism, cronyism and finance capitalism.

This August 9 ses­sion is the third since May, when the gov­ern­ment of Puer­to Rico began an attempt to restruc­ture its $74.8 bil­lion in bond debt. A fis­cal con­trol board appoint­ed by the U.S. gov­ern­ment ini­ti­at­ed the process, sim­i­lar to bank­rupt­cy, under Title III of the 2016 Puer­to Rico Over­sight, Man­age­ment and Eco­nom­ic Sta­bil­i­ty Act (aka Prome­sa), signed by Pres­i­dent Barack Oba­ma. Because of its unique colo­nial his­to­ry, the U.S. ter­ri­to­ry may not offi­cial­ly declare bank­rupt­cy and is required to ser­vice its debt above all else. The very exis­tence of Puer­to Rico as we know it may be at stake.

None of the more than 100 lawyers in the hear­ing room direct­ly rep­re­sent the so-called indi­vid­ual bond­hold­ers,” rook­ie investors who bought bonds through bro­ker­ages. Instead, they rep­re­sent spe­cial­ized investors, such as mutu­al fund com­pa­nies, insur­ance com­pa­nies and hedge funds with experts in debt collection.

With hun­dreds of mil­lions on the line, the lawyers jock­ey for rank. I’m from Queens and I remem­ber that when you don’t pay, there are con­se­quences,” says Susheel Kir­palani, attor­ney for a coali­tion of invest­ment firms.

Sev­en hours after the hear­ing begins, a black SUV with a slid­ing door and dark­ened win­dows shut­tles groups back to the air­port and hotels.

A month lat­er, Hur­ri­canes Irma and Maria dev­as­tate the island. Judge Swain can­cels an Octo­ber 4 hear­ing cit­ing a human­i­tar­i­an cri­sis.” With hur­ri­cane dam­age esti­mat­ed at $45 bil­lion to $95 bil­lion, mar­ket ana­lysts say debt repay­ment is unre­al­is­tic. Through­out both storms, the finan­cial firms con­tin­ue fil­ing motions remote­ly in the court’s dig­i­tal docket.

A pub­lic list of Puer­to Rico’s debthold­ers does not exist. Since 2014, the Gov­ern­ment Devel­op­ment Bank of Puer­to Rico, which issued the bonds, has denied requests for their iden­ti­ties — includ­ing one from a gov­er­nor-appoint­ed over­sight com­mis­sion — cit­ing trade secrets and privacy.

For five months, In These Times and Cen­tro de Peri­odis­mo Inves­tiga­ti­vo (CPI) have been work­ing togeth­er to track down those identities.

Our first set of find­ings was released Octo­ber 17. Of the more than 30 known finan­cial firms vying for Puer­to Rico’s debt, at least 24 are hedge funds known as vul­ture firms, which spe­cial­ize in risky assets and cater to wealthy investors.

This activ­i­ty con­tin­ues the cen­tu­ry-long cycle in which out­side investors extract prof­it from Puer­to Rico and send it off the island, aid­ed by Puer­to Rico’s colo­nial sta­tus and spe­cial tax breaks. The vul­ture firms and mutu­al fund com­pa­nies involved knew the island was wild­ly over­com­mit­ted, but they trust­ed the pow­er of their out­size legal and lob­by­ing efforts to squeeze out pay­ments, no mat­ter the cost to Puer­to Ricans. As firms bat­tle in court, they smell fresh oppor­tu­ni­ties after the storms.


Even before the hur­ri­canes, it appeared unlike­ly that Puer­to Rico could pay up. In 2015, then-Gov. Gar­cía Padil­la warned the debt was not payable.” The cur­rent gov­er­nor, Ricar­do Rossel­ló, pro­ject­ed this sum­mer that the island might run out of mon­ey in Novem­ber, despite aus­ter­i­ty mea­sures and mas­sive school closures.

