Category: banks

Maharlika — everything, everywhere, all at once

Pasting this in full before it gets paywalled.

By Stephen CuUnjieng

SIGNED, sealed, delivered — it’s yours. Now what do we have with Maharlika and what will they do with it? I have previously said I am supportive of a national development fund. Preferably one like Indonesia’s, but at least the Senate improved on the House version. Still, would it be the way I would do it? No, but I am not the president or a senator, so what should the managers and board do with what we have?

It is clear as can be seen from the rushed document that there are even sloppy typographical errors that could have been cured with a little proofreading. In the section on the Bangko Sentral ng Pilipinas (BSP), the bill mentions “the monetary board” when it clearly should be “the Monetary Board.” Was that so hard to miss, and correct? What else might be there?

More important, there are contradictions or at least ambiguities, which should have been worked out, unless they were intentional. If the latter, then I would be worried. Sec. 2 on the “Declaration of Policy” seems to imply without being explicit that this is a national development fund from what the aims are. Yet there is no provision delineating this or limiting the breadth of what the Fund can invest in or where. Then in Section 14 on what the Fund can invest in, it reads to me like “Everything, Everywhere, All at Once.” Literally any type of equity, debt, or hybrid debt or equity plus joint ventures anywhere is allowed. That was carried over from the bill passed by the House. This does not seem in line with the “Declaration of Policy” in Sec. 2. If I was charitable, I could argue that this is where to park the money, starting with the initial P75 billion until they make the long-term investments but that is something the board and management may choose to follow, impose or ignore. If the latter, then it is no longer a national development fund but a regular fund with unlimited scope.

Short-term, long-term

Let us even argue that this broader scope of permissible investments is just “short-term” until the long-term investments are made. What if they lose value in the meantime or are so illiquid that they can’t be liquefied to fund the long-term investments? Why do I worry that Sec. 14 was not meant for just short-term investments, i.e. for the money on hand until the long-term investments are made? If it was just short-term, why would that section allow joint ventures and unlisted securities which are not liquid, short-term, or easily sold? If for the long term as well, then why is there no limitation on where and what the Fund can invest in? Again, it seems to be the old provision from the bill passed by the House and just carried over without clarifying what it meant, unless they really plan for it to be open-ended. Unless that was the intent and the Declaration of Policy was just principle that the Fund’s board and managers could comply with in whatever way they want to. So, in reality, full discretion. If so, then it really is the old House bill version with some statements of principle but no implementing or limiting provisions, which is an all-encompassing fund and not a national development fund. If that happens, then I worry and I don’t think that is a very good use of proceeds or worth the trouble and use of funds from the various government sources as Sen. Imee Marcos pointed out. Frankly, the government through existing entities can do that already, so why create something new and use profits of the Bangko Sentral (BSP) which are better used building up its own balance sheet? More on that later, but as Senator Marcos pointed out this is not coming from a windfall. The funds are being allocated away from other potential uses of funds by the DBP, LandBank, BSP and the national government.

Open-ended

On June 3, Sen. Mark Villar, the principal author of the bill which has become law, basically said it is both a general fund that can invest in anything and a national development fund. That means it is open-ended and really can be anything, unless the board and management choose to limit the Fund’s scope voluntarily. The board and management have the discretion to allocate what percent to a general fund and to the development side. Should they decide, that scope can also be changed by subsequent boards and managements.

Then there is the way the Fund is being funded. Most mutual funds that invest in public debt and equity are fully funded from the start and fully invest their funds in a short period of time. Unless they are open-end funds and raise new capital, they sell some of their holdings to buy other stocks or bonds. Most private equity firms that invest in unlisted securities (as at least what should be the national development fund side is targeted to do), usually get commitments but only call the funds when needed. What does that mean? Let us for example say XYZ Fund raises $1 billion in commitments from 100 investors who for simplicity commit $10 million each. At that start, there is no money in the fund, except perhaps an initial call of 5 percent or less for organizational purposes. So, in this case all that is put is $50 million. Then they decide to make a $100 million investment in a company or project, the Fund will receive 10 percent, or $100 billion, from the investors who will each send $1 million, or 10 percent of their commitment. This continues until the Fund is fully invested or the Fund reaches the end of its investment period. That way there is no worry about what to do with the money until the Fund makes the investments.

