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Activists Are Challenging Laws That Enable Vulture Funds to Exploit Global South

Vulture funds target financially distressed areas like Puerto Rico. Independence organizers are pushing back.

Paul E. Singer, founder and president of Elliott Management, during his keynote at the 6th annual CNBC Institutional Investor Delivering Alpha Conference on September 13, 2016, at the Pierre Hotel in New York City.

Cyn Rodriguez, an organizer with the Puerto Rican independence group Colectiva Solidaridad (Collective Solidarity), was sitting in the 350-seat auditorium of the Alexander Hamilton U.S. Custom House when they recorded a man who rose from his seat during the Financial Oversight and Management Board’s (FOMB) 31st “public meeting” on December 17, 2021. The man began shouting: “Puerto Rico not for sale! Not for sale! Not for sale!” He had interrupted Puerto Rico’s Department of Economic Development and Commerce Secretary Manuel Cidre Miranda, a “businessman” who once told Forbes that he believes in “reducing regulations [and] making Puerto Rico a one-stop shop for investors.”

Economic development agencies and the Puerto Rican government are slated to privatize more and more sectors of the economy as part of the FOMB’s debt restructuring plan and its “modernization” campaign. Two men in suits approached the protester and started removing him from the premises. He struggled to resist them, saying, “How dare you stand there and tell lies?” He was one of four attendees who disrupted the meeting that day to draw attention to the injustice of exploitative proposals — and to the exploitation and subjugation that Puerto Rico has faced both in recent years and throughout its colonial history.

“I was angry the whole time,” Rodriguez said. “They [the FOMB] were talking about Puerto Ricans like they were nothing but labor, and about the archipelago like it was a playground for the gringos — the rich and tourists.” Rodriguez said Puerto Ricans have been suffering due to the cruel austerity measures imposed by “La Junta,” the Spanish sobriquet for the FOMB, an unelected board created by the Obama administration in 2016 through the Puerto Rico Oversight, Management, and Economic Stability (PROMESA) Act. The FOMB oversees the restructuring of Puerto Rico’s $72 billion debt.

Before the meeting, several protesters gathered outside the Custom House and held a banner that read (in Spanish and English): “We bring machetes to the vultures and say ‘get out of my island.’” The phrase was adapted from a Puerto Rican folk song’s lyrics. The protesters called on incumbent Puerto Rican Gov. Pedro Pierluisi to resign from office and demanded the immediate abolishment of the FOMB.

Hedge funds, also called vulture funds, have spent decades perfecting predatory investment practices that target financially distressed countries around the world; Puerto Rico, Argentina, Greece and the Republic of the Congo are among the countries preyed upon. Some of the most prominent vulture investors, many of whom are based in New York, include Paul Singer of Elliott Management, Kenneth Dart of Dart Enterprises, Steven A. Tananbaum of GoldenTree Asset Management and Mark Brodsky of Aurelius Capital Management, among others.

These vulture investors “have followed a well-established playbook” to manipulate the $119 trillion bond market, according to a recent report published as part of the joint “Not a Game. It’s People!” corporate accountability project, which seeks to challenge predatory investment practices globally.

Maggie Corser, Rob Galbraith and Natalia Renta — in collaboration with consultants at Hedge Clippers, the Center for Popular Democracy and adjacent grassroots organizations — authored the report, titled, “Pain and Profit in Sovereign Debt: How New York Can Stop Vultures from Preying on Countries,” to reveal the ways in which vulture funds extract wealth from indebted countries and propose policy recommendations for New York lawmakers. “Because most sovereign debt contracts are governed by either New York State or English law, New York is uniquely positioned to step in and pass laws that would disrupt the vulture fund playbook and stop them from profiteering at the expense of countries in financial trouble,” the report stated.

According to the report, predatory financial actors use vulture fund playbook strategies to “extract debt payments to enrich themselves while communities face regressive taxes, slashed public services [and] privatized public goods.” Vulture investors knowingly purchase sovereign debt for “pennies on the dollar” from debtors that are desperate for credit and, in the process, impose exorbitant interest rates to maximize profits at the expense of local communities.

The report notes that asset management firms “often average a rate of return 300–2000% on their initial purchase of distressed sovereign debt.” Vulture funds also prolong debt restructuring processes by refusing to cooperate with debtors, use “high-powered lawyers” and “ruthless legal tactics” to sue indebted countries so that courts can mandate repayment in full and, finally, benefit from forced austerity policies and international debt relief initiatives, which they use to “hold both other creditors and the debtor country hostage.”

New York law has played a central role in enabling vulture funds’ predatory investment practices. Policy prescriptions outlined in the report look to establish a framework for countries to restructure their unsustainable debt, eliminate the capital gains tax loophole that vulture funds have long exploited and strengthen champerty law, “which is intended to prevent predatory financial actors from buying financial instruments for the purpose of filing a lawsuit.” In 1999, Elliott Management sued the national bank and government of Peru to demand full repayment of the country’s debt that it had purchased (with interest, of course). Ultimately, the outcome of the case was a Court of Appeals decision that weakened the champerty law, rendering it null.

Billionaire vulture investor and Elliott Management founder Paul Singer got his way. And so, the vultures kept circling — they had what they needed to “suck the blood out of” debt-ridden countries around the world, according to Julio López Varona, co-director of community dignity campaigns at the Center for Popular Democracy and longtime consultant for the corporate accountability campaign. “These are human beings making decisions.”