To under­stand how the island fell so deeply into debt, one must fol­low a cen­tu­ry of colo­nial­ism, crony­ism and finance cap­i­tal­ism. Soon after Puer­to Ricans became U.S. cit­i­zens in 1917, the Unit­ed States imposed high ship­ping costs that hob­bled the island’s econ­o­my. Con­gress then spurred out­side invest­ment by turn­ing the island into a U.S. tax haven, lur­ing in man­u­fac­tur­ing and phar­ma­ceu­ti­cal com­pa­nies. The boom did pro­vide mid­dle-class jobs, but it nev­er cre­at­ed an own­er­ship class. Assets and prof­its flowed away.

As part of a deal to bal­ance the U.S. bud­get in 1996, Pres­i­dent Bill Clin­ton agreed to phase out the loop­hole that allowed busi­ness­es to oper­ate in Puer­to Rico tax-free. Com­pa­nies left the island in droves, tak­ing thou­sands of jobs. Then-gov­er­nor (and the cur­rent governor’s father), Pedro Rossel­ló, was crit­i­cized for not push­ing back, but, accord­ing to a 1999 Orlan­do Sen­tinel arti­cle, he argued the mea­sure would help the island be treat­ed the same as the [U.S. main­land] states.”

With that exemp­tion gone, Puer­to Rico’s gov­ern­ment turned to a spe­cial tax break that remained in place from the 1917 Jones-Shafroth Act. As a U.S. com­mon­wealth, Puer­to Rico can issue bonds that are triple tax-free” — exempt from tax­a­tion by Puer­to Rico, the U.S. gov­ern­ment, and any U.S. state or municipality.

With the econ­o­my stag­nat­ing, Puer­to Rico increas­ing­ly sold these bonds to pay for infra­struc­ture projects. Friends” of Puer­to Rico’s cur­rent admin­is­tra­tion often got first dibs, and many of the projects were white ele­phants, unlike­ly to ever raise enough rev­enue to com­pen­sate their backers.

One infa­mous exam­ple is the Trump Inter­na­tion­al Golf Club Puer­to Rico. Puer­to Rico’s Gov­ern­ment Devel­op­ment Bank grant­ed devel­op­ers $25 mil­lion in the ear­ly 2000s to build a golf course and hotel. The golf course strug­gled to pay its debt, and the gov­ern­ment reis­sued $26 mil­lion in bonds after Don­ald Trump agreed to license his name to the project in 2008. The own­ers declared Chap­ter 11 bank­rupt­cy in 2015 and nev­er paid back the loan.

In 2006, these prac­tices caught up with the Puer­to Rican gov­ern­ment. The island ran out of mon­ey and shut down for two weeks, fur­lough­ing 95,762 employ­ees and tem­porar­i­ly shut­ter­ing 1,600 pub­lic schools.

With the 2008 glob­al finan­cial col­lapse, Puer­to Rico’s econ­o­my went into a tail­spin. Ten per­cent of its pop­u­la­tion emi­grat­ed between 2006 and 2016. Today, 46 per­cent of the pop­u­la­tion lives below the fed­er­al pover­ty line (com­pared to a nation­al aver­age of 14.7 per­cent) with a 40 per­cent labor force par­tic­i­pa­tion rate.

There is a whole gen­er­a­tion that knows that we are not going to live the life that our par­ents lived,” says Veróni­ca Rivera Tor­res, who con­vened a gath­er­ing of Puer­to Rican women in a pub­lic park in San Juan in Sep­tem­ber 2015 to dis­cuss the toll of aus­ter­i­ty. There are no retire­ment plans, the rights of pub­lic employ­ees are pre­car­i­ous, there is no work.

The major­i­ty [of the women who came] were doc­tors, lawyers, pro­fes­sion­als,” Rivera Tor­res recalls. Some were in a state of shock. For exam­ple, a woman with a doc­tor­ate, with the oppor­tu­ni­ty to leave, did not, because of loy­al­ties to her fam­i­ly and her coun­try. Now she is in a sit­u­a­tion of inse­cu­ri­ty. Some women have secu­ri­ty, but their chil­dren or grand­chil­dren are fac­ing precariousness.”


