What do GameStop and Puerto Rico have in common? Vulture Hedge Funds
In the last few weeks, we witnessed how with the ease of a post, thousands of Reddit users were able to beat hedge funds at their own game. It was a surprise attack from small-dollar investors, who bought more and more of GameStop’s stock in a battle against hedge funds that had bet against its future. But just as quickly as these GameStop enthusiasts were able to join the world of fast-paced trading, institutional players shut them out. Unfortunately, this type of casino quality to the market that usually benefits hedge funds at the expense of companies, their employees, and regular people is nothing new. In fact, the GameStop frenzy altogether is not new, it simply exposed what hedge funds have become — a system of exploitation that puts greed and profit at its core.
So, what do GameStop and Puerto Rico have in common? Well, they have both attracted a group of vulture hedge funds that have a vested financial interest in their economic failure. The type of manipulation by hedge funds that occurred in both the GameStop rumble and the Puerto Rico debt crisis shows that these hedge funds are willing to destroy whole companies and nations simply to fill their pockets. For far too long, hedge funders have known that they can manipulate stock prices, create a crisis, throw a nation into a frenzy, and rake in huge profits. All of this at the cost of destroying families and whole communities in the process.
Nations across the world, including Puerto Rico, Nigeria, Venezuela, and the Congo, have been mired in debt that they were unable to pay. How do vulture funds get away with profiting from this pain? By buying debt at a steep discount and demanding full repayment. Vulture funds swoop in when they know debt is no longer sustainable and aggressively use all the tools at their disposal to rake in huge profits–knowing full well that their short-term profits come at the expense of a nation’s future. In fact, many of the vulture hedge funds that we hear about today were created to operate and succeed under a market that allows them to bet on a company or country’s failure. The results of this process are catastrophic. For a company like GameStop, it can mean substantial job losses. For nations like Puerto Rico, the Congo, and Argentina, the consequences can be poverty and even famine. Over the last 10 years, for example, Puerto Rico’s austerity measures have caused the closure of over 500 schools, cut thousands in pensions and labor rights, and completely deteriorated its infrastructure to the point of collapse — all of which have caused the island to lose more than 10% of its population.
As an example, we can look at GoldenTree Asset Management, an aggressive vulture hedge fund that pounced on Puerto Rico’s debt after Hurricane Maria. GoldenTree was one of the many hedge funds that saw an opportunity to profit out of the debt restructuring process and took it without any accountability for the people that it destroyed in its path. GoldenTree has already made hundreds of millions of dollars from their investments in Puerto Rico, pushing to get paid no matter the costs for the people of Puerto Rico. GoldenTree, and their Chief Investment Officer Steven Tananbaum, are perfect examples of the type of “bad faith players” that have taken over the financial game.
So what can we do about it? There is a real solution to stop vulture hedge funds from profiting off sovereign debt crises and it lies in New York State law. Approximately half of sovereign debt contracts are governed by New York law. We can stop vulture hedge funds from continuing to decimate countries by creating an orderly process for restructuring a country’s unsustainable debt. The process should include an overall audit of the debt and prevent any single hedge fund from having too much power by mandating supermajority voting that can bind dissenting vulture hedge funds in sovereign debt restructuring negotiations.
While the latest Wall Street showdown didn’t necessarily teach us anything new, it did give the public a general understanding of the greed, carelessness, and overall recklessness that constructs hedge funds. These are multi-billion dollar firms that make their money at the expense of individuals and sometimes at the detriment of entire nations. This is about an unethical financial system that is set up to not only let these bad actors benefit but flourish off a nation’s distressed debt.
The key takeaway from all of this is that there is great power behind a people-powered effort. New Yorkers have an opportunity to plug the loophole and stop the theft. Redditors were able to cause hysteria in Wall Street with a simple post. Now it’s time for New York State, the financial capital of the world, to pass laws that prevent these predatory practices.