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Thursday, January 19, 2012

A Conversation with Former Finance Secretary Lito Camacho on the PEACe Bonds

Editor's Note: This is a record of Maitet Diokno-Pascual, former chairperson of the Freedom from Debt Coalition (FDC), on her phone conversation with Jose Isidro Camacho, former Philippine Secretary of Finance, prior to his confirmation as DOF Secretary in 2002. The FDC had just published a statement opposing the confirmation of Mr. Camacho as DOF Secretary for his involvement in the PEACe Bonds controversy. For a more complete background and timeline of the PEACe Bonds controversy, please refer to a previous blog post: “Revisiting the PEACe Bonds” (

This is Dear All,

Last Thursday afternoon while at a dialogue organized by the PRRM1, I got a phone call from Finance Secretary Lito Camacho. According to Malou he had called up earlier at the FDC office, and they gave him my cellphone number. This rather long message (my apologies) is to report our phone conversation. Thanks, Maitet

Mr. Camacho told me he had read our statement and was very upset about our view that he should not be confirmed. He expressed his disappointment. So I told him that FDC firmly believes that what he should have done was to object to the deal, not just inhibit himself. Besides, based on the letter produced at the Senate hearing by John Osmeña—it's Marissa and Dan2's letter to BSP governor Rafael Buenaventura—it looks like Mr. Camacho didn't exactly inhibit himself.3 (It now turns out that his inhibition letter to the President was dated September 54, after the deal was all ironed out. But I didn't know this yet at the time he called or I would have raised it.)

So Mr. Camacho explained the nature of his "participation" at that meeting. He confirmed he was there (in other words no inhibition). But he said he was there only for a while (so most of the time he was inhibiting himself). And he said he was there to support Edeza5's position to hold a public auction rather than a negotiated purchase/sale of the bonds.

The latter point gets sticky. I say this because it means two things: when Marissa and Dan wrote that incriminating letter (9 August 20016) to Buenaventura, they already knew that the bond would be auctioned. But they were talking as if it were still a negotiated sale, and I guess that's partly because, as they admitted to us, they were still hoping for a negotiated sale. I have read that letter and there is even mention of how much will go to Treasury how much will go to CODE NGO. In fact the purpose of the letter was to ask the BSP to broaden the scope of the reserve eligibility to cover P35 billion of bonds from the original P15 billion. The reason for this, they explain in the same letter, is that the Treasury "haggled" for a bigger savings which means that for them to get their targeted billion peso profit they needed a bigger flotation. My question about this is, did they know this would still be the case under auction mode? Would it be the same under auction as under negotiation? Were they so sure already then of snagging the auction?

The second question I have has to do with Edeza. He wrote the BIR on August 87, seeking clarification over the tax exemption. But the framework he used was that of a negotiated deal. But auction was already what his boss the finance secretary said, at the meeting where his boss and his boss's sister didn't exactly inhibit themselves. Why didn't Edeza seek clarification from the BIR under an auctioned framework? Because they wouldn't get the tax exemption? In the end, Bañez8 replied to Edeza's August 8 letter with a ruling of August 16, reaffirming the tax exemption because there would only be one buyer. But Bañez also put in his ruling that if the conditions are different then this ruling becomes invalid. So what Edeza/Treasury did was to limit the auction to 19 lenders. Why didn't he seek a clarification from BIR under an auction? That's a very very very big omission. Not only because of the tax loss, but because the 19-lender limit paved the way for a MANUAL auction BY FAX. That enabled the "silipan" to take place.

Let me go back to Mr. Camacho's disappointment with FDC. He said, are you saying I have no integrity. That's all I have in this job (and I guess as a banker). So I said, precisely why you should have objected to the deal rather than simply inhibit yourself. He went on to say, isn't integrity about honesty. Are you saying I am not being honest? I said it's about more than that. It's about knowing what's the proper thing to do to protect your name and that of your family, to protect your President, to protect the institutions you serve. I told him, if I were in your shoes and I had a kapatid who wanted a deal from the very agencies I was supervising, I would tell that kapatid to choose, between me serving in government and the deal. No way you can have both.

But I also questioned him about his supposed inhibition. I raised Edeza's memo of July 12 to him. In that memo, Edeza was not just asking for technical decision, he was also asking for a policy decision. I told that to Camacho. If you did not respond, then that means you left the President open/vulnerable, because a subordinate cannot decide on a policy matter. He says he referred Edeza back to Bañez re Edeza's questions on the tax exemption. So I said can Bañez decide on when to implement a policy and when not to? Kasi that's what Edeza was asking. He reminded Camacho in his July 12 memo that in an earlier case the exemption from capital gains tax was not implemented. So he asked Camacho in his memo, alin ba talaga kuya? (words to that effect of course). Mr. Camacho told me he could not remember that.