Even as Puer­to Rico was rack­ing up enor­mous debt, finan­cial firms were hoover­ing up its bond offer­ings and clam­or­ing for more. A num­ber of the bonds were what Saqib Bhat­ti, co-author of a 2016 report from the ReFund Amer­i­ca Project on Puer­to Rico’s debt, describes as the munic­i­pal ver­sion of a pay­day loan,” with astro­nom­i­cal inter­est rates. About half of Puer­to Rico’s cur­rent debt is deferred inter­est on these loans. Mean­while, Gold­man Sachs, Cit­i­group and oth­er Wall Street firms have raked in more than $1.6 bil­lion in fees to struc­ture the deals.

As Puer­to Rico’s debt grew riski­er, vul­ture funds grew more inter­est­ed. There is tremen­dous demand [for Puer­to Rican bonds],” one mar­ket ana­lyst told the New York Times after Stan­dard & Poor’s down­grad­ed Puer­to Rico’s bonds to junk sta­tus in Feb­ru­ary 2014. The Times not­ed that hedge funds see ways of pro­tect­ing them­selves” in case Puer­to Rico’s oth­er debt will have to be restruc­tured at some point.” That pro­tec­tion entailed an army of lawyers and lob­by­ists who banked on sev­er­al pecu­liar­i­ties of Puer­to Rico’s colo­nial sta­tus: its inabil­i­ty to declare bank­rupt­cy and a clause in its con­sti­tu­tion, from 1952, stip­u­lat­ing that the coun­try must hon­or debt from gen­er­al oblig­a­tion bonds before pay­ing any oth­er expenses.

The strat­e­gy has been effec­tive. The Puer­to Rican gov­ern­ment passed a bill to restruc­ture its debt in 2014, but two mutu­al fund com­pa­nies, Oppen­heimer­Funds and Franklin Tem­ple­ton Invest­ments, sued and a fed­er­al court declared the bill uncon­sti­tu­tion­al. Now, thanks to Prome­sa, the firms are deploy­ing their legal might in court to ensure that, should there be a hair­cut on Puer­to Rico’s debt, they get paid first.

The claims made in court amount to only about $17 bil­lion of the total $74.8 bil­lion the island owes. The iden­ti­ties of many of Puer­to Rico’s oth­er debthold­ers remain unknown. On August 30, the gov­ern­ment pub­lished an offi­cial 15,000-page list con­tain­ing the names of poten­tial cred­i­tors,” although it does not iden­ti­fy bond­hold­ers. Some on the list may be gov­ern­ment sup­pli­ers and con­trac­tors, for exam­ple, or an indi­vid­ual investor in a mutu­al fund.

CPI and In These Times spoke with one Puer­to Rican agri­cul­tur­al work­er whose fam­i­ly bought some of Puer­to Rico’s bonds. I bought them from Pop­u­lar Secu­ri­ties,” he explains. I liked them because they are from here.”


Of the mutu­al fund com­pa­nies now in court, the largest claim — rough­ly $4.9 bil­lion — comes from Oppen­heimer­Funds, a sub­sidiary of the For­tune 500 life insur­ance com­pa­ny Mass­Mu­tu­al. Ear­li­er this year, Mass­a­chu­setts Sec­re­tary of the Com­mon­wealth William Fran­cis Galvin opened an inves­ti­ga­tion into Oppen­heimer and oth­er Puer­to Rican bond sell­ers to deter­mine if small investors had been informed of the risks. The peo­ple who invest­ed in mutu­al funds, gen­er­al­ly, are not ter­ri­bly sophis­ti­cat­ed,” Galvin says. They don’t get into the detail of what that con­sists of. So there­fore they are rely­ing upon the peo­ple who put the funds togeth­er to pro­tect them.”

A review of records of the nation’s two largest finance reg­u­la­to­ry bod­ies — the Secu­ri­ties and Exchange Com­mis­sion and the industry’s self-reg­u­la­tor, the Finan­cial Indus­try Reg­u­la­to­ry Author­i­ty (FIN­RA) — reveals that sev­er­al of the largest mutu­al fund com­pa­nies involved in Puer­to Rico’s debt have a long paper trail of ille­gal behavior.

