The Legacy Bank Mess: A Parting of Partners (Part 4)

PDIC has a Deposit Insurance Fund (DIF) of 61 billion pesos but has outstanding obligations of P72.5 billion to the BSP. To the layman, it would seem that PDIC is bankrupt. And it may very well be, except for the assurance of Jose Nograles that "All [loans] are in current status and matched with identifiable repayment sources." Most people think that PDIC borrowed all this money from the BSP to supplement and replenish its DIF. It is not so. It is the BSP that initially grants emergency loans to distressed and troubled banks for a period of 90 days, extendable for another 90 days. If the bank is unable to pay these loans within the statutory 180 days, then these loans are transferred to the PDIC, which has less stringent requirements (PDIC accepts real estate properties as collateral). The loans turn into a PDIC assistance when the bank signs an agreement with the state insurer for a rehabilitation plan.

So why didn’t the BSP approve the legacy banks’ request for emergency loans? Because the BSP already knew that based on its (and PDIC'S) 2005 examination of the banks’ books, it did not have the required amount of government securities as collateral. So it allowed all 12 legacy banks to declare bank holidays, and then asked the PDIC to move in early December, 2008 and put the banks under receivership, which it did. Then, late January, 2009, PDIC exercised its charter that allows the insurer to borrow from the central bank to pay claims of depositors of banks placed under its receivership. On February, 2009, BSP disapproves the P14 billion loan request of the PDIC stating that PDIC “have more than enough (DIF) reserves to cover it (deposit claims).” But did it have even enough? Or the question should be, does PDIC have any reserves left?

In 2002, the BSP lent UCPB P25 billion in emergency loans. In 2003, PDIC paid out P8 billion in cash for the bank’s non-performing assets (NPAs). By 2005, PDIC still had P12 billion in loans to the bank. It was only in April, 2009 that PDIC approved the conversion of the P12 billion loan into equity with Nograles noting that the capital notes of PDIC will be converted into convertible preferred notes once the Supreme Court rules on the ownership issue of UCPB. Then in March, 2004, PDIC absorbed the P7.64 billion loan of Philipine Bank of Communications (PBCOM) and converted this into a soft 10-year term loan as part of its “financial enhancement package” where it only charged one percent in interest per year. The pact involves the eventual sale of 67 percent of the bank’s capital stock five years from the infusion of the financial package for the then-bleeding bank. PDIC has a lien on a substantial number of the bank shares: designed this way to make sure that PDIC will be protected in its financial rescue of P7.64 billion, clearly way above the buying offers for the bank’s shares. But now PDIC has a big headache in making its timetable to get its hands on its money it advanced to PBCom because the two warring major shareholders cannot resolve its disputes. In 2006, PDIC paid P3 billion for Export and Industry Bank’s NPAs and granted the bank a six-year term loan of P7 billion, paying PDIC an interest of one percent on the first year of availment and five percent on the next five years. EIB, in turn, used the P7 billion to purchase high-yielding government securities, which will be held in escrow for PDIC. PDIC has tied up P25.6 billion of its DIF as long-term loans and equity into the three banks. Add another 10 billion it paid in cash for the banks’ NPAs, and PDIC has sunk in P35.6 billion of DIF into the three banks.

It is not hard to imagine that it may have tied up the rest of the P61 billion DIF into other banks, considering that as of 2008, PDIC owed the central bank P72.5 billion. The BSP would have known the illiquid position of pdic and that is why in September, 2008, it approved a P3-billion loan for the PDIC to pay insured depositors of the padlocked G7 Bank, a seven-unit rural bank based in Bicol. “The BSP and PDIC are co-regulators. It’s our joint responsibility,” said PDIC president Jose Nograles, when asked about the new loan. But five months later, the BSP disapproved PDIC’s loan proposal that it needed to pay the depositors of 12 banks with more than a 100 branches located all over the country. The BSP maintained that PDIC had acquired “more than enough reserves” to pay P14 billion of insured deposits. PDIC nets about P6 billion cash a year in bank assessments and interest income, and it is therefore impossible for it to have accumulated P14 billion in five short months.

Why had BSP turned down an otherwise routine loan request? Why had it become PDIC’s sole responsibility, and not BSP’s co-responsibility? And faced with this unexpected rebuff and rejection, what is the younger Nograles saying and doing that is now endangering public confidence in pdic and the rural banking industry?

