Keyi Cui

On Dec. 7, 2018, several groups of student activists walked into the Yale Investments Office and sat down in protest of Yale’s holdings in fossil fuel and Puerto Rican debt. Five hours later, they was forcibly removed.

After the dust settled, 48 students — primarily undergraduates — received citations from the Yale Police Department for trespassing on Yale property and were required to pay fines. While the discussion of endowment justice and ethical investments had been in the limelight for over half a decade, the December 2018 sit-in featured a group with a new message. For the first time, members of Despierta Boricua, the Puerto Rican student organization at Yale, sat in the lobby of the Investments Office for hours on that long December day to demand that Yale divest its holdings in Puerto Rican debt.

Adriana Colón ’20, a member of Despierta Boricua who attended the December 2018 rally, said in an interview with the News that the protest was necessary to achieve what the group saw as endowment justice.

“Students have been talking to the administration for years,” Colón said. “Yale tries to act like their investments are apolitical. … Yale has intentionally stalled on these discussions because [the administration] benefits from the fact that Yale students are only here for four years. We use direct action because we refuse to comply by Yale’s rules.”

Still, the Yale Investments office, led by Chief Investment Officer David Swensen GRD ’80, has long pushed back on claims that investment in Puerto Rico is unethical. It has argued that, in line with PROMESA — the Puerto Rico Oversight, Management, and Economic Stability Act — Yale has not demanded payment from U.S. territory. It further argues that Puerto Rico will still prosper if it successfully restructures its debt.

“At the end of the restructuring, if successful, Puerto Rico’s debt will be sustainable over the long term and the Commonwealth will regain access to the capital markets, both necessary steps for the island’s recovery and development,” a statement on the Yale Investments Office website reads.

Yale does not directly invest in Puerto Rican debt; it invests through fund managers and private equity firms. According to Charles Decker GRD ’18, Ward 9 alder and a leader of the Yale graduate student union Local 33, which has long advocated for transparency when it comes to endowment investments, Yale’s indirect investments are a staple of Swensen’s investment strategy. Decker said that Swensen’s appointment as chief investment officer in 1985 saw a shift from direct investments to investments in fund managers and private equity firms. In other words, while Yale does not directly invest in Puerto Rican debt, it does invest in fund managers that directly invest in Puerto Rican debt.

One of these fund managers, the Boston-based Baupost Group, had invested over $1 billion in Puerto Rican debt by 2017. The Harvard Management Company also ranks among the clientele of Baupost Group, according to a February 2019 report by The American Prospect. A 2016 letter from Baupost Group Chief Executive Director and Founder Seth Klarman sent to investors reveals that Swensen sat on the hedge fund’s board in 2016, per a report from The Intercept, an online news publication.

The Yale Investments Office declined to confirm or deny Swensen’s current role in Baupost Group.

So what exactly is the Puerto Rican debt crisis? Does the Yale Investments Office play a part in it? And what are Yale activist groups trying to accomplish regarding Yale’s indirect investment in Puerto Rican debt?

Puerto Rico: An Economic and Political History

Directly after Hurricane Maria devastated Puerto Rico in September 2017, a survey that polled 2,200 Americans was released by Morning Consult: only 54 percent of those polled said that they believed Puerto Ricans were American citizens.

The poll reflects the misconception that many Americans have regarding Puerto Rico, an unincorporated U.S. territory. Under U.S. law, an unincorporated territory is land that is controlled by the United States but does not have legal statehood. Despite its lack of statehood, the Puerto Rican political system is not dissimilar from that of some U.S. states.

The relationship between the U.S. and Puerto Rico has a long history. At times, the relationship has proven economically beneficial for both parties, at other times, economically disastrous for the latter. A 1976 U.S. tax law, known as Section 936, encouraged small businesses to invest in Puerto Rico by offering near-tax-free business ventures on the island. This led to a massive increase of manufacturing in Puerto Rico, particularly in the pharmaceutical industry.

Former President Bill Clinton LAW ’73 replaced Section 936 with a more modest tax cut known as Section 30A in 1993. Congress voted in 1996 to phase out all tax breaks related to Section 30A by 2006. This decision, coupled with the nearing recession, wiped out nearly half of Puerto Rico’s manufacturing jobs by 2014. According to Statista, an online statistics database, Puerto Rico’s unemployment rate increased from 10.6 percent in 2006 to 16.4 percent in 2010 — evidence of the decrease of jobs following the repeal of Section 30A.

Still, pharmaceutical companies continue to play a large role in the Puerto Rican economy, and pharmaceutical products comprise more than 50 percent of Puerto Rican exports. This high level of Puerto Rican exports helps the U.S. minimize drug imports from foreign countries. According to a January 2017 report from Investopedia, the U.S. only imported 25 percent of its pharmaceuticals as of 2017.

