defending celso

i’m not going to pretend i understand what’s really going on with celso de los angeles and the banking establishment.  my kneejerk response when i read that his rural banks had a ponzi-like scheme going, promising high returns to depositors, higher than that offered by the big banks, i was disgusted, lalo na’t it seemed that he was counting on the pdic to bail out his depositors just in case…

and then i read manila times columnist dan mariano‘s vilification of celso de los angeles, and it made me think again. in the wake of the u.s. economy’s crash thanks to innovative financial schemes, it’s hard to think positive of celso’s own innovations, especially because he has been painted as an incorrigible scoundrel by the mass media.

but if it’s true that big banks could actually match the interest rates he offered on savers’ deposits but big banks just won’t because it would eat into their huge profits, then talaga, it’s possible that celso is the victim of a vilification campaign that was meant to panic his depositors, thus to protect the interests of big banks rather than the interests of the banking public.

makes me wonder about the senate and house investigations.  sino ba talagang pinoprotektahan nila?  makes me wonder too about vice-president noli de castro’s deafening silence.  anyway here’s dan mariano’s column in full:

Vilification of Celso de los Angeles

If you are convinced that Celso de los Angeles is as guilty as sin, read no further.

Off the bat, let me say he is a former classmate of mine. I still regard him as a friend even if these past couple of weeks he has not replied to my calls, text messages and e-mail. Given the pressure he is under, I don’t fault him at all.

As Celso’s friend, I am ready to give him, if not sympathy, then certainly the benefit of the doubt. I am still so prepared-even in the current lynch-mob atmosphere created by certain central bank officials and other quarters.

Not too long ago, Celsotold some of his friends he was anxious about a plot to shut down his businesses. The rural banks he set up, for instance, were offering depositors interest rates on their savings that the big banks could not-or simply refused to-match lest it cut into their profit margins.

As a result, the number of depositors in Celso’s banks, which were spread out across the archipelago, grew at such a rate that the big banks began to feel genuinely threatened.

Serves the big banks right, I thought. Their interest rates were so tiny they did not even allow their depositors’ savings to keep pace with inflation. Keeping your money in one of those big banks was only a bit better than stuffing cash into your mattress, but it still was a losing proposition for the average depositors. I had thought that the aggressive marketing tack taken by Celso’s banks would ultimately stir the big banks into giving their customers a similar or an even better deal. I had hoped the big banks would finally wake up and realize that they now face a serious competitor.

Boy, was I wrong.

Instead of stimulating the big banks’ competitive instincts, Celso’s rural banks-along with his “preneed” ventures, which formed an integrated business-became the object of what amounts to corporate murder. The big banks decided to deal with the competition the only way they knew how-elimination at all costs.

For months, articles and columns were caused to be printed in newspapers and aired on radio and TV questioning the “unsound practices” of the rural banks identified with De los Angeles. Predictably, politicians saw a chance to draw free publicity to themselves and grabbed it.

In what seemed like the blink of any eye Celso had become one of the most vilified men in the Philippines.

Even before the hatchet job was completed, enough of the rural banks’ customers had been so unnerved that they understandably withdrew their money.

Result: A bank run triggered, not by the lack of assets or fraudulent business practices, but by negative publicity and intimidation by officials-far too many of whom look forward to a cushy sinecure in conglomerates that own big banks after retirement.

But was there anything intrinsically illegal in how Celso’s banks and preneed companies operated?

For an answer let me quote excerpts from a column written by Dean de la Paz in the Busi-nessMirror. Last Friday, de la Paz wrote in part:

“Despite the absence of an elementary preneed code, regulators and Monday-morning quarterbacking politicians cry illegality. Because there are no laws, to declare criminality requires some amount of creativity for the charges to stick if fraud and malice are to complement illegality.

“Let us examine a hypothetical preneed offering and see whether those are present.

“Matching revenues against costs is critical in the preneed industry. Where revenue sources and fund providers are one, through a virtual holdout feature, risks of defaults are mitigated, collections more efficient and the matching of revenues to costs closer. Note that here we have a preneed subscriber as clients of either a credit-card company or borrowers in affiliated banks.

“By enhancing this financial model, either through a compounding mechanism on the invested fund where interest earned is compounded monthly, quarterly or even semiannually, a doubling of earnings can be achieved.

“For instance, a credit-card holder paying an effective annual interest of 36 percent, or 3 percent monthly, quickly covers a holdout on the same individual whose funds provided costs a nominal 12 percent annually. By tying an investment that earns 12 percent annually to a debt, or a revenue source that earns 36 percent within the same period, a financial institution can earn 300 percent over the same base. Depending on the compounding schedule-doubling can occur in less than five years.