An Expose of PDIC: The Makings of a Syndicate

Ricardo Tan, former president of PDIC, claimed that sometime in 2005, Nograles had invited him to dinner in Edsa Plaza Shangrila hotel but was surprised by the appearance of Celso de los Angeles. Prospero Nograles, then House majority leader, asked him to go easy on the probe of the Legacy Group because its owner was well connected with top administration officials. This dinner came after PDIC had started its own investigation of the legacy banks. “We conducted a probe based on the complaints of depositors,” Tan said.“What we found were fictitious deposits, [rotating] collateral from one bank to the other, unsafe and unsound [banking practices] and improper documentation.”

The older Nograles kept on coming up with different explanations for that meeting, and noting that if he had wanted to intervene in the Legacy case, he should have talked to the BSP and not PDIC. He is quoted as saying ““The function of PDIC is to pay depositors of banks ordered closed by the central bank which files complaints against erring banks. Filing cases is not the function of PDIC. So why should I talk to him (Ricardo Tan) when it is not his function? His job is to collate assets of closed banks and pay depositors.” Not surprisingly, Celso echoed the same line by saying “Why would I talk to Ric Tan when he was not with the BSP, and I did not have any closed banks at that time?” If Celso could play dumb on the powers of PDIC, Prospero Nograles certainly cannot get away with feigning ignorance. He was the majority leader when RA 9302, the law that restored PDIC’s power to examine and investigate banks, was deliberated on the floor and passed by the House in 2004.

We can therefore logically infer two facts from Tan’s revelations: first, that contrary to the younger Nograles’ protestations in the 2009 congressional hearings, PDIC could and had in fact investigated the legacy banks as early as 2005 and second, that Celso had powerful friends who were obviously interceding and running interference for him. Celso himself disclosed in an interview with Ricky Carandang that that he was “close” to some influential political figures like Vice President Noli De Castro, House Speaker Boy Nograles, former congressman Butch Pichay, and Environment Secretary Lito Atienza. VP Noli acknowledged that Celso was a campaign supporter in his 2004 election run for the VP position. How valuable was he to Noli de Castro? Obviously a big-time contributor- it was De Castro who recommended that De los Angeles be appointed in 2004 as chairman of the National Home Mortgage Corporation. Nograles admitted that he was a legacy preneed investor before 2004 and still had a collectible of P18 million in legacy investments. Legacy bank insiders revealed that the Speaker had availed of the bank’s car promo plan under its 6-year DYM time deposit. The Speaker has admitted to attending parties thrown by Celso. Carol Hinola, former president of the Legacy group, alleged that Congressman Ed Zialcita received a monthly stipend of P100,000 as consultant fees. Patricio Mangubat of the New Philippine Revolution wrote that the Paranaque congressman “is not just a silent investor but a very active one.

Obviously, these powerful friends had to ensure that the golden goose would keep on laying the golden eggs. Having influential partners and backers was not enough to keep the money machine operating. It needed inside men to ensure that BSP, PDIC and SEC would not spoil the party. The critical roles of BSP and PDIC as potential spoilers in the grand scheme are axiomatic; what is not evident is the function of the SEC. Most of the bank depositors confidently deposited their hard-earned money into the legacy rural banks, not only because of the high interest rates offered but because the banks were part of a conglomerate that included supposedly profitable sister companies engaged in preneed plans, motorcycle dealerships, credit cards, etc. Celso and his friends could not allow the SEC to close down these companies and therefore bring down confidence in the legacy “business model” that Celso kept on mentioning during the initial senate hearings. This was the business model that was making it possible for the legacy banks and preneed companies to rake in billions of pesos.

Enter SEC Commissioner Jesus Martinez, close cousin of congressman Zialcita. Hinola had narrated that during lunch on Feb. 14, 2006 at a Japanese restaurant at the Shangri-La hotel in Makati, Martinez, who was accompanied by Zialcita, has asked her “ if we have any problems with the SEC that he [Martinez] could help us with and at that time…” Martinez must have been a big help because Hinola accused him of receiving a Ford expedition in 2007 and a P5 million house in 2008, all courtesy of legacy funds. One potential problem (SEC) dealt with, two (BSP and PDIC) to go.
Very few people are aware that Prospero Nograles has a close relative working in the BSP. His name is Manuel Bendigo and he is the brother of the wife of Nograles. Though the BSP started investigating the legacy banks as early as 2004, it would seem that the legacy banks were always one step ahead of the investigative team. Would it be farfetched to believe that this brother-in-law played a key role in keeping Celso abreast of BSP’s findings and plans? Two down, one to go.

