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How Did UBS Recommend Puerto Rico Junk For Mom And Pop Clients?

November 5, 2013 Blog

How on earth could trusted, so-called UBS “financial advisors” recommend that conservative and retired investors in Puerto Rico fill their accounts with Muni Bonds which have near junk ratings?

That’s the call the firm made for conservative investors, and it’s shocking to hear what has happened to thousands of trusting and unwitting investors.

A casual look at the ratings of Puerto Rico municipal bonds from Standard & Poor’s, Moody’s and Fitch should have led any UBS financial advisor worth his salt to limit the recommendation of these junk bonds to only the most sophisticated investors. Hedge funds and other such investors have the appetite for high risk securities, mom and pop investors do not.

The storm of Puerto Rico debt, which this blog has intensely focused on over the past several weeks, has been churning for years. UBS was at its center, packaging $10 billion of highly leveraged, closed-end bond funds over the past decade and selling them to retail clients.

The storm’s warning signs were abundant and clear, according to an increasing number of news reports. With investors worried about a downgrade or a default, Puerto Rican bonds lost 15% this year through the end of October. But the economic news from Puerto Rico has been bad for almost a decade, and it’s a wonder how UBS missed it.

Economic output has dropped 16% on the island commonwealth since 2004, tourism revenue is down 15% since 2007 and unemployment is almost 14%, almost double that of the United States, according to a report last week in Bloomberg by Bill Fairies, Martin Braun and Michelle Kaske.

How could UBS have missed more than a decade of Puerto Rico’s severe budget deficits, unfunded pension liabilities, slow economic growth and tight cash flows?

According to the Bloomberg report, the danger to investors could get a lot worse.

“A downgrade could force many mutual funds to sell part of their Puerto Rican holdings, flooding the market,” the report stated. “’Puerto Rico could represent a systemic issue for the municipal-bond market,’ says Carlos Colón de Armas, an economist and former official of the Government Development Bank, which conducts the island’s capital-markets transactions.

“’We are now in a situation where the bonds are trading like junk. I think the ratings agencies have been careful not to lower the (general obligation bonds) further, to avoid creating havoc in the muni-bond market.’”

In a separate story, Kaske from Bloomberg noted that Standard & Poor’s has threatened to lower Puerto Rico by one level, making it junk bond status, “if the economy deteriorates to the point we believe it significantly hampers the ability to lower budget deficits.”

The only buyers for Puerto Rico Muni Bonds now seem to be vulture hedge funds willing to pay pennies on the dollar and profit off the misery of cash starved retirees, according to other reports.

Something is very rotten in this paradise island, and it has been rotting for years. How did UBS miss it?

Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions, including UBS.