“In the preneed industry, a hypothetical educational plan can be offered featuring a front-end 20-percent rebate. With warrants that allow repurchases where credit-card companies buy the plan via postdated checks [PDCs], a double-your-money instrument can be offered.

“Should the plan holder liquidate prior to maturity, the 20-percent front-end rebate and the PDC repayments that double the plan’s initial value count as the cost of the investment. Matched against the credit-card company’s 36-percent-per-annum revenue, the cost of the assignable preneed plan can adequately be covered under normal circumstances.

“When offered as a contiguous package, is this patently illegal? Was fraud the intent? Are these designed to steal from plan holders? Or were they meant to offer yields matched against specific revenues?”

Some commentators bewail the fact that the deposit insurance cover for the customers of Celso de los Angeles’s rural banks will cost taxpayers some P14 billion.

Yet some of the same pundits remain mum on, say, the billions of pesos in kickbacks from World Bank projects that were reportedly cornered by a close relative of a high-ranking government official.

Now, why is that?


  1. a similar theory was proposed in the case of the preneed companies, like cap. they were doing well and when other companies, including foreign investors wanted to muscle in, they put forward the argument that companies like cap had to have cash and other assets on hand similar to insurance companies -the companies wanting to muscle in on preneed companies. this was done, the theory goes, at the behest of us advisers who either didn’t appreciate the home-grown nature of the preneed industry, or who were simply out to muscle in on preneed.

    the result was that government regulatory powers were used to force the preneed companies into a situation where their whole business was forced into the mold of insurance companies, leading to panic and a collapse in the industry. in that sense the collapse of the mother company of insular life is poetic justice.

    which is not to say there weren’t bad corporate practices in the case of some preneed companies, or unwise decisions. for example cap decided to honor obligations when the government had deregulated school fees, when cap could have said it would only pay out based on what had been the tuition fee rates for decades; that might have been ok, too, even if it decided to be old-fashioned about honoring obligations, but the regulatory hostility nipped futher sales in the bud.

  2. hey manolo ;) wow the system really sucks. correct me if i’m wrong but it seems to me another failure of mainstream media to provide a check and balance to “regulatory hostility” and vilification campaigns that serve only vested interests.

  3. i think there’s two reasons. first, anytrhing affecting the onwers of media is taboo. second, it’s really a case of not really comprehending business, how it works, or the interrelations between business government etc. in my case, it’s why i’ve decided to take an mba. much of the “real” news is happening in the business pages, it’s where you see the real relationship between corporations and officialdom. and finally, there’s so much money going around from corporations, everything is spin sooner or later.

  4. you’re right. media practitioners are in a bind — bawal to put their owners in a bad light even if their owners are very much a part of the political-economic dynamics that render us the basket-case of asia. and yes, media people by and large are rather naive, barely grounded in politics and economics and have little sense of how tightly intertwined they really are behind the scenes and under the table. and so every press release of this president or that politician or banker or ceo is taken as gospel truth and simply echoed without question… good for you, taking an mba, galing! at the very least for journalists and reporters there should be crash courses, interdisciplinary, that would encourage analytical and critical thinking.

  5. manuelbuencamino

    it’s true that CAP collapsed partly because of AGILE’s recommendation that forced educational pre-needs into the mold of insurance companies that have to set aside money for catastrophic events.( Life or property insurance firms have to have this kind of back-up funds in case of a plague or a natural disaster)

    However, the only catastrophic event that would require a set aside of this sort for educational pre needs is for millions of insured kids to wake up one morning as geniuses and ready to enroll in college without going through elementary and secondary school.

    But pre-need educational companies are not entirely blameless. They kept on selling open ended plans even after Ramos deregulated tuition fees.

    As a matter of fact, they used deregulation as a marketing tool – “tuition will be sky high by the time your kid gets to college so get our plan now and ensure his education”.

    Well, tuition increased astronomically. Where would the pre need companies get the money to cover the increase? Because of the nature of the funds they hold, pre-need can only invest in safe investments.; bonds, blue chips etc.

    But these instruments were giving very low yields. So the only way for pre-needs to live up to their obligations was by selling more plans. In effect, it became a ponzi scheme – new money covering old monies due.

    This could have gone on and maybe pre need companies would have found a way out of their predicament, maybe they would have changed their plans from open ended to structured or maybe yields for safe investment like bonda would have turned around… If only the government did not suspend the license to sell educational plans.