Here we are starting with zero targeted investments but P75 billion in funds. What will the Fund do with this pending use of proceeds? It also reads that this Fund will continue to be funded until it gets to P500 billion regardless of whether the Fund is making the envisioned long-term investments or not. Or is it profitable or not. Not the normal way it is done. For example, GIC manages the reserves of Singapore. Their private equity fund and investments in global private equity funds don’t send the money ahead except for calls for management fees and the like. They usually send the funds when investments are made. It is different if you are a windfall fund like Norway where revenues from their sale of oil is managed but this is not the case here. While sovereign funds are not limited to those with windfalls it is unusual when there is no windfall or revenue stream to fund ahead of commitments. Even more odd if what is envisioned is a national development fund and not a sovereign wealth fund, then as I put it, why can Maharlika invest in everything, everywhere, all at once? I suppose because it is a two-in-one fund, but those two are at cross-purposes.

Most problematic

Then there is the matter of using the profits of the BSP. Central banks, especially if you are not fortunate to be from a reserve currency like the US or European Community, are never big enough. Most prudent governments want to build the asset base of their central banks as fast and as much as they can to have the wherewithal to act in a financial crisis whether homegrown (like we had in 1983-1985) or regional (1997) or global (2008 and Covid and this year after the Ukraine invasion), which happen with regularity and more so recently. Under the BSP law, 100 percent of the profits of the BSP are returned as additional capital. Well, not anymore. The Senate version adds that “the monetary board (sic) can recommend to the president” that the investment of their profits to Maharlika be deferred if needed. Note, it is the president who decides, not the independent central bank and Monetary Board. Also, the nature of emergencies and crises is they are usually unforeseen, hence the need to prepare for their possibility ahead of time and not post its occurrence. When it happens, the central bank will have to use what resources it has and not be able to recall prior profits given to Maharlika or wait for the forthcoming profits and defer sending that if the president agrees. Frankly, this is the most problematic provision of Maharlika for me.

That analogously, is also the issue with using DBP and LandBank as funders. It lessens what is available to lend and by about 10 times the amount they invest in Maharlika. Why 10 times? Regardless of how they find it, what the LBP and DBP invest in Maharlika is charged to their equity. In their respective cases, initially P50 billion and P25 billion. Now a bank needs about 10 percent Tier 1 capital. So P1 in capital supports about P10 in loans and other debt instruments. As the Maharlika investment is charged to their equity, that means up to P750 billion less lending for both. Can the Bankers Association of the Philippines and BSP confirm if I am correct? I hope I am wrong but if I am right this is something to carefully assess and suggest the administration consider.

Especially given the clashing goal of merging LBP and DBP to make them bigger so they can be more efficient and lend more. How is that accomplished by taking away P750 billion in lending capacity up front, even while Maharlika has yet to find investments, and this will continue if the capital investments continue for these two banks.

Let me put it analogously. If it was too imprudent to let the pension funds like SSS and GSIS invest in Maharlika and are permanently barred, wouldn’t the same logic apply to the BSP given their need to constantly build up their balance sheet and resources to defend the peso and stabilize the economy as needed? Same with DBP and LBP if they are to fund infrastructure, development and agriculture. Why take away equity which will result in 10 times reduction in lending capacity?

Let me leave discussion of management, organizational structure and funding to another column. If we had to have a government-funded investment fund, I wish it was a national development fund, similar to the one Indonesia is trying out. That is not what Maharlika is. It could be implemented as a national development fund, but what is provided by the law is open-ended. It seems to be some hybrid fund whose direction is open to the board and managers but whose funding is set.

In the week since its passage, I have been listening to all the arguments of the government officials on how this will help Philippine infrastructure and so on. I agree if the Fund dedicated its resources to be a national development fund, it could. If that was the intent, then why did they set up a Fund that could invest in everything, everywhere, all at once? And why is that part not being explained?

 

Shooting Stars and the Falling Peso

O. Roncesvalles

I remember a time in 2012 when many big-bank economists predicted that the Philippine peso would remain a shooting star at around P42/$ by year-end. The peso then was a ‘darling’ currency, having nicely recovered from a low of about P49/$ in the wake of the Financial Crisis of 2008. Little did the bank economists know that there would soon be a literal u-turn; the peso shortly began its doldrums to where it is today at P53/$. It hasn’t been a pretty sight for the responsible authorities at the central bank.

Read on…

PH awash with cash

Tony Lopez

… It is not for lack of money that the government cannot institute drastic reforms and alleviate poverty. This government and this country are awash with cash. The economy is awash with cash.

