Puerto Rico Rescue Should Help Taxpayers, Not Benefit Hedge Fund Clients

The Puerto Rican flag flies near the Capitol building as the island's residents deal with the government's $72 billion debt on July 1, 2015 in San Juan, Puerto Rico.
Joe Raedle/Getty Images

When lawyers get dodgy about who they’re representing, what they’re representing might be worth a second look as well.

Susheel Kirpalani works for Quinn Emanuel Urquhart & Sullivan, which bills itself as the largest law firm in the world devoted solely to business litigation and arbitration. He appeared before the House Natural Resources Committee earlier this month at a hearing on legislation to address Puerto Rico’s dire financial situation.

Kirpalani represents investors in COFINA, a debt-issuing, financing tool that was developed by Goldman Sachs in 2006 to help Puerto Rico issue new debt despite having already reached its constitutional debt limit. Bonds issued by COFINA are backed by sales tax revenue.

These bonds are of basically junk-bond quality. They promise high yields for the significant risk that goes with lending money to a dangerously profligate government.

Puerto Rico is $72 billion in debt – just about equal to its annual GDP – and has begun to default on payments, close vital services, such as hospitals, and otherwise run out of money. Congress is working on a way to address the debt in the short term, perhaps place a control board over its finances and demand other reforms to help it right the ship.

Kirpalani basically needs a favor from the committee. Puerto Rico’s constitution says it must repay its general obligation bonds first, even before it pays employees – a provision the governor has threatened to defy. His allies have convinced House Speaker Paul Ryan, R-Wisc., and Rep. Rob Bishop, R-Utah, chairman of the committee, to insert a provision that would create something called “super bankruptcy.”

In super bankruptcy, general obligation bonds would not necessarily be honored first. Kirpalani argues the COVINA bondholders should continue to be paid since the Puerto Rican government continues to collect sales tax.

That’s a pretty big favor.

Kirpalani’s clients are mostly hedge funds, such as Whitebox Advisors, Goldentree Asset Management, EJF CapitalMerced Capital, and Tilden Park Capital Management. And it’s not exactly easy in this political climate to convince Congress to vote for something that favors hedge funds over the small investors who prefer general obligation bonds precisely because of the low risk.

Kirpalani said at the hearing he’d never been involved with anything that involved Congress before. But when it came to being asked by Congress the uncomfortable question of who he represents, he seemed like an old Washington hand.

“Your clients, I understand, are Goldentree Asset Management, Merced Capital, Tilden Park Capital Management, and Whitebox Advisors? Is that correct?” asked Rep. Doug LaMalfa, R-Calif., a member of the committee.

“That is correct,” Kirpalani said … “in addition to some individuals.”

Later, LaMalfa asked, “So these are hedge funds, they regularly seek out situations, especially post-2014, where they are looking to invest in a situation where there is trouble?”

“These particular clients that I’m representing …  I have actually not seen very active in the hedge fund space, have never represented them before,” Kirpalani said.

There are several reasonable interpretations of this statement, but one is Kirpalani fully understands Washington, fully realizes his clients are hedge funds and fully gets the need to be a bit foggy about this.

And that ought to tell you something.

It also ought to tell you something when leadership is asking congressmen to leave the hearing rather than vote against the version with the speaker and chairman’s amendment going to the House floor.

It ought to tell you something when Mike Needham, president of Heritage Action for America, the political arm of The Heritage Foundation, and Bernie Sanders are smelling the same rat.

Needham, whose voting scorecard is the gold standard for identifying conservative Republicans in Washington, has warned Congress not to “set any bad precedents” by, among other things, “reversing payment prioritizations.”

Sanders has said if COFINA truly was created to get around the debt ceiling and was indeed unconstitutional, that part of the debt should be wiped away.

There are no shortcuts for Puerto Rico. It must trim its public sector drastically, lower taxes and work with private industry to return middle-class private sector jobs to the island. It will be a hard road back no matter what happens with this legislation.

But helping hedge funds with high-risk investments avoid a haircut ought not be the focus of the legislation.

After all, Kirpalani’s instincts are right. He seems to be looking for a special favor, and Puerto Rico is hardly in position to provide it.


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