For refusing to play ball and go easy on the legacy probe, Ricardo Tan was replaced as PDIC president by Michael Osmena, who died in office. On December, 2007, Jose Nograles, an unheard-of Senior Vice President of Landbank and more importantly, younger brother of the House of Representatives’ majority leader, was appointed as PDIC president. It would seem that the younger Nograles had two marching orders- the first and immediate priority was to set aside and bury the adverse findings of PDIC’s 2005 investigations of the legacy banks. He obviously accomplished his first mission. Ricardo Tan said in an interview with the Inquirer ““When I left PDIC [in April 2006], our exposure to [De los Angeles’] 12 banks [in terms of insured deposits] was P4 billion,” “Since then, PDIC’s exposure has risen to P14 billion.” What was the new PDIC president’s second mission? That in case the some of the legacy banks failed, PDIC, in compliance with its overall mandate, would pay the depositors promptly and expeditiously. Remember his older brother’s quoted job description of the PDIC president? “His job is to collate assets of closed banks and pay depositors.” A month after the legacy banks’ closure, Celso announces that PDIC will soon be paying the bank depositors. Swift deposit payouts would have avoided unwanted attention into legacy bank anomalies and the criminal negligence of the regulatory agencies. But the syndicate did not take into account the one flaw in its grand plan- PDIC had no money to pay out and the BSP inexplicably refused to lend it money. How and why did this happen to the PDIC that had boasted that it had a DIF of P61.5 billion pesos? Part 4 will reveal the hidden interests of the big financial institutions that caused the drying up of the govt-controlled private funds.

The Legacy Bank Mess: Half-truths are Whole Lies (Part 2)

George Orwell wrote that “We have now sunk to a depth at which the restatement of the obvious is the first duty of intelligent men.” Ordinary depositors who are alarmed and dismayed by the actions and actuations of PDIC formed a group called DEADBOL (Depositors Enabling All Depositors of Banks of Legacy,). The members call on PDIC to fulfill its overall mandate of protecting depositors. The group demands that PDIC performs its own published mission of adopting “responsive resolution methods” and ensuring “prompt settlement of insured deposit.” So far, five months have passed since the closure of legacy banks, and depositors, who had put their faith in PDIC, are starting to believe and realize that PDIC does not intend to honor its obligations to its insured depositors. PDIC is spouting a lot of half-truths so as to condition the public and we now see that it is DEADBOL’s duty to expose these irresponsible statements of commission or omission, and restate the truth.

Congressmen, senators, and media have the mistaken notion that PDIC is funded by people’s money; PDIC is content for reasons of its own not to disabuse them of this misinformation. PDIC is a government agency that administers a fund that does not use taxpayer’s money. Except for the initial seed money of P3 billion pesos from the government, the Deposit Insurance Fund (DIF) is basically funded from premiums paid by all operating banks. You can be sure that the banks have found out a way to pass on these assessments to the depositors who absorb these hidden costs. To characterize the DIF, which has grown to more than P61 billion pesos, as government funds is a half-truth. That is like saying that SSS and GSIS funds are also owned by the government. Fortunately, the truth is that these funds are private funds but unfortunately, managed by government officials who are driven by dark motives and hidden interests.

On February 9, 2009, PDIC came out with a press release that it is “prioritizing the claims of depositors with regular savings accounts of P100,000 and below in keeping with the state deposit insurer’s mandate to protect small, unsophisticated depositors. “ Nograles further qualified this half-truth by saying that “in keeping with the PDIC’s mandate to protect the small, unsophisticated depositors” and that “stopping the payouts as some quarters have suggested will be prejudicial to small depositors who have valid deposit insurance claims.” Nowhere in the PDIC charter can one find the words “small” and “unsophisticated” but the PDIC president used both words to describe a depositor that his organization is supposed to protect. Now that the maximum insurance coverage is P500,000 per account, will Jose Nograles in servicing future claims say that a 100,000 pesos and below account represents a small depositor; P250,000, medium; and P500,000, big? Does having a small deposit make you an unsophisticated depositor? Where is Nograles getting his lexicon? Yes, we recall Senator Mar Roxas, during a senate hearing on the legacy mess, first using the words sophisticated and unsophisticated to describe both bank depositors and preneed investors. And the younger Nograles latched on to these words, as if to ingratiate himself with the legislative investigators. Labeling is a cognitive distortion which can lead to logical fallacies.