Where is that money?  To start with, the savings rate is 30 percent of the value of output of goods and services or GDP.  GDP is P15 trillion.  So 30 percent of that is P4.5 trillion.   With that, we can finance the entire government’s operations for one year and still have P1 trillion of excess money.

We have $27 billion in annual OFW remittances. That’s P1.35 trillion.  It can finance the entire government infrastructure program in 2019.  The P1.35 trillion is 1.6x the infra budget of P847.2 billion this year. This P1.356 trillion is orphan money because nobody marshals it for productive purposes.  The P1.35 trillion thus is marooned inside elegant malls and in forests of condos where a square meter is overpriced at least five times its real value.

In addition, we earn $25 billion from our call centers and business process outsourcing (BPO).  That’s another P1.25 trillion.

Moreover, right at the central bank, private banks have parked P3 trillion of private deposits— money the banks are too lazy or too afraid to lend (because the BSP is a much better borrower and you talk to only one guy).  If the banks were to lend out the P3 trillion, they would have to employ entire bureaucracies—processing loan applications, interviewing loan applicants, visiting or assessing properties used as collateral, and holding so many meetings to approve the loans.

… Additionally, the Philippines has $81.8 billion in foreign reserves—money that can pay for importations for a year.  That’s another P4-trillion money.

So why do your bureaucrats keep courting credit rating agencies to get an investment grade credit rating?  We don’t need to borrow abroad.  We don’t even need foreign investments.

We have so much money locally.  So why does Duterte go around the world panhandling?  The Philippines is capital-surplus.  In fact, the country has been exporting capital, rather than importing, in the past 10 consecutive years.

Duterte has appointed a new central bank governor, Nestor Espenilla, 58.  He is an economist and a 36-year veteran at BSP. Our central bank is supposed to be among the world’s best. Outgoing BSP Governor Amando Tetangco Jr. has been cited world’s best no less than eight times.

So again I ask this:

If the Philippines is awash with so much money and our central bank is that good and (it is among the oldest central banks in Asia), how can you explain the fact that in Asean, with the possible exception of Indonesia, the Philippines has the highest inflation rate, the highest interest rates, the highest unemployment, the highest poverty incidence, and the lowest foreign investment inflow and the lowest ranking in Asean in Human Development Index or a measure of people’s well-being.

How come out of 1,500 towns, 600 towns  do not have a bank branch?  How come more than 60 million Filipinos do not have a bank account?

Amid so much liquidity (the techspeak for so much cash), how come 25 million Filipinos wallow in abject poverty?

RCBC money laundering scandal

Lala Rimando

5 things I learned in Day 3 Senate probe on the US$81 million (~Php3.8 billion) money laundering scandal

1. Brave casino vs. play-safe bank

It appears Solaire has defied the popular claim that casinos are the “blackhole” in anti-money laundering efforts. Solaire’s Atty Benny Tan told the senators that as soon as their attention was called that some of the millions-dollar-worth stolen Bangladesh funds found their way into their casino gaming tables, the company officials acted quickly.

“We have frozen the P107,350,602 balance in their chips. We have also confiscated various denominations of cash in their rooms amounting to P1,347,069,” Tan said mid-way into the 5-hour long Senate hearing on March 29, 2016.

Senators Serge Osmeña and Teofisto Guingona III were pleasantly surprised and commended the Ricky Razon-controlled Bloomberry Resorts, the owner and operator of Solaire casino.

This came after the senators, particularly Osmeña and Guingona, got exasperated after grilling the RCBC top officials over the same issue. RCBC president Lorenzo Tan and legal chief Macel Estavillo who insisted they cannot just unilaterally freeze their clients’ bank accounts without a court order. (A court order did come weeks after but by then, the $81 million funds have long been withdrawn.)

Anti-money laundering officials have long complained that casinos should be among those institutions covered since officials said they become blind once the illegal funds enter the casino system. Banks and remittance firms, on the other hand, are covered and subjected to intense regulation…yet the dirty money was successfully laundered thru these two.

2. Junket agents play major role in cleaning or washing illegal funds via casinos

I loved it that details of how the different roles in a casino business are played were discussed at the hearing. I’ve always believed that casinos have to be a willing participant to pull off a heist. Apparently not. Junket agents are key.

Junket agents are the ones who bring in the foreigner high-rollers to, in this case, Manila casinos. Two casinos were used: High-end Solaire and the modest Midas Hotel and Casino, both in Manila City. Macau agents are an easy prey (or willing heist participants) since business in that island is dying.

