While sleek resorts adorn the shores, foreign dollars are spent freely, poverty remains.
So much for that 'Trickle Down'!
La Perla “slum” Puerto Rico
UBS caught in island squeeze
Over the years, Puerto Rico has attracted the very wealthy, who come for the postcard-perfect beaches and the promise of a tax-free life.
Many of them shelter their millions in local municipal bond funds, which have been hit hard of late as the island struggles with a weak economy, rising interest rates and outsize debt loads. For the Swiss banking giant UBS, which boasts that it manages money for half of the island's millionaires — roughly $10 billion — the downturn has created a particularly nasty headache.
The bank's clients had piled into highly leveraged bond funds run by UBS and were encouraged by its brokers to borrow even more money to invest in those funds. In some cases, money was lent improperly, exacerbating current losses, according to UBS employees in the region close to the situation, who spoke on the condition that they not be named because of a company policy against speaking to the news media.
Now, a number of UBS clients have been forced to liquidate hundreds of millions of dollars in holdings in these funds to meet margin calls. And the bank says it has begun an internal investigation into the lending practices of some of its top-producing brokers in the commonwealth.
Last week, after inquiries from The New York Times, UBS put one broker on administrative leave after claims emerged that the adviser had encouraged his clients to buy securities on lines of credit, violating the bank's policy. Typically, customers use margin loans to buy securities on borrowed funds. Margin loans are governed by regulators and limit the amount of risk a customer can take on.
A spokeswoman for UBS, Karina Byrne, said the bank's investigation was continuing, and added that the general weakness in municipal markets across the United States and Puerto Rico and apprehension about the direction of interest rates had contributed to steep declines in Puerto Rico funds.
UBS has had its share of embarrassments in recent years. It agreed to pay $1.5 billion last year to settle claims that its traders and managers had manipulated global benchmark interest rates for years.
Around the same time, a former UBS trader was sentenced to seven years in prison after he was found guilty of fraud that prompted a multibillion-dollar trading loss at the big bank.
Also last year, UBS paid $26.6 million to settle accusations by the Securities and Exchange Commission that the bank and two of its executives in Puerto Rico had made misleading statements to investors, which the agency said had concealed a liquidity crisis in UBS funds.
Puerto Rico, a commonwealth of the United States where residents typically pay no federal income tax, is financially regulated by the SEC. While other big banks do business in Puerto Rico, UBS is one of the few to have a large team of brokers on the island.
For years, the bank's funds had strong returns and paid healthy dividends. The Tax Free Puerto Rico Fund II, with $357 million in assets, has a five-year return of 6.8 percent, according to UBS documents.
But as Puerto Rico's economic woes have deepened, UBS customers have seen the value of their holdings fall.
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