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Mar 02

The Explainer: Legacy redux

That was taken from episode of Niall Ferguson’s documentary series, “The Ascent of Money,” on which his best-selling book with the same name was based.

Tonight we continue our discussion on the collapse of the Legacy group, the PDIC’s woes, and introduce a new topic: pending legislation that will spread the risk from banks to the taxpaying public.

I’m Manolo Quezon. The Explainer.

 

I. A viewer’s personal plea

 

Depositor in Legacy are between a rock and a hard place.

Here’s a simple demonstration of the concept of deposit  insurance, at it’s most basic level.

Imagine the front row of our audience to be depositors in a bank. Each depositor puts money in the bank, expecting interest.

The bank, in turn, uses the deposits to lend money at interest to the public, in this case, the second row.

When the second row pays up, the banks then mnakes a profit and pays the interest to its depositor.

Niall Ferguson, in his book, calls it the 3-6-3 rule. Pay 3% interest on deposits. Charge 6% interest on loans. Go and play golf at 3 pm.

Now to make money, money can’t be left idle, but this then leads to a potential problem when banks suddenly face panicking depositors, who all of a sudden, and all together, want their money back.

This sort of panic is what deposit insurance is meant to prevent.

The PDIC gets its money from insurance premiums paid not by you, the depositor, directly, but rather, from the banks themselves.

http://www.pdic.gov.ph/index.php?nid1=6&nid2=1&nid3=10

According to the PDIC insurance premiums are charged the banks according to this formula:

The bank is assessed 1/5 of 1% per annum of the assessment base of the bank as insurance assessment.

The PDIC makes insurance available on the basic expectation that not all banks fail, but when one does, there are enough premiums from everyone to cover the depositors, up to a basic limit, on the bank that fails.

But this isn’t how it’s turned out.

Think of it this way. Here’s a clip from the show, “Little Britain“,take a look.

 

That bit of British humor reminded of a lengthy comment left on our blog by David Whittall. Now his story isn’t funny at all.

http://www.the-explainer.com/?p=4#comment-15842

You can find his comment on our blog. Let me summarize part of his comments.

Mr. Whittall is a British retiree, and he explains how he and his family did well for themselves by putting their money in rural banks.

I put Php100,000 into a 5 Year Peso Time Deposit with ‘Bank of East Asia’, Minglanilla, Cebu, in March 2005.

On my return to Cebu in May, there had been 2 x Php1,666.67 paid into my commercial ATM Bank Account. 20%pa/12, Tax Free per month.

Encouraged by it being ‘real’, I got my wife to place Php250K deposit and her 20+ year old daughter. I placed another Deposit of Php150,000 to take me up to the Maximum Insured Deposit under PDIC of Php250,000 per person/Bank.

However there is separate Insurance for Joint Accounts. After opening accounts at some other Rural Banks in Cebu, we also placed Joint Accounts x 3 “Me &/OR Wife”, “Me &/OR Daughter”, Wife &/OR Daughter”.

As a ‘Family of 3, depositing 3 x Single and 3 x Joint Accounts we had a total of Php1.5M on Deposit at that Bank, fully covered by the PDIC. This was producing a monthly income of Php25,000 per month.

I did not need to find a new job (difficult @ age 50), and could afford to retire in ‘Paradise’ of the Philippines.

 

With these payouts, he felt this was a good thing and gives a concrete example of why he felt this was a good deal for investors:

With my UK Private Pension, I was able to take 25% at that time as tax free cash lump sum, whilst the 75& Balance had to be converted to an Annuity (I took one out with ‘Legal & General’ who seemed the best at that time). I get about £300 a month from that, paid into my HSBC UK Bank Account.

That 25% of my Pension, converted to Peso, and invested in such Rural Banks, paying 20%pa, actually gives me about the same income as the 75% into the Annuity. What is more, the Capital is intact, protected by the PDIC, and would be available to my Widow on my decease. (The annuity only paid this for 5 years to give higher monthly income return, than with longer term widow benefits).

These Legacy Group Banks have been operating since 1998 and offering “Double Your Money in 5 Years”. Initially Interest was only paid on Maturity which equates to an APR of about 14%pa compounded.?Hower the ones I placed from March 2005 to April 2008, were ‘Monthly out’, giving us money to live off each month.