In the wake of tax incentive repeals in the 1990s, divestment in Puerto Rican manufacturing raised various economic challenges for Puerto Rico. With a shrinking economy, Puerto Rico opted to begin issuing state bonds, which the United States decided would not be taxed at the federal, state or local level. The bonds’ triple-tax-exempt status proved attractive to investors, and former Puerto Rico Gov. Luis Fortuno described in an interview with Qatar-based media source Al Jazeera that Puerto Rico began to overissue the bonds.

“They were extremely attractive in the marketplace, and Puerto Rico actually got addicted [to bond issuing], I would say,” Fortuno said in the 2016 interview. “So it was a lot easier to just go out and borrow rather than make tough decisions.”

Ultimately, these bonds resulted in the downfall of the Puerto Rican economy and a debt crisis that still cripples the nation. While U.S. states are allowed to declare Chapter 9 bankruptcy — the form of bankruptcy available to municipalities, cities, states and other civil bodies — Puerto Rico’s right to declare Chapter 9 bankruptcy was revoked in the Bankruptcy Amendments and Federal Judgeship Act of 1983. There is little legislative history, testimony or explanation as to why Chapter 9 bankruptcy, which had been available to Puerto Rico since 1934, was revoked.

Other attempts to counteract the repeal of Section 936 and Section 30A tax breaks proved equally unsuccessful. In 2008, Puerto Rico tried to attract wealthy individuals and small businesses with the goal of creating 50,000 jobs. The pieces of legislation, called Act 20 and Act 22, both proved unsuccessful. Far from its goal, the legislation created only 5,832 jobs in the region, according to an economic analysis report in 2015 by the Puerto Rico Department of Economic Development and Commerce.

In 2016, the poverty rate hovered around 43.5–44.5 percent, according to Data USA and the U.S. census.

Puerto Rico defaulted on its debt July 1, 2016. This was the first time that a U.S. state or territory had not paid its general obligation bonds since 1933. Puerto Rican officials took their bankruptcy case to federal court in 2017, announcing that the region could not repay its $123 billion in debt and pension obligations — an unprecedentedly high amount of debt. The next highest bankruptcy by a municipality in the U.S. was Detroit in 2013, which filed for bankruptcy after incurring $18.5 billion in debt. Attempts to solve the 2016 default problem led to the passing of the Oversight, Management and Economic Stability Act of 2016, which put the entire process of restructuring Puerto Rico’s debt in the hands of eight people.

These eight people make up the Financial Oversight and Management Board of Puerto Rico, which is tasked with working with the Puerto Rican government and its debtors to lay a foundation on which Puerto Rico can stabilize and recover from its debt crisis.

As Puerto Rico began to deal with its debt crisis, disaster struck in 2017: Hurricane Maria. The hurricane was classified as category five — the highest level for observed hurricanes. According to a Harvard report, the estimated death toll was in excess of 4,600.

When Hurricane Maria struck the Caribbean island in September 2017, a century-old piece of U.S. legislation crippled the island’s ability to receive emergency supplies in the first weeks after the hurricane. The Merchant Marine Act of 1920, popularly known as the Jones Act, prohibits trade between U.S. states and its territories from being carried out with foreign-made ships or crews made up of non-American workers. While the protectionist measure proved successful in helping American sailors’ financial interests, it drove up costs incurred in the relief of Hurricane Maria.

In line with executive response to previous natural disasters, President Donald Trump waived the Jones Act on Sept. 29, 2017 — two weeks after Maria had begun to ravage the island. Although the waiving allowed more relief aid options for Puerto Rico, the Jones Act received bipartisan scrutiny from members of Congress, with the late Sen. John McCain a vocal opponent.

Currently, Puerto Rico is in court with its debtors in an attempt to restructure and pay off its debt. While Puerto Rico is not allowed to declare bankruptcy, U.S. federal courts are acting as a mediator in restructuring the debt in a deal suitable to both Puerto Rico and its debtors.

According to Jonathan Macey, the chair of Yale’s Advisory Committee on Investor Responsibility — which advises the Investments Office on ethical investment practices — there are advantages to Puerto Rico paying off its debt.

“If they want access to capital markets in the future, then paying back their debts will give them access to capital markets in the future,” Macey said in an interview with the News.

The Investment

The Yale Investments Office did not respond to comment, in line with past decisions not to comment on individual investments. The issue of Puerto Rico and Yale’s indirect investments in Puerto Rican debt is addressed on the Yale Investments Office’s website, under a tab addressing “social responsibility” in its investments.

“When Yale activism groups, as well as other state and local organizations, demanded that the University disclose all investments in Puerto Rican bonds, cancel all those held by Yale, and fire investment managers who refuse to sell or forgive the debt, the matter was referred to the [Advisory Committee on Investor Responsibility],” the office’s official statement reads. “The ACIR concluded in January 2018 that divestment from Puerto Rican debt is not warranted when an investor is abiding by the applicable legal framework in a process in which the debtor’s interests are appropriately represented.”

