How Banks Responded to “Blackout in Puerto Rico”


May 1, 2018

In the course of investigating Blackout in Puerto Rico, reporters for FRONTLINE and NPR reached out to the banking giant UBS to ask about the special bond funds it sold to Puerto Ricans in the years leading up to the island’s financial collapse.

Officials for UBS declined to be interviewed on camera. But in written responses to our questions, the bank said:

UBS does not discuss specific clients’ accounts or their activities or share client information. UBS clients can borrow in order to invest with the firm. The same is true for clients of all leading securities firms. Clients who borrow knowingly choose to do so and can pay off those loans whenever they want to. Clients are updated regularly on the details of their balances and interest.

… All loans used to purchase securities fully disclose terms which require repayment as soon as the underlying collateral does not cover the borrowed amount. Because this is based on results from market activity, margin calls are by their nature time sensitive.

The company also responded to questions about Carlos Capacete, a former bank official for UBS in Puerto Rico. In interviews with FRONTLINE and NPR, Capacete said banks like UBS helped fuel the debt crisis in Puerto Rico. He also said he tried to warn UBS officials that brokers with UBS were skirting bank policies in order to boost bond sales.

“Mr Capecete [sic] is a disgruntled former employee of UBS who has tried to sue UBS on five separate occasions since he left the firm,” the bank said.

 It continued:

Our compliance practices are thorough, and extensive investigations are conducted when concerns are raised. Nothing about the firm’s non-purpose lending program was in violation of any federal banking regulation. As the firm has acknowledged in the past, UBS independently identified and brought to the attention of management that one financial advisor was advising his clients to use non-purpose loans as a means to purchase securities in violation of firm policy. After a thorough investigation confirmed the allegations, the broker in question was terminated.

We also reached out to several major banks that were involved in underwriting Puerto Rican bonds to ask them about their involvement in a $3.5 billion debt offering in 2014 — the largest bond offering of its kind in U.S. history. Most banks declined to speak on the record, but several provided written statements.

Morgan Stanley wrote:

In March 2014, Morgan Stanley helped Puerto Rico raise $3.5 billion to restructure its debts and pay off some of its obligations. The termination of our and other counterparties’ swap agreements that were included in the deal were triggered by ratings downgrades and fully disclosed to investors with at least six separate references in the bond prospectus. Some eight months after this transaction, Morgan Stanley extended an additional $250 million in credit to Puerto Rico and related entities to help manage its liquidity.

Oriental said:

While Oriental might have been listed as an underwriter of the $3.5 billion 2014 GO bond issue, it had no other involvement. It received no allocation on of bonds from the lead manager of the underwriting group. It did not purchase, sell or distribute any of the bonds as an underwriter. It received no underwriting compensation on related to this transaction, and it did not participate in or have any influence over the selection on of the bonds to be refunded by the government from the 2014 GO bond issue.

Santander wrote:

When the Puerto Rican government went to the public market with a bond issuance in 2014, many banks participated in the underwriting and distribution of the debt as part of a syndicate of broker dealers.

Santander’s role in this bond offering as an underwriter was minimal and we did not sell these bonds since this issuance was offered in the Municipal Tax Exempt market in the US. The performance of investments following Puerto Rico’s economic decline is an issue being dealt with across the financial services industry. We continue to work through these legacy issues and support our clients in Puerto Rico in a difficult economic climate that has been compounded by the impact of Hurricane Maria.

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