The truth is that the pdic is chartered “to promote and safeguard the interests of the depositing public by way of providing permanent and continuing insurance coverage on all insured deposits,” regardless of the size of the deposit but up to the statutory insurance coverage per account. It is a fact that this is the first time that PDIC has differentiated and prioritized claims according to the size of the account.

In congressional and senate hearings, Deputy Governor Espenilla, Jr. said that the BSP began investigating the Legacy banks as early as 2005. When a congressman asked Nograles why hadn’t PDIC earlier conducted its own investigation of the legacy banks, we heard Nograles mumble that due to bank secrecy laws, PDIC could only examine individual bank accounts only after a bank has been placed under receivership. This is a half-truth. BSP Governor Tetangco, Jr. in a August, 2005 speech to a financial forum says that he is “happy to report ……, our partnership with local financial regulators (SEC, IC and PDIC), is now fully operational with major projects currently underway. These projects include conglomerate mapping, information sharing, joint examination arrangements, rules harmonization and financial literacy.” The PDIC Forum 2004 proudly announced that RA 9302, the Amended PDIC Charter signed into law on July, 2004, enhanced “PDIC’s capability to minimize risks to the DIF by reinstating its authority to examine banks subject to prior approval of the Monetary Board” and investigate complaints related to unsafe and unsound banking practices. The PDIC newsletter trumpeted that this authority will fortify the financial sytem’s safety net by “allowing prompt remedial intervention.” Dictionaries define prompt as “performed with little or no delay” and remedial as “tending to improve or rectify.” Given then PDIC’s enhanced examination powers, did PDIC examine the books of the banks before the banks actually closed? And if it did, did it delay intervention until it was too late? Part 3 will attempt to provide answers to these burning questions.
 

The Legacy Bank Mess: An Expose of PDIC (Part 1)

The legacy mess created by Celso de los Angeles has once again rocked the already ailing preneed industry. The sudden closure last December, 2009 of Legacy Consolidated plans and its two affiliated preneed companies added an estimated 30,000 victims to the legion of planholders holding useless educational and pension plans. Although this development spelled more bad news for the floundering preneed industry, it was not unfamiliar to the public that had experienced years ago the closure of CAP, Pacific Plans, and several other companies in the business. If for anything, legacy plans had just delivered the final blow on a moribund industry.

What is insidious and potentially catastrophic is the deleterious effect of the collapse of the legacy banks on public confidence and faith in the banking system. Surprisingly, it is not Celso that is the villain in this unfolding scenario that is fraught with serious negative implications for the country's rural banking sector. The Philippine Deposit Insurance Corporation was established in 1963 with a single overriding mandate – to ensure public confidence in the banking industry. This is achieved by providing all depositors in all banks with an insurance coverage of P250,000; and second, by acting as the ‘receiver’ of failed or closed banks. Up until the closure of several legacy banks, PDIC has been faithfully fulfilling its current overall mandate “to provide depositor protection and strengthen public confidence in the banking system.” Hundreds of banks have closed and been declared insolvent since PDCI was created, but it had remained the faithful guardian and guarantor of the depositors’ money.

The PDIC Occasional Paper No. 1 2005 mentioned that “notwithstanding problems arising from the poor quality of record-keeping, PDIC’s continuing efforts at expeditious settlement of claims has paid off in terms of a shorter period of time for payouts. The average number of days to start payouts from date of closure has improved from 289 calendar days in 1993 to 41 calendar days in 2002, and single digit levels beginning 2003.” However, this progress is all set to be reversed and retrogress with the convoluted manner that PDIC is now conducting the filing, verification, processing and payout of legacy bank claims. It is twisting and bending its own policy, rules and regulations, and conjuring a new set of procedures that are tedious and time-consuming. Since the closure of the legacy banks before mid-December of 2008, PDIC President Jose Nograles defends its actions by explaining in numerous press releases that PDIC just wants to make sure that only “legitimate depositors” are paid because bank officials have not only lost banks records but created fictitious accounts. We understand the need for precautions but it seems that Nograles, reading his innumerable sound-and-print bites, would rather not pay the depositor who in good faith banked his hard-earned money than risk paying a fraudulent claim. As of now, almost 150 days since the closure of banks, only a miniscule percentage of depositors have been paid. None of the 100k accounts above, which account for about 75 percent of the total 135,000 accounts, have been paid. PDIC had previously adhered to the necessity of prompt payment of insured deposit claims, not only to maintain credibility and confidence in the deposit insurance system but just as important, to help eliminate possible contagion effects of closure. So why would PDIC, under the leadership of Jose Nograles, deliberately ruin its excellent track record of single digit days payout and run the real risk of eroding public confidence? The answer is both political and financial but before we delve into the dark motives of powerful men and hidden interests of big commercial institutions, we first need to expose the myths and propaganda that PDIC is peddling to the general public.