The ACIR is a committee within the Yale Investments Office overlooking the ethics of various investment strategies. The committee is made up of Yale alumni, staff, faculty and students. Macey said in an interview with the News that the ethical question regarding Puerto Rican debt is who should make the decision on who should handle the Puerto Rican debt crisis: the “legitimately and democratically elected officials” of Puerto Rico or activists who “unilaterally agree that they don’t want Puerto Rico to pay principal or interest on the bonds.”

“Who is in the better position to make that call is the question,” Macey said. “Either Puerto Rico will pay back their investors or not. If not, then that’s their prerogative regarding the debt. The people who bought this debt were aware of the risk.”

Yale’s indirect investment in Puerto Rico lies in its investments in its fifth-largest fund manager, Baupost Group, as well as four other investment groups: Fortress Investment Group, Carmel Asset Management, Cyprus Capital and Corbin Capital Partners, according to a report from The Intercept. The Intercept also revealed in 2017 that, to avoid public scrutiny, the Baupost Group had invested over $1 billion in Puerto Rican debt using two shell corporations, both called Decagon Holdings LLC.

The first shell company was created in Nevada in 2015, the second in Delaware in August 2016. Puerto Rico defaulted on July 1, 2016.

Julio López Varona, a steering member at Vamos4PR — a national network of groups committed to Puerto Rican welfare — criticized the timing of these investments in an interview with the News.

“What we are opposed to is the fact that specifically these hedge funds that Yale invested in were hedge funds that bought bonds in the middle of the debt crisis,” López said.

Scrutiny and Defense

The Yale Investments Office does not explicitly disclose its investments to the student body, according to Decker. The Local 33 research team worked to uncover Yale’s indirect investment in Puerto Rican debt by going through various tax filings in recent years.

Decker has been involved in Local 33’s efforts to support local and undergraduate groups in their attempts to dissuade endowment investment in Puerto Rican debt. Decker said that Yale students should be in involved in the dialogue regarding how Yale’s endowment is invested.

“We are trying to form a union to build a more transparent and democratic university,” Decker said. “And part of that is the entire community being in the discussion and dialogue regarding [Yale’s] investments.”

This is not the first time that Local 33 has uncovered Yale’s investment in debt, according to Decker. Decker pointed to Local 33’s previous research into how Yale has historically put its money in distressed debt, as has happened with Argentina and the U.S. mortgage crisis.

The Yale Investments Office declined to comment on the alleged investment in Argentine debt and the U.S. mortgage crisis.

Colón argued against the university’s investment in Puerto Rican debt, saying that, “Yale shouldn’t be part of this investment because it is contributing to a humanity crisis.”

In the past, Yale has divested in various sectors that it has deemed unethical. According to Macey, under the recommendation of the ACIR, the Yale Investments Office has not invested directly or indirectly in assault weapon retailers that sell such weapons to the public. This practice was decided in August 2018. Additionally, according to Yale’s recently released filing with the Securities and Exchange Commission, the Investments Office divested 99 percent of its holdings in Antero Resource Corporation, a natural gas and oil company frequently criticized by the Endowment Justice Coalition. Yale’s exposure to the company dropped from $77,698,000 in September last year to $357,000 in December.

The Investments Office declined to comment on its divestment in Antero.

While Yale has defended its indirect investment in Puerto Rican debt, Macey said that the Investments Office would take issue with “unethical collection efforts.”

“I don’t want unethical or questionable actions regarding the collection efforts of the investors,” Macey said.

Macey cited the seizing of government property as one such method of unethical investment. He claimed that Baupost Group has not undertaken any such unethical collection methods in its attempts to collect on its Puerto Rican bonds, adding that Puerto Rico has not paid its debtors since U.S. federal courts began mediating the restructuring of Puerto Rican debt.

A Dialogue

The ethics surrounding investment in Puerto Rican debt are highly contested by activists and the Investments Office.

The Investments Office claims that despite deeming other investments unethical, the ACIR has cleared the ethics of its indirect holdings in Puerto Rican debt.

On the other hand, student activists have accused Yale of stalling on the issue and directly harming their Puerto Rican students by holding Puerto Rican debt, which has crippled the nation. They have demanded a transparent endowment and student participation in the investment discussion.

Regardless of anyone’s position, one thing is certain, according to Colón. There will be more protests.

“We end all of our actions with ‘We will be back,’” Colón said. “We won’t stop fighting until Yale meets our demands [regarding Puerto Rican debt investment], and we are sticking to that. There will be more rallies.”

Nick Tabio | nick.tabio@yale.edu .