April 11 (Bloomberg) -- Popular Inc., Puerto Rico’s largest lender, amassed record losses during the credit crisis and got a $935 million injection from U.S. taxpayers. Now a loan to a real estate venture overseen by the chief executive officer’s nephew is burning a hole in the bank’s books.
Popular loaned the money two years ago to a developer controlled by Jose Vizcarrondo, whose uncle, Federal Reserve Board of New York director Richard Carrion, is the bank’s CEO, according to a March proxy filing. Vizcarrondo’s company used the cash to buy a residential project in Puerto Rico that had defaulted on an earlier debt to Popular, the filing shows. Pouring more money into the project hasn’t worked out: Popular said it wrote off more than half the $15.7 million.
Add that Vizcarrondo, 49, is a Popular board member who until two months ago helped set Carrion’s pay, and the saga exposes conflicts of interest and potential weaknesses in the bank’s governance, according to Professor James Post of Boston University in Massachusetts.
“This deal does smell like rotten fish,” said Post, who was co-author of “Redefining the Corporation,” a study of governance and accountability. “It immediately raises the question: Have there been other deals of this sort that have gone on, and are shareholders entitled to know about that?”
The loan is among the latest “related-party transactions” between Vizcarrondo and Popular, which paid companies linked to him at least $33 million since 2004, regulatory filings show. The bank posted $1.87 billion of losses from 2007 through 2009 under Carrion, who has been Popular’s CEO since 1994 and a director on the New York Fed's board since 2008.
The debt of Vizcarrondo’s firm, TP Two LLC, was included in a $500 million package of mostly distressed loans put up for sale in January, according to Popular. Regulators haven’t accused the bank, Carrion or Vizcarrondo of wrongdoing, and Vizcarrondo left Popular’s compensation committee after TP Two’s debt soured, according to the proxy.
“We maintain internal procedures that require that all related-party transactions be reviewed and approved by our audit committee, which is composed entirely of independent directors,” Ignacio Alvarez, the bank’s chief legal officer, said in an e-mailed statement. There’s no blanket prohibition on such transactions, which sometimes “may be in the best interest of the corporation and its shareholders,” he said.
Carrion, 58, Vizcarrondo, 49, and the New York Fed declined to comment.
Popular, organized in 1893, owns Banco Popular del Puerto Rico and acquired local lender Westernbank after it failed last April. The company has 185 branches on the island and more than 100 in New York, New Jersey, California, Illinois, Florida and the Virgin Islands, according to the company’s annual filing with securities regulators.
The lender ranks 38th among firms supervised by the Fed, with $38.7 billion in assets and deposits of $26.8 billion, according to the company. It’s fifth on the list of commercial banks still holding funds from the $700 billion Troubled Asset Relief Program, the taxpayer-funded program for U.S. financial companies. Popular posted net income last year of $137 million after a $574 million loss in 2009.
Regulators bolstered Popular with TARP funds in November 2008 as write-offs surged on subprime residential mortgages and commercial and construction loans. As commercial real estate defaults continued to mount in 2009, Popular sought to dispose of a partly occupied 70-unit residential development of houses and condominiums in the suburbs of Dorado on Puerto Rico’s northern coast, said Teruca Rullan, a company spokeswoman.
The bank had financed the project and seized it after a default by the owner, Treasure Point Corp., which used Desarrollos Metropolitanos LLC as its general contractor, Rullan said. Jose Vizcarrondo is CEO of Desarrollos, a construction company with about $33 million of revenue in 2010, according to this year’s Popular proxy.
Popular sold the site in August 2009 for $13.5 million to TP Two, a firm controlled by Vizcarrondo and his father, Julio Vizcarrondo Jr., 76, according to the bank’s 2004 proxy. Julio was a Popular director from 1990 until 2004, the same year his son joined the board, according to Rullan and the bank’s 2004 proxy. He’s also Carrion’s brother-in-law, the bank said. He declined to comment.
The Vizcarrondos outbid two other “reputable” developers and builders, the bank said in this year’s proxy filing.
‘His Offer Was Better’
“We looked at another offer from another party to buy that property,” Alvarez said in a phone interview. “This was a workout situation. His offer was better. We thought his knowledge of the property was better.”