In fact the income from some 5 x Legacy Group Banks, gave us enough savings to save the life of my wife’s Mama, who had a heart attack and a stroke in February 2009. She was in the ICU with bleeding in her brain and paralysed down her left side. her kidneys had shut down when her body diverted blood supply to her heart and brain to maintain her life with the seizure and heart attack. One kidney never recovered, and the other only partially so she has needed Kidney Dialysis, twice a week ever since!

 

But then, Legacy closed down. Mr. Whittall touchingly writes of the problem of having their principal –fully entitled to insurance payouts, and supported by all the necessary documents to prove he and his family are bonafide depositors- trapped as the PDIC seemingly takes its time to pay out.

But the PDIC itself says-

http://www.pdic.gov.ph/index.php?nid1=6&nid2=1&nid3=17

That it will pay “as soon as possible,” hopefully within six months of the claim of a depositor who wants an insurance payout; with such claims having a limit of being filed within 24 months of the bank being taken over by the PDIC.

And furthermore, here’s the proverbial fine print-

the six-month period shall not apply if the documents of the claimant are incomplete or if the validity of the claim requires the resolution of issues of facts and law by another office, body or agency, independently or in coordination with PDIC.

Mr. Whittall asked some tough questions and when we return, we’ll ask an expert to venture an opinion on Mr. Whittall’s questions.

 

II. Tough questions

 

That was taken from episode of Niall Ferguson’s documentary series, “The Ascent of Money,” on which his best-selling book with the same name was based.

So here we are with our guest, Mr. Leung, who knows a thing or two about the PDIC since he headed it, once upon a time, and was Secretary of Finance besides. Mr. Leung, let me ask you our viewer’s questions.

1. “All this talk of borrow money makes us suspicious that the Deposit Insurance Fund (DIF) is not liquid? This DIF was funded mainly from the ‘premiums’ paid by the Bank (who used some of the Depositors money to cover that).”

2. “The PDIC keeps referring to it as Government money? How can this be, when it is from the Premiums – it is the Deposits as the funds source, not the Goverment?”

3. ““…[There is talk] some depositors may have used fake accounts to split their deposits. There is talk of fake loans etc, but what has this got to do with paying out those genuine Depositors with ‘clean accounts’. We have ‘Bank Certification’ for Deposits in 4 out of the 5 Banks, which should mean they were properly recorded and registered with the PDIC, surely?

4. “[My mother-in-law is desperately ill!] I e-mailed the DAB asking if there is no ‘FastTrack’ for life and death situation, or a loan facility against the PDIC pay out, but no reply from them?

5.  “I want to make a point that paying out 20%pa is not ‘exorbitant’ or ‘unbelievable’ and indication it MUST be a SCAM? [But] it is sustainable with sound Banking Practices, if the Bank is offering ‘Microfinance Loans’ and good RISK MANAGEMENT? I borrowed money to pay for Mama’s treatment, from a Rural Bank, using some security to cover the repayments.

The secured Loan rate I paid is 3%pm. With Admin charges, Documentary Stamps, insurance, etc, the Annual Percentage Rate is 45.5%pa if it were a 12 month loan term. I have heard the same Rural Bank even charges as much as 5%pm (also against some security)!

So you tell me why such income from loans cannot cover a Deposit Rate of 20%pa, so must be a SCAM?”

6. “A Power Point presentation by the Legacy Group showed their assets as being 15B at end of 2006, and they were collecting deposits and selling pre-need plans up to November 2008. Extrapolation of those power point figures, to end of 2008, predicts 19.5B, so difficult to see where it has all gone to claim insolvency?”

7.  “Why is the PDIC under Nograles, not working a lot closer with the BSP?”

Now having tackled Mr. Whittall’s questions, we’d like to look at  pending legislation that would spread the risk of banks to all taxpapayers. This, at least, is the fear of our guest.

H’es brought some helpful charts we’ll be presenting to you as we proceed with this discussion.

 

My view

 

Caveat emptor. Buyer beware. Or in this case, taxpayer beware. Around the world, citizens are alarmed over the manner governments are bailing out bankers and financiers, using taxpayer money to do it.

We should bear in mind that legislators and bankers with bad intentions can work hand in glove to use the public as their personal piggy bank.

Let’s hope more citizens will take the time and trouble to scrutinize the laws our lawmakers are crafting.

 

 

 

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