SAN JUAN — A new report from progressive organizations reveals the web of lawyers, lobbyists, trade groups, and cultural institutions that vulture funds use to prey on debt-addled countries like Puerto Rico.
A vulture fund is one in which investors profit by buying the debt of a distressed entity and then selling the debt for higher than they purchased it for. Predatory investors have created a multibillion-dollar industry by buying government debt for cents on the dollar from countries that cannot make their debt payments and then forcing those countries to make payments at the face value of the original debt, leading those governments to impose crippling austerity measures like the gutting and privatization of public services.
Such funds, which typically use political and economic structures that favor investment managers over people, hold debt in countries like the Republic of Congo, Peru, Argentina, Panama, Ecuador, and Puerto Rico. Meanwhile, the citizens of these countries suffer at the hands of the measures their governments pass in effort to pay off the debt.
Titled “Vulture Fund Power Players: The Lawyers, Lobbyists & Trade Groups Fueling Wall Street Predation,” the report by the Not a Game Coalition names multiple vulture funds and outlines the networks they use to force countries to pay to the detriment of their own people. The grassroots and non-profit organizations New York Communities for Change (NYCC), Center for Popular Democracy, Churches United for Fair Housing (CUFFH), LittleSis, Strong Economy for All Coalition, and the Hedge Clippers contributed to the report.
Vulture Funds Take Countries to Court
After buying a country’s debt at a steep discount, vulture funds tend to forgo negotiations in favor of litigation—a key part of their strategy that can drag out court battles for years until the struggling country has no choice but to pass budget cuts due to their lack of access to international capital markets.
When Argentina defaulted on over $100 billion in 2001, its debt was scooped up by vulture funds for pennies on the dollar. Elliott Management, a hedge fund founded by wealthy investor Paul Singer, refused a proposed debt restructuring in a tactic that eventually netted the fund a $2.4 billion payout, representing a 1,270 percent return on its initial investment.
Vulture funds and others sued Argentina through New York federal courts 11 times and won every single case. Investors often secure significant wins in New York and London, where most of the world’s sovereign debt is held.
While predation by investors is nothing new, the process has been greatly aggravated since New York ruled that Elliot Management did not violate the state’s champerty law, which sought to stop predatory financial actors from buying debt just to file a lawsuit, during Peru’s sovereign debt litigation. In 2004, the New York State Legislature created a loophole that exempted debt transactions of over $500,000 from being reviewed under champerty, which “ensured the good health of the vulture’s business.”
“Over and over what we find is that there’s a pattern around who are the people who are doing the bad things —in this case, the hedge funds— and who are enabling them,” Julio López Varona, co-chief of campaigns for the Center for Popular Democracy, told Latino Rebels. “For many reasons, one of them is because these people specialize in these practices overseeing and supporting hedge fund practices. And on the other (hand), because these connections are, in some cases, convenient for parties.”
Many of these vulture funds have go-to lawyers they repeatedly use when suing countries. Elliot Management has consistently tapped Otto G. Obermaier from the law firm Wel, Gotshal & Manges, as when it sued the governments of Peru and Panama. Obermaier is emblematic of the revolving door relationship between Wall Street vulture funds and the New York legislature. As the U.S. attorney for the Southern District of New York, Obermaier refused to indict the investment firm Salomon Inc., parent company of Salomon Brothers investment bank, after it admitted to manipulating the government securities market. He excused his lack of action by saying “there was no need to punish innocent employees and shareholders.”
Obermaier co-wrote a book on defending white-collar criminals, titled White Collar Crime: Business and Regulatory Offenses.
“The revolving door between the government and the private sector is greased by money. It just swings faster and harder because there’s so much money involved,” Michael Kink, executive director of the Strong Economy for All Coalition, told Latino Rebels. “The profits are so explosive when these hedge funds drive into debt and drive austerity in the countries and commonwealths they’re attacking.”
Lobbying Efforts Influence Policy and Attack Countries
DCI Group, a Washington-based lobbying and public relations firm, has been a key piece of multiple vulture funds’ strategy to winning federal government support and public opinion. The group was integral in Elliot Management extracting billions from Argentina by creating an influence campaign that stretched a decade and targeted all three branches of government.
As part of its lobbying efforts, it created a coalition dubbed “American Task Force Argentina” that shifted attention away from Singer and Elliot Management and onto organizations like National Grange and the Colorado Association of University Professions as the debt dispute’s real victims, according to Bloomberg. Both organizations later denied being part of the coalition.
DCI Group reportedly fed lines to nonprofits, policy experts, and journalists, according to Bloomberg Businessweek.
“There is a real effort from hedge funds to build narratives that talk about inefficient governments and unscrupulous, corrupt politicians and lazy citizens,” López Varona said, explaining that much of DCI Group’s work around Puerto Rico’s debt has been convincing people that the debt came from systematized and legalized predatory practices, not through any fault of the people of the archipelago.
DCI launched a smear campaign against Puerto Rico in 2014 on behalf of Doral Bank, which was then seeking $229 million from the insular government. The lobbying group published full-page ads in the Wall Street Journal and Politico, claiming a debt plan by then-Gov. Alejandro García Padilla would hurt seniors and retirees.
