Richard Thiel, the actor who portrayed the great James Bond villain, Jaws passed away last week at the age of 74. The notion of mad villains plotting global destruction therefore was on the top of our minds when the New York Times reported on Friday that hedge funds are turning Puerto Rico into an unofficial island fiefdom.
Indeed, the hedgies, who own a big chunk of Puerto Rico’s junk-rated municipal debt, have burrowed into Puerto Rico’s government with the efficiency of an army of trained termites. A group of 28 hedge fund managers are now “dispensing unofficial advice, providing public relations support and offering to lend money to a Puerto Rican government wrestling with high unemployment and mistrust from municipal bond investors,” according to New York Times reporter Michael Corkery.
“The hedge funds, including Perry Capital, Fir Tree Partners and other members of the self-styled Ad Hoc Group of investors, have bought $4.5 billion of Puerto Rico government guaranteed and tax-supported bonds – or roughly 10 percent of the total – making them a financial and political force on the island,” Corkery wrote.
Hedgies quietly running Puerto Rico’s finances behind the scenes almost sounds like a scenario out of classic Bond films such as Dr. No or Goldfinger. Slowly, Bond, M, Moneypenny and the whole Double Zero gang come to realize that the slightly odd, eccentric financier they’ve been watching from afar is really an evil genius plotting complete mayhem.
Can the hedgy bigwigs gathering in Puerto Rico further undermine Mom and Pop investors, who have already seen the value of their bonds and closed end bond funds plummet?
The New York Times certainly thinks so. The hedge funds are in control of the island Commonwealth and willing to flex their muscle to their benefit, toying with the municipal bond market by first flooding it with capital and then dumping the bonds when the moment is ripe. Hedge funds creating mayhem in Puerto Rico bonds will only undermine the value of the paper in the long-term.
The hedge fund “investors are seeking to make money by bolstering the value of their bonds, many of which they snapped up at a discount when mutual funds and wealthy individuals — the typical holders of municipal bonds — dumped their holdings fearing the island was near financial calamity,” according to the Times. “The rosier picture the hedge fund group can paint, the more likely their investments gain in value, as other investors step in to buy the bonds.”
“The hedge funds are controlling the narrative, and the government is a willing participant,” said Robert Donahue, managing director at Municipal Market Advisors, a research group.
“Publicly, finance officials in San Juan say they welcome any and all investors,” according to the Times report. “The hedge fund suggestions, they add, are not that different from the unsolicited advice other investors have made in the past. Privately, the officials view the hedge funds with caution.”
The scenario in Puerto Rico is turning into a diabolical mess. Hedge funds that own Puerto Rico debt are exerting their influence to stack the market in their favor. Hedge funds are short term investors, looking to make a quick buck, while the vast majority of Puerto Rico’s debt is Mom and Pop investors who bought the bonds for the long haul. Short term opportunists gaining power and influence over billions in finances in an island paradise might sound like a plot out of a James Bond thriller, with the suave hero saving the day at the very last moment. Sadly, these circumstances are all too real and rather than a happy ending, may very well end in tragedy.
Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions. For more information about Zamansky LLC, please visit https://www.ubspuertoricofunds.com/.