Another legacy from Celso

Been absent for quite a while, not just because I am preoccupied with a lot of things- foremost is the preparation and filing of claims with PDIC- but simply because nothing really new has been happening regarding Celso de los angeles. Sure, there are a lot of cases being filed in court against him but that is to be expected considering the nature of his crimes. BSP started it or was it initiated by angry investors in his preneed buyback plans? then PDIC got into the swing of things by filing two cases against him for syndicated estafa. I even read that SEC also filed a case against this criminal mastermind. Of course, here in the Philippines there is a wide gulf between filing cases and actually getting the respondent found guilty.

However, this legacy imbroglio has spawned another crime and celso is mentioned not because he is the perpetrator but because his misdeeds have created another monster. PDIC is now emerging as the criminal, led by its mastermind, its president who goes by the name of Jose Nograles. If his name sounds familiar, it is- he is the brother of Speaker Prospero Nograles. What is his crime? that will be the topic of our forthcoming blogs.

Expedition: lost and now found

The return of the Ford expedition right at the front of PDIC was a calculated strategy. Celso planned it in such a way that it would be traced back to him. Never mind if he swore under oath in the senate hearing that he had a lot of expeditions but did not have one owned by one of his rural banks. He'd rather be called a liar in order to cover up his dear friend and protector, SEC commissioner Martinez. I really suspect that the expedition was used by Martinez or by his wife or by his son but when things got hot, Martinez asked Celso to arrange it in such a way that it could not be traced back to the Martinezes. There is no other explanation why a criminal mastermind would allow himself to get easily caught returning the "hot" vehicle. Of course, anyone parking a car in front of a government building at an unholy hour would attract interest from security guards patrolling the perimeter. I just pity the hapless driver of Celso who was ordered to park the car, and knowing Celso, he would be paying his driver minimum wages even after going through detention and grilling by PDIC authorities.

This incident serves only to prove that Celso and Commissioner Martinez are thick as thieves!!!

Properties of Celso

The senate hearing today details some of the properties of Celso. What is shocking is that the land and properties listed under the trust fund of the preneed companies are still under the name of Celso and used by him. He sleeps in the One Roxas Triangle condominium and his son uses the 2,138 sqm resort in punta engano. Senator Enrile divulged the damning info that Celso has been trying to sell his Ayala Alabang house and lot for P200 million. This is the property that is located in 303 Country Club drive, which I have always maintained belongs to him, and is different from the 3,000 plus sqm lot that he sold last December for P57 million. In fact, last night (Sunday), the lights of the Country Club drive house were switched on indicating that Celso was there last night planning his moves for the next day's senate hearing. Of course, Celso may not have been there but was in the One Roxas triangle condo, supposedly belonging to the preneed trust fund. What came out per Carolina Hinola's account was that deeds of sale for these properties were signed by Celso as vendor but were not notarized. So for all intents and purposes, Celso still owns these properties.

Same thing with the Ford expedition and the house sold by the son of SEC commissioner Martinez to a legacy company: supposedly sold by the son but still in the name of the younger Martinez' corporation. In other words, the younger Martinez still owns these assets and as Senator Roxas pointed out, this maneuver was a bribe to Martinez because the younger Martinez still uses the car and the house. You can fathom the devious mind of Celso from these relatively small scale transactions, and then extrapolate what he did to the funds of the legacy banks and preneed companies. The house and expedition cost a total of P6.5 million pesos, but the cost to the public and the government can easily top P13 billion or even P20 billion to include the preneed buyback investors.