DCI Group’s influence in Puerto Rico has swelled since former President Donald Trump appointed Justin Peterson, who formerly worked in DCI’s energy practice, to the Financial Oversight and Management Board for Puerto Rico (FOMBPR), an unelected but federally-imposed group of lawmakers that control Puerto Rico’s finances.
Puerto Rico eventually exited bankruptcy after grueling debt negotiations that ended with gutting austerity measures and a cut to Puerto Rico’s debt from $33 billion to $7.4 billion, which necessitated an immediate $7 billion cash payment to bondholders and a $10 billion bond swap.
“All of our countries have been undermined because of this debt, and in order to be able to continue doing that, they (vulture funds) need that perception that these countries are basket cases, when in fact that is not the case at all. The problem is that they have not gotten a chance to develop in a way they should have,” José González, senior director of data and research at New York Communities for Change, told Latino Rebels.
Venable LLP, a Washington-based law firm, lobbied for six different vulture funds to block legislation that would grant Puerto Rico the same bankruptcy protections available to the United States and restructure Puerto Rico’s electric utility.
Multiple lobbyists from Venable passed through the “revolving door” between Wall Street and Washington. Daris Meeks, who has been moving back and forth between the two for decades, served as director of domestic policy for Vice President Mike Pence. Andrew Olmem served as the deputy assistant to President Trump for economic policy, is the former chief counsel of the Senate Banking Committee that negotiated the Dodd-Frank Act, and currently works for the firm Mayer Brown. Former Democratic congressman from Michigan, Bart Stupak, also works for Venable.
Trade Groups Influence Interest in Washing and State Governments
The Managed Funds Association (MFA), a trade group representing the hedge fund sector, is meant to “enable hedge fund and managed futures firms in the alternative investment industry to participate in public policy discourse, share best practices and learn from peers, and communicate the industry’s contributions to the global economy,” according to filings with the Internal Revenue Service.
Representatives from multiple vulture funds sit on the MFA board of directors, including Susanne Clark, general counsel and senior managing director of Centerbridge Partners; Eric Epstein, president of Davidson Kempner Capital Management; Chris Hayward, president of GoldenTree Asset Management; and Zion Shohet, chief operating officer of Elliott Management. Together, the group owns debt from Puerto Rico, Argentina, and the Republic of Congo.
Between 2019 and the third quarter of 2022, the MFA spent more than $16.8 million on federal lobbying. Primary targets include the Short Sale Transparency and Market Fairness Act, the Insider Trading Prohibition Act, and the Ending the Carried Interest Loophole Act.
Vulture Funds Launder Credibility Through Cultural Institutions
“The wealth accumulated by vulture fund managers allows them to bankroll —and obtain governance positions at— favored civil society institutions, thus affording them political and cultural influence and burnishing their reputations as philanthropists,” the report reads
Singer, chairman of Elliott Management, also serves as chairman of the board of trustees of the Manhattan Institute for Public Policy, a prominent right-wing think tank founded by Reagan CIA Director William Casey.
Singer leads the Paul E. Singer Family Foundation, a private charity that made $11.7 million in grants and contributions in 2020. He also sponsors the Singer Family Prize for Excellence in Secondary School Teaching at the University of Rochester and was a trustee at Harvard Medical School.
While Singer is one of the most prominent examples of fund managers using their immense wealth to gain power and influence in civil society, he is by far not the only one. Steven Tananbaum, founding partner and chief investment officer of GoldenTree Asset Management, sits on the board of trustees of New York’s Museum of Modern Art (MOMA). Tananbaum is also a member of the Council of Foreign Relations, a Wall Street-backed think tank that heavily influences U.S. foreign policy.
The MOMA’s board also includes Daniel Och, who founded the Puerto Rican debt vulture fund Och-Ziff Capital Management, and Larry Fink, chairman and CEO of BlackRock, the world’s largest asset manager, with nearly $8 trillion in assets under management.
Meanwhile, Fink sits on the board of trustees of New York University and NYU Langone Health. He also sits on the board of Tsinghua University School of Economics and Management and the board of directors for the Council on Foreign Relations, and is a trustee of the World Economic Forum, a corporate-backed international lobbying group.
Grassroots Attempts to Stop Vulture Funds
Because most sovereign debt contracts are governed by the courts in New York and London, both financial centers are uniquely positioned to radically change the state of sovereign debt if they choose to disrupt predatory Wall Street investment.
New York, where nearly half of the world’s sovereign debt is held, has played a key role in helping vulture funds wreak havoc across Latin America and the Caribbean. In the absence of an international sovereign debt restructuring framework, New York could pass laws that would disrupt vulture fund strategies, multiple contributors to the Not a Game report told Latino Rebels.
“We can’t rely on people just to be good and not do sleazy, horrible, extractive things. We need sharp, clear rules that set a structure for operation,” said Kink.
During the most recent session of the New York State Legislature, both the upper and the lower houses introduced legislation to create the aforementioned framework. They are expected to reintroduce the bill during the 2023 legislative session. If passed, the new framework could create a process whereby indebted governments can restructure their debts by reaching agreements with most creditors without being held hostage to vulture funds.
In addition, if New York strengthened its champerty law, it would prevent predatory financial actors from buying up debt with the express purpose of filing lawsuits.
Carlos Edill Berríos Polanco is the Caribbean correspondent for Latino Rebels, based in San Juan, Puerto Rico. Twitter: @Vaquero2XL