Popular financed the sale to TP Two with a $10 million loan and $13 million line of credit, and $15.7 million remains outstanding, Rullan said. This loan is now non-performing, the bank said.
The bank announced Jan. 31 that it planned to sell about $500 million of loans, 75 percent of which were non-performing. The Vizcarrondo loan is included in this batch, Rullan said. Popular has written off $8.6 million from the value of the loan in advance of the sale, she said.
The Vizcarrondos’ company “continues to pay the loan as the units are sold,” and isn’t in default, Rullan said. “In the current real estate market, sales have been lower than anticipated. The loan is payable from the proceeds received from the sales of residences.”
Jose Vizcarrondo received $99,000 in total Popular compensation -- including stock -- in 2010 and beneficially owns 249,621 Popular shares, according to a regulatory filing. The shares advanced 7 cents to $3.10 in Nasdaq Stock Market trading today. They’ve dropped 1.3 percent for 2011 and 85 percent in the past five years.
“His knowledge of the construction industry is of benefit to the board as it provides a better understanding of the real estate industry, which has experienced a material deterioration in recent years and represents a material risk to the corporation,” according to the proxy filing.
Vizcarrondo asked the bank’s board not to consider him an independent director because of the “non-performing status” of the loan and he resigned from Popular’s compensation committee Feb. 18 as a result, according to this year’s proxy. He still serves on the bank’s risk committee.
“He was not an independent director and my firm would not consider him an independent director,” said Nell Minow, editor for GovernanceMetrics International, a corporate governance research company in New York. “There’s an inherent conflict of interest there that cannot be resolved.”
Popular’s biggest shareholder, with a 6.55 percent stake as of Dec. 31, is the New York-based hedge fund Paulson & Co., run by billionaire John Paulson, according to Bloomberg data. Paulson made $15 billion betting against subprime lenders during the financial crisis. Armel Leslie, a spokesman for the fund, declined to comment.
Puerto Rico home prices rose 54 percent from 2000 through the third quarter of 2008, according to seasonally adjusted figures from the Federal Housing Finance Agency. Prices fell 8.9 percent since then through the second quarter of 2010. About 20,000 completed or unfinished homes remain unsold as of this year, according to Hans Moll, president of the Puerto Rico Homebuilders Association.
“With the significant consolidation that is occurring in the Puerto Rico banking market, we continue to believe Banco Popular will emerge from the crisis in a significantly better position,” Christopher Neczypor, an analyst with Goldman Sachs Group Inc., said in an April 10 report.
Desarrollos isn’t the only company linked to Vizcarrondo to gain from Popular contracts. The bank paid $33 million from 2004 through 2006 to Metropolitan Builders SE, a firm in which Vizcarrondo is a partner, proxy filings show. This company was awarded construction contracts valued at $52 million in 2002, the filings show.
The bank told shareholders about the contracts in its 2004 proxy when Vizcarrondo was first nominated as a director, according to Alvarez’s e-mail. Shareholders “voted to elect him notwithstanding,” he wrote.
Carrion’s overall compensation, including stock, increased 67 percent last year to $1.8 million, according to the proxy filing. The bank could make a profit this year of about $111 million, according to a Bloomberg survey of six analysts.
N.Y. Fed Director
Carrion became a director of the New York Fed in January 2008 and was reelected to another three-year term in December, according to the regulator’s website.
As a Class A director, Carrion was elected by other banks regulated by the New York Fed as one of their representatives on the board. The other Class A directors are JPMorgan Chase & Co. CEO Jamie Dimon and Charles Wait, head of the Adirondack Trust Co.
Jack Gutt, a New York Fed spokesman, declined to comment on Popular’s loan to TP Two.
Carrion didn’t set the TP Two deal in motion, wasn’t part of the approval process and abstained from all board votes relating to the TP Two deal, said Rullan, the bank spokeswoman. All the transactions involving Vizcarrondo were “fully vetted by the board of directors and properly disclosed to investors,” according to the bank.
“Carrion was either the initiator or he allowed it to go forward,” said Post at Boston University. While one data point doesn’t make a trend, he said, “it raises troubling questions about the commitment to loyalty to the corporation.”
To contact the reporters on this story: Donal Griffin in New York at Dgriffin10@bloomberg.net;
To contact the editor responsible for this story: David Scheer at email@example.com.