Former UBS Insider Says Banks Fueled Puerto Rico’s Economic Crisis | Blackout in Puerto Rico | FRONT LINE | PBS

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In the years before Hurricane Maria devastated Puerto Rico, a debt crisis crippled the island’s finances, wiping out billions of Puerto Rican investments and leaving the island’s infrastructure dangerously vulnerable.

Now, a former UBS insider is speaking publicly about the bond frenzy that pushed the island into default and then bankrupted it just four months before the storm hit.

Bank chief Carlos Capacete says he has seen banks like UBS help fuel the crisis, encouraging the local government to run into billions of debt. As this debt grew, the Puerto Rican government failed to meet the island’s basic needs, such as its aging power grid. When the bond market crashed, it took with it the savings of thousands of Puerto Ricans.

While the Puerto Rican government is not blameless, Wall Street’s role in promoting subprime debt has been overlooked, Capacete said.

“During the subprime mortgage crisis, people were talking about Wall Street. “Look what they did on Main Street,” Capacete said. “In Puerto Rico, the crisis is, ‘Look what Puerto Ricans have done.’ No one is talking about Wall Street… The bonds that were sold that created the massive $74 billion bond debt in Puerto Rico were sold using all the investment bankers on Wall Street. not just Puerto Ricans. If the banks had been responsible, if they had said, “Hey, look, you can’t borrow that amount, so we’re going to limit it to that,” we wouldn’t be here right now.

Capacete spoke publicly for the first time as part of a joint FRONTLINE and NPR investigation into the response to Hurricane Maria, Breakdown in Puerto Rico.

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If the banks had been more responsible, Puerto Rico wouldn’t be in such dire financial straits, says former UBS insider Carlos Capacete.

Before leaving the bank in 2014, Capacete worked for more than 25 years for UBS Puerto Rico, a subsidiary of the Swiss financial giant and the island’s largest wealth manager. He rose through the ranks of the bank, becoming the head of the largest branch on the island, in Hato Rey, the central banking district of San Juan. At his peak, he managed a $3 billion portfolio. But his world would come crashing down, along with the Puerto Rican economy, after he raised the red flag on the bank’s practices that put Puerto Rican investors at risk.

Prior to the stock market crash, Puerto Rican bonds were big business for banks. Borrowing took off in 2006. It was then that, to avoid a government shutdown, Puerto Rico began borrowing more and more to cover annual government expenses, rather than for large infrastructure projects like most cities and states. In 14 years, the island has added $48 billion to its debt.

For UBS Puerto Rico and other banks, the government’s borrowing spree has provided new opportunities, Capacete said. Banks have played a pivotal role as underwriters of government bond offerings, seeking buyers for Puerto Rican debt and earning millions of dollars in fees.

“All the major banks in New York came to Puerto Rico regularly to offer deals,” Capacete said. “’Look, we can do another $200 million, another $500 million.’ This is how the deficit, the structural deficit, was financed.

Capacete said that even when research reports began coming out in 2012 raising questions about Puerto Rico’s debt sustainability, managers continued to tout the bonds to clients.

Banks like UBS didn’t just underwrite bond contracts for the government of Puerto Rico, which were sold to investors across the United States. They also found a lucrative niche by creating specialized Puerto Rican bond funds sold only to clients on the island – funds that Capacete helped oversee. These bond funds were riskier than allowed on the mainland because Puerto Rico, as a US territory, is exempt from key investor protections under the Investment Company Act of 1940.

At first, Capacete said, the funds created steady income for Puerto Rican clients. But over time, he said, there weren’t enough new investors to sell to, so the bank had to find ways to sell more to existing customers.

In 2011, sales were slowing and brokers were raising concerns. In May, a group of UBS Puerto Rico brokers compiled a list of 22 problems with the funds, including oversupply and price instability. In response, the bank managers called a meeting with all the brokers on the island.

“So you all know our gross production is down about 40%,” UBS-PR Chairman Miguel Ferrer said at the time in a recording of the meeting later released to the public. “When I ask, or when brokers are asked why they don’t produce, almost everyone answers the same thing: because there is no product. Bullshit, bullshit.

At the end of the meeting, the message was clear: sell the funds or find a new job.

This surge in sales, Capacete said, was not just for bond funds. He says the bank was also pushing financial advisors to sell more loans to Puerto Rican clients, using their bond investments as collateral. It was then that Capacete became suspicious.

“There were other peers of mine who were very successful. So successful in fact that I found it very odd,” Capacete said. “Because you have a shrinking economy…it had no makes sense to me that these people are doing so much business lending.”

He started to examine it. “And then one day this client comes up to me and says, ‘Hey, you know what? Do you know what they are doing in this other branch? And I said, ‘Tell me.’ And he told me the diagram. They took out the loan. The adviser would tell them to deposit the money in a local bank, keep it there for a week or two, bring back a similar amount, and use it to buy more funds from Puerto Rico.

Capacete believed it was against banking rules to use such loans to buy securities like Puerto Rican bond funds. He worried that clients would not understand that by using loans to buy more bonds, their losses would be magnified if the market failed. Alarmed, he alerted the bank’s compliance officers in May 2012, but said he heard nothing until the following February, when he was visited by two compliance officers from UBS’s US headquarters. .

“One of them speaks up and says, ‘We understand that you are concerned about whether there are financial advisers giving out loans for unnecessary purposes’, which means misuse of the loans program “, said Capacete, recounting the meeting. “And I said, ‘Yes, I am.’

Capacete said he jumped out of his seat in disbelief.

“It was against company policy and you were putting customers in a very high risk situation,” he said. He thinks the bank didn’t pay enough attention to his concerns “because they were making money”. The loans were profitable, he said, “and I was the one spoiling their party.”

The party ended in August 2013 after a major financial publication raised concerns about Puerto Rico’s ability to service its debt, sending bond prices into a tailspin. Soon, investors big and small saw their portfolios plummet. Puerto Ricans, who had been heavily concentrated in the island’s bond funds, were particularly hard hit, with losses in the billions.

Capacete’s concerns would eventually come to the attention of the Securities and Exchange Commission, which in 2015 settled with UBS for $15 million over allegations that a broker had engaged in the loan program. The settlement said UBS’s failure to catch the broker was “due to a clerical error” but was still a “significant discrepancy”. UBS did not admit guilt in settling.

UBS declined to be interviewed, but in response to questions called Capacete a disgruntled former employee who has sued the bank multiple times. The bank said the terms of its loans are fully disclosed to customers and it conducted an internal investigation which found only one broker abused its loan program.

“After a thorough investigation confirmed the allegations, the broker in question was terminated,” the statement said. UBS also pointed to a separate SEC finding that it did not mislead its clients.

The bank continues to deal with the fallout from its Puerto Rican bond funds. In total, UBS Puerto Rico has paid over $65 million in regulatory fines, and to date over 1,900 UBS clients in Puerto Rico have filed claims against the bank. More than half of those cases have been settled with damages estimated at more than $350 million, according to the Securities Litigation Consulting Group, which has provided expert witnesses in cases against UBS.

“The problem is the risk that customers were put in, that they didn’t understand,” Capacete said. “Whenever you recommend a strategy to a client, you better make sure it’s right for them, because if not, you’re responsible.”

Emma Schwartz and NPR Laura Sullivan contributed to this story.


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