Junket agents earn from commission whether the gambler wins or loses (rules depend per casino). Agents can monitor how their players are doing via the “dead chips,” or those plastic round chips that they get pieces of after paying for their equivalent in cash (or via credit line from junket operator) at the casino counter.

These are “dead” since there are rules on how they can encash it. Winning chips are easily encashable, but the dead chips, which is in effect the player’s capital, cannot be encashed immediately. In Solaire, the agents have a “rule” that the dead chips can only be cashed in after they have been “rolled” (used for gambling) at least 6 times. The agents can monitor that thru the casino’s digital records of the activity of the chips.

But Sen. Osmeña said the agents—not the casinos—can change that “rule” and just allow the player to cash the chips even if the player hasn’t played 6x yet. That way, that player, assuming he is in on the heist, can more easily “wash” the dirty, illegal money and off he goes with the cash.

In this case of a heist, it does seem that the junket agents have to be working closely also with the junket operators. The latter are businessmen who usually advance money or extend credit to high rollers, as well as provide the hotel rooms, logistics of going to the Manila casinos from, say Macau, and the VIP rooms where the private gambling away from the prying eyes of mere mortals happens (no, we’re not talking about baccarat or some lowly gambling machines here. Those are for the masses.) VIP rooms are only for gamblers who play with a minimum of P25,000 to maximum of P1.5 million bets each game, at least in Solaire. Consider these “services” that the junket operators provide as insurance and, well, convenience.

3. Connecting the dots: Who knows who

Some names mentioned: Wei Kang Xu is an agent, as well as Dingxi Zi from Macau. Kim Wong, who was present at the Senate hearing, is a junket operator.

One of Wong’s clients is Shuhua Gao, who owes Wong P450 million after a series of loses in Solaire. Gao was going to sell his land in Beijing to pay Wong, but Gao reportedly said he needed to open a dollar bank account in Manila to course the funds from Beijing. Wong, who has been pestered by RCBC branch manager Deguito for business, referred Gao to the aggressive bank manager. The three–Wong, Gao and Deguito—met at Wong’s office at Midas Hotel in May 2015, and the RCBC branch manager suggested Gao opens a corporate account instead of an individual account. A corporate account needs 5 individuals. (Note: So far, there seems to be no corporate account opened.) Wong said Deguito promised to “take care” of the account opening. The 5 individuals in that account opening exercise turns out to be all fake, the RCBC and Anti-Money Laundering Council would later discover, citing IDs used in what was supposed to be the most basic part of the required know-your-client bank process.

Meantime, Gao, who has referred about 18 players to Solaire already, introduced Wei Kang Xu and Dingxi Zi who are supposedly planning to invest in the Philippines. They alerted Wong and Deguito that a large amount is coming soon. Indeed, in early February, a series of inward remittances to those fake accounts would receive a total of $81 million. Wong said he was not surprised but that only required that all the funds are used to play in the casinos, Solaire and Midas.

4. Where the $81 million funds went

What we know so far:
The $81 million that reached the RCBC bank accounts in the bank’s Jupiter branch where the manager is Deguito were sent to remittance firm Philrem owned by couple Michael and Salud Bautista to be converted from dollars into pesos. Philrem coursed the convertion thru RCBC’s Treasury via its bank account in another branch (not in Jupiter branch).

This means the illegal funds entered the RCBC system twice: as an inward remittance from the New York account of Bangladesh central bank, and as a forex transaction by Philrem, a 3rd party.

Of the $81 million, $63 million went thru Solaire and Midas. Here’s a breakdown based on Wong’s account:
>> $29 million went to Solaire.
>> $21 million went to Midas.
>> Php400 million and $5 million via Kim Wong.

The balance of $17 million remains unaccounted for. Wong said Philrem still has the amount, but the Bautista couple said they delivered everything to the Chinese group (Xu, Zi and Gao) in Solaire.

Unfortunately, there are no more CCTV footages of this “delivery” since Solaire keeps them only for 14 days, as required by Pagcor.

Wong says he has in his possession some $4.63 million due him as the “bangka” when his players lose while gambling in the casino.

5. The P1 billion threshhold

RCBC says the head office gets a trigger if some P1 billion funds go thru their system (as a deposit or withdrawal), prompting an elevation of any transaction, suspicious or not, to the more senior officials. But the frontline officials have their own discretion and may use their instinct when dealing with these big amounts.

Lorenzo Tan and Atty Macel Estavillo stuck to their message: the rogue branch manager made bad judgement calls.