Oppen­heimer, San­tander and UBS, which col­lec­tive­ly claim more than $6.7 bil­lion in Puer­to Rico’s Prome­sa case, have paid more than $450 mil­lion in fines for fraud and rules vio­la­tions since 2011. More than $85 mil­lion of those fines relate to the sale of Puer­to Rican bonds.

Through­out Puer­to Rico’s debt cri­sis, Oppen­heimer has main­tained a sun­ny out­look: We believe that the media’s cov­er­age of devel­op­ments in and relat­ed to the Com­mon­wealth of Puer­to Rico could best be described as par­tial news,’” it wrote in a state­ment to bond­hold­ers in March, tout­ing high returns on Puer­to Rican secu­ri­ties in 2016. After Puer­to Rico declared itself bank­rupt, Oppen­heimer reas­sured, the mar­ket for bonds issued by the Com­mon­wealth remains liq­uid, and Puer­to Rico’s rev­enues stand at an all-time high.”

Enti­ties from Con­gress to Judge Swain have dif­fer­ent lev­els of pow­er to restruc­ture the debt. Pres­i­dent Don­ald Trump pledged on Octo­ber 3 to wipe it out,” but his bud­get direc­tor quick­ly reversed course. (Trump made an odd ref­er­ence to Gold­man Sachs, which bought $120 mil­lion in bonds in 2014 — and whose exec­u­tives pop­u­late Trump’s admin­is­tra­tion — but has not offi­cial­ly filed a claim.) Oth­ers are call­ing for the Unit­ed States to buy out the debt or for an equi­table restructuring.

After Hur­ri­cane Maria, Oppen­heimer pub­lished an arti­cle not­ing, Longer-term solu­tions in Texas, Louisiana, Puer­to Rico, the U.S. Vir­gin Islands, Flori­da and else­where will require sig­nif­i­cant financing.”

With­out sig­nif­i­cant change, we should expect more of the same: aus­ter­i­ty mea­sures to muster the funds to ser­vice that debt, and tax incen­tives to attract out­side investors, cronies first. One con­tract to rebuild Puer­to Rico has already caused con­tro­ver­sy. White­fish Ener­gy in White­fish, Mont., won a $300 mil­lion bid Sep­tem­ber 26 to rebuild the ener­gy grid. The two-year-old firm has two full- time employ­ees. Its pri­ma­ry backer is HBC Invest­ments, a pri­vate equi­ty firm run by Joe Colon­net­ta, a major Trump donor.

As recent­ly as 2012, Puer­to Rico passed tax breaks aimed at lur­ing wealthy investors and hedge fund man­agers to move to the island. Spend six months of the year on an island with beau­ti­ful beach­es and sun­shine [and] you could come away not only with a tan, but with almost 100 per­cent of your income still in your pock­et,” the Cay­man Finan­cial Review not­ed. Mean­while, in the after­math of the storms, the Cen­ter for Puer­to Rican Stud­ies esti­mates that 14 per­cent of Puer­to Rico’s pop­u­la­tion will leave with­in a year.

Saqib Bhat­ti says the com­bi­na­tion of aus­ter­i­ty and tax breaks is a dan­ger­ous cock­tail. Cuts are speed­ing up the exo­dus of Puer­to Ricans from the island, while they are cre­at­ing tax incen­tives for rich white peo­ple to buy up lots of real estate there,” he says. This could very well lead us to a Puer­to Rico with­out Puer­to Ricans.”

The sit­u­a­tion depress­es us as a coun­try and as a peo­ple,” says Rivera Tor­res. But they will not defeat us now. I am con­vinced that as a coun­try we can orches­trate a strong resis­tance. We start from hope and from our humanity.”

Joel Cin­trón Arbaset­ti and Car­la Minet, Cen­tro de Peri­odis­mo Inves­tiga­ti­vo and Alex V. Her­nan­dez and Jes­si­ca Stites, In These Times
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