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December 1st, 2015 10:43 am
Puerto Rico Debt Crisis: Richard Carrion Is a Problematic Witness Sitting Alongside Governor Garcia Padilla
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At today’s Senate Judiciary Committee hearing on Puerto Rico’s fiscal situation, Governor Alejandro Garcia Padilla will likely face tough questioning from Senators displeased with his handling of the island’s economy.  Sitting alongside Gov. Garcia Padilla to face those questions will be a close friend from the Commonwealth’s financial sector:  Banco Popular Chairman and CEO Richard Carrion.

Carrion, whose bank is no stranger to asking for federal assistance – it received almost $1 billion in TARP funding from the Treasury (which it did not repay until July 2014) – is a longtime Garcia Padilla supporter who continues to maintain a close relationship with the Puerto Rican government.  Additionally, Banco Popular’s General Counsel Javier Ferrer is the former GDB President under Gov. Garcia Padilla, and longer-tenured lawmakers will also be familiar with the bank’s previously cozy relationship with Representative Luis Gutierrez, who lobbied for that TARP funding for the bank in 2008.

The island’s largest lender holds unmatched influence over the Island’s financial sector, controlling over 40% of the Commonwealth’s credit market.  It has also benefited from Puerto Rico’s debt crisis by collecting underwriting fees on large swaths of the public debt and acting in a fiduciary capacity for many debt issuers.

At today’s hearing, we therefore urge Senators to consider the motivations behind Carrion’s testimony.

Over the years, Banco Popular stands as the biggest beneficiary of Puerto Rico’s debt crisis, collecting fees to underwrite huge swaths of Puerto Rican debt.  Since 2008, Banco Popular’s subsidiary, Popular Securities, has been involved in the underwriting of over $56 billion in Puerto Rican bond offerings, mostly for the Puerto Rican government.  In that capacity, Popular has had a direct hand in the issuance of billions of dollars of debt to investors on the island and mainland, including to small investors, pensions, and mutual funds.  As underwriter, Popular has performed due diligence on every bond offering in which it has been involved.  Yet in advocating for a complete restructuring of Puerto Rico’s debts, Popular is now asking to restructure the very same bonds it recommended to regular investors saving for retirement after having passed judgment on their suitability for such investors.

In addition to fees collected as underwriter, Popular also acts in a fiduciary capacity for several bond issuers, serving as paying agent, escrow agent, and trustee.  These issuers include institutions with deep ties to Gov. Garcia Padilla’s administration, including the Government Development Bank, COFINA, the University of Puerto Rico, and the recently defaulted Public Finance Corporation among others.

Despite having already profited handsomely on the debt crisis that it has helped to create, Popular is now advocating for a complete restructuring of the government’s public debts.  At first glance, it seems strange that a large lending institution like Popular would take such an anti-lender stance on Puerto Rico’s debt, especially given that it helped to issue so much of it.  Through an agreement with JP Morgan, and previously Morgan Stanley, however, Popular is only exposed to a small fraction of the underwriting exposure for any offering made to mainland US investors.  Further, most of Popular’s outstanding exposure to Puerto Rico debt is to several of the Island’s 78 municipalities, which has never been part of a restructuring proposal.  Their direct exposure to debt that would be subject to a restructuring is minimal.

Even after a total debt restructuring, Popular would no doubt choose to continue its practice of selling  loans made to struggling, regular Puerto Ricans to mainland institutional investors and hedge funds at steep discounts, who in turn seek 100% repayment from the borrowers.  To be clear, Popular has long engaged in these dealings with Wall Street, having already unloaded over $1.75 billion in loans to institutional investors which are in varying states of foreclosure.

All of this suggests a self-serving agenda.  While it carries minimal direct exposure to the debts that it seeks to restructure, Popular stands to profit handsomely on the backs of regular Puerto Ricans by continuing to sell their loans to Wall Street firms when they cannot pay their debts.

It triggers the question, then, that if Popular truly seeks to restructure these debts for the good of Puerto Rico, will it support the same type of unilateral restructuring for other types of loans taken out by regular Puerto Ricans who are Popular customers?  Will Popular allow its own clients to restructure their mortgages and car loans and cease and desist from any and all foreclosure processes against these borrowers?  Or will it reap the financial benefits of the crisis that it is creating for Puerto Rican borrowers?

In addition to those questions, here are some others that Senators would be wise to ask of Carrion:

  • What is your relationship, personally and professionally, with Gov. Garcia Padilla, his administration and his family?
  • How is it that your bank, the largest in Puerto Rico, has avoided the exposure to public securities experienced by other banks?
  • As a recipient of a large federal bailout resulting from poor lending practices, what qualifies you to advise on the best path forward for Puerto Rico’s recovery?
  • As a private sector leader, why are you not working with other members of the private sector to reach a consensual solution?
  • If you are willing to advocate for massive debt forgiveness to the Puerto Rican government, are you willing to provide similar debt forgiveness to regular Puerto Ricans that struggle to make loan payments to your bank?

Considering that the biggest beneficiary of the Puerto Rico debt crisis now calls for “Super Chapter 9” bankruptcy and broad restructuring powers, those are all reasonable questions.

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