A Moral Fight”

Not only is New York in a crucial position to disrupt the vulture fund playbook, but nearly a quarter of the state’s residents are immigrants who, sources say, tend to come from communities that have been impacted by these predatory investment practices. New York Communities for Change (NYCC), a grassroots organization involved in the corporate accountability campaign, has been staging direct action against vulture investors and engaging in legislative advocacy in recent years. The coalition of working families is over 20,000 members strong.

“This is a moral fight,” NYCC Program Director Alicé Nascimento told Truthout. “It’s really about the poorest countries in the world versus the richest people in the world, who are made rich because these countries are poor.”

Thanks to the work of organizers, awareness of these injustices is growing, Nascimento said.

“Now, there’s this realization — not just in the U.S. but around the world — that these are not good faith players and that they’re out betting on many countries’ economic failures for their own profit,” she continued. “This is something that has affected our membership since we’ve come into this fight.”

Over the past three years, the New York State Legislature has increased taxes on New York’s wealthiest residents, passed incremental police reform legislation and built upon the Climate Leadership and Community Protections Act to combat environmental racism statewide. Nascimento believes that these reforms have created a ripe political environment for the report’s policy recommendations to be passed.

“There is an environment … here and a disposition to challenge concentrated wealth that we have not seen before,” Nascimento said. “People are really seeing what’s behind the veil.”

Members of the corporate accountability project have sent the report directly to most lawmakers in the legislature. State Sen. Gustavo Rivera and Assemblywoman Maritza Davila are co-sponsoring Senate Bill S6627 and Assembly Bill A7562 which, if passed, would prevent predatory creditors from holding out during debt negotiations. Assemblymember Ron Kim is sponsoring the Capital Gains Tax (S2522/A3352) bill along with Senator Rivera. This bill would force vulture funds to pay taxes on income generated from investments. The Carried Interest Tax bill, which seeks to tax “the carried interest income vulture investors as traditional earned income,” is being co-sponsored by State Sen. Brad Hoylman and Assemblymember Jeffrion L. Aubry.

Together, these bills represent a coordinated policy effort by lawmakers to disrupt the vulture fund playbook.

Growth or Stagnation?

“You can’t squeeze water from a stone,” Joseph Stiglitz, former chief economist at the World Bank and Nobel Laureate in Economics, told the crowd at the 2021 Growth Policy Summit. “If they can’t pay, they can’t pay.”

But this is precisely what vulture funds have been doing to debtors.

Asset management firms have jeopardized the long-term economic well-being of debt-ridden countries — the majority of which are located in the Global South — through ruthless litigation and lobbying. Vulture investors engage in extortion on a global scale, impeding sustainable development, draining indebted countries’ resources through endless cycles of litigation and weaponizing international debt relief processes to demand more from indebted countries, which, in turn, deepens economic stagnation.

Natalia Renta, senior policy strategist at the Center for Popular Democracy, told Truthout that although the focus of the organizations’ work is on New York, “international institutions [e.g., the International Monetary Fund] should be more responsive to the needs of debt-ridden countries instead of the greed of wealthy investors.”

The prevailing market-based or private contractual approach to sovereign debt restructuring is skewed toward vulture funds. It is decentralized, deregulated and lacks sovereign immunity protections. Despite this, the aforementioned limitations can be overcome in two ways: a multinational statutory solution (using international economic law) or a “soft law” approach (via the quasi-judicial system) that drastically improves sovereign debt agreements by making them more equitable and efficient.

Building Bridges

There are a multitude of places where the effects of vulture capitalism are being felt.

“We need to do more to build bridges between countries where this is happening,” López Varona said. “The suffering that happens in Puerto Rico … is not disconnected to the suffering of other places.”

Puerto Rico has lacked a “mechanism to force creditors to the negotiating table” since 1984, according to the “Pain and Profit in Sovereign Debt” report. Vulture funds have fought to maintain the status quo, which is why former Gov. Alejandro García Padilla announced that Puerto Rico’s debt was “unpayable” instead of declaring bankruptcy in 2015. Under U.S. rule, Puerto Rico cannot control its economy, as it lacks access to international markets, debt relief and the ability to negotiate its debt, some of which is of “questionable legality,” according to Stiglitz. Moreover, Stiglitz has made it clear that the current restructuring plan will “further weaken” the Puerto Rican economy and leave it with “an unsustainable level of debt.”

“Independence is the only way for us to be free,” Colectiva Solidaridad’s Rodriguez said. “This is a struggle that has lasted 123 years.”

Rodriguez explained that the group’s demands include independence for Puerto Rico, canceling its debt, abolishing “La Junta,” repealing the Jones Act and Act 60, and securing reparations for “heinous crimes” committed by the U.S. These include land grab exploitation, human experimentation, mass sterilization, torture and murder, according to Rodriguez.

Colectiva Solidaridad, which started as a group that provided support to mutual aid organizations in the archipelago, has shared educational materials (in English and Spanish) about the impact of U.S. imperialism and other issues on Puerto Rico via social media. Cycling between in-person and remote support amid the pandemic, Colectiva Solidaridad has collaborated with myriad independence groups both on the mainland and in the diaspora to stage direct action. It will be launching a campaign against La Junta and the debt in early 2022.

Solidarity, education and direct action are needed to mount pressure on lawmakers to establish a multinational framework that either improves upon or goes beyond the prevailing contractual approach. Much of the solution boils down to simple economics.

“If you grow very rapidly, you can repay more. But if you don’t grow, you can’t repay,” Stiglitz said at the summit. “It isn’t really in the interest of the creditors to demand too much of [indebted countries].”

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