    That’s one reason why CAP collapsed. It could not sell anymore and so it became illiquid and unable to meet their obligations.

    Another reason why some of the pre-needs failed is because of bad investments. Some of them engaged in incestuous investments. and they are using the two aforesaid reasons as a cover for their business malpractice.

  6. manuelbuencamino


    Celso was in similar trouble in the 80s. Dan Mariano fails to remind us of that.

    Ask around about Celso’s well-earned reputation. I appreciate Dan Mariano standing up for a friend but he is completey wrong on this one.

    The BSP, the Rural Bankers Association of the Philippines and the big banks wanted him closed not because he was giving them stiff competition but because he was stiffing his depositors with his double your money ponzi scheme. Thus destroying the credibility of the entire banking sector.

    The BSP lowered prime interest rates so interest rates on bonds, micro lending, credit cards, home and motor vehicle financing followed suit. Where was Celso going to get the money for his double your money scheme? His business model was to lend deposits to borrowers through his credit card and financing companies which were financed by those deposits to begin with.

    Celso’s banks were closed because he could not meet solvency ratios. Those ratios underlie the credibility and stabilty of the banking system. Celso’s banks would remain liquid for as long as he could attract new deposits. That’s the how a ponzi scheme operates. The difference between a ponzi and a legitimate bank is solvency not liquidity

  7. hey manuel ;) so our problem seems to be with regulation, ‘no? when to regulate, who to regulate, how to regulate, so that the interests of the public are truly served? but who regulates the regulators. parang everything is so arbitrary…

    as for celso, yeah, his spotted record doesn’t help. which makes me wonder how he got as far as he did, ang dami na niyang nabola at nadaya before red flags were raised, i suppose because of his political connections e.g., noli and nograles. well, at least merong palang hangganan ang power of good connections. consuelo de bobo.

  8. pahabol. i’m still convinced though that the big banks could raise interest rates on savings deposits but won’t just because well, they’ve gotten away with it for so long. i’m also asar and not sure i understand why big depositors have no habol beyond 250k in case of a run. when i asked a relative who works in a big bank he said, that’s the government’s call, not the banks’. i still don’t get it.

  9. so it was part of the strategy to end the depression ushered in by the crash of ’29? … but what about the not-small (but not-so-big) depositors? why no protection for them? is the logic that it’s the small depositors who cause bank runs, not the not-small depositors, so if small depositors are assured, then there would be no danger of bank runs? but look what happened to celso’s rural banks.

  10. Hey angela,
    There’s a gym rule: no pain no gain. In investments, no risk no return. Big banks pay little interest because they can get away with it because we need them for the payments system (they backstop the clearinghouse operations for checks, although technically the BSP does the clearing). But they are the most regulated and have to put up liquid reserves against possible loan losses. Still, it amazes me that they do make money year in and year out. Something in there violates the textbook model of perfect competition. But your money is basically safe in the big banks.

    In the US, the big banks messed up. Can it happen here? Sure. What’s the likelihood? I don’t know. If a criminal mind were to get hold of one big bank, he could spread the “disease” very fast. That’s what happened with the financial crisis from the mortgage loans in the US market.

    I believe the Legacy group activity shows there are regulatory loopholes. But closing the loopholes is not enough. One should think through why the problem arose to begin with. Preneed is an aleatory contract (sorry for the legalese, it means it depends on uncertain events), but so is insurance. “Moral hazard” is everywhere, and somehow the insurance industry has matured and not just through regulation (I’m sure there was a time when scams plagued the insurance sector). I still think the Insurance Commissioner is the best technical home for regulating preneed companies. The problem is IC is not equipped to take on that task today.


  11. jojie-riyadh

    I worked for almost 10 years with Merchants Bank during which it was merged with Bank of Commerce and PCIB and left before it became a universal bank to be eaten by Equitable Bank. I remember during this time that Banco Flipino Savings which was very stable, “subok na Matibay,Subok na Matatag” but to be closed down by then CB Pres.Jobo Fernandez (former President of Far East Bank)purely on orders by Marcos. Politics and not performance is what is ailing the financial institutions because of some vested interests by powerful groups who are greedy enough to corner the big slice of the pie.


  12. Hey angela,
    banks and regulators seem to have acquired a certain notoriety nowadays, whether here or in the US. Maybe I’m a polyanna, but I’ve been thinking of a way to give banks a better reputation and use them in the election process. You may be interested in my recent post, and you may re-post in full in your blog. Please see:–-or-using-the-atm-as-a-poll-machine/