One other thing Mr. Camacho brought up was the point we made about RCBC/CODE NGO having an information advantage over rival bidders. For one he was not denying that the rival bidders were not as well informed as RCBC/CODE. His counter argument, which CODE NGO and Edeza also use, is that dealers are familiar with these types of debt papers and know very easily what features they have and have experience in pricing these kinds of papers. All I asked him was as follows: We all know that RCBC and CODE had a 7-month headstart over rival bidders. RCBC and CODE knew very intimately the bond and all its features. So are you telling me that it was sufficient to level the information field by fully disclosing to rival bidders the features of the bond one day before the auction? Hindi siya makasagot. It now turns out that there was an October 2 memo9 of Edeza to the GSEDs (government securities eligible dealers) saying that the bonds would carry a 20% withholding tax. That explains why up to the day of the auction, the Treasury had to issue a memo explaining the tax exemption and reserve eligibility features of the PEACe Bonds. May nalilito pa rin na rival bidder. That's a level information field according to Mr. Camacho.

At some point Mr. Camacho asked me, who do you think is holding on to those bonds right now. I said the Yuchengco Group of companies. He said, no, it's RCBC. I said, no, that's not what Dan Songco told us. Dan told us that it was the Yuchengco insurance companies that were holding on to the bonds. He then said he had just checked the Scripless Registry (that's the electronic record of who holds the bonds, the record is kept by the Treasury) and according to the Scripless Registry RCBC is holding the bonds10. Apparently Mr. Camacho's purpose in telling that to me was to stress that this was a purely private transaction between CODE and RCBC. (Para hindi siya ma-plunder.)

But his information also raises new questions. It shows that the DoF and Treasury were both lying in their press release of December 13, when they said that RCBC bought the bonds, RCBC sold the bonds to CODE-NGO, and CODE NGO sold the bonds to RCBC Capital11. Their stories do not jive at all, and the more they open their mouths the more contradictions emerge.

Also, if RCBC is holding on to the bonds, then CODE-NGO never figured in the transaction and could not have earned the P1.4 billion profit. Mukhang laway talaga.

Mr. Camacho also brought up the matter of the auction. He said if the auction was lutong makaw how come no dealer has complained. They are the ones who should rightfully complain (hint hint hindi tayo sa FDC). So I said, come on, how can the dealers complain? You've come from a bank, tell me, how can a dealer complain? Di niya ma-gets or at least pretend siya na di niya ma-gets. So I told him, let's not fool each other here. We all know that may silipan sa auction na iyan dahil nga by fax ang bidding. Of course he denied knowing anything about that. I told him I have had communications from three banks. One said, "RCBC and only RCBC was meant to win this auction." Another one, and I almost told him it was his own bank Deutsche Bank12, said, halata naman sweetheart deal iyan. Another one told me, you should know why there was no bid lower than RCBC's. If anyone complained to the government they would be implicating themselves. Alam nila may dayaan kasi kasama sila doon. Alam nila at 10 am, at 11 am, etc., kung ano ang pinakamababang bidded yield. Kaya walang makapagtutol. And besides, in the end, the government saved money diba so why should the losing dealer complain? Galing talaga.

Mr. Camacho said he would look into the matter. I told him, perhaps by now the data has been corrupted. And I cautioned him about the possibility of alerting anyone involved in the silipan before he can discover what happened. But I also suggested to him to produce a schedule, from the 1st fax in to the last fax in, indicating time received, dealer (by code if not by name), amount and yield bidded. He seemed very willing to disclose this data. I suggested he disclose it to the public, not just FDC. But I'm not sure if the data would have been corrupted by now.

Anyway our phone conversation ended rather abruptly because the hi-tech cellphone battery conked out. That's how long we talked. That's also how hi-tech my cellphone is!

So I get home and recharge cellphone only for it to ring again. Mr. Camacho calling again, to give me the cellphone number of Mr. Edeza (who heads the National Treasury, Liling's13 former job). Mr. Edeza is willing to give us a tour of the auction room etc and show us the blotter, whatever that is.

I have not yet called Edeza, as suggested by Camacho. I will do so soon. Anyone wants to come along, let me know. But first I have to find that little piece of paper where I wrote down Edeza's number. That's how hi tech I am!

That's all I can remember for now. Whatever else I can remember I will post anew. Thanks, Maitet

1Philippine Rural Reconstruction Movement
2Marissa is Maria Socorro Camacho-Reyes, sister of DOF Secretary Jose Isidro Camacho. She was also the chairperson of CODE-NGO, a primary proponent of the PEACe Bonds. Dan is Danilo Songco, CODE-NGO's managing director.
3In July/August 2001, Secretary Camacho hosted a meeting between CODE-NGO and the Bureau of Treasury. He and his sister were present at the meeting.
4Secretary Camacho writes to President Arroyo requesting for permission to inhibit himself from having to make any decision, approve or sign the proposed debt issue of the PEACe Bonds.
5Edeza is Sergio Edeza, Treasurer of the Philippines
6On August 9, 2001, CODE-NGO wrote BSP Governor Rafael Buenaventura asking for an expansion of reserve eligibility of the PEACe Bonds from PHP 15 billion to PHP 35 billion. The Monetary Board Resolution No. 1261 granted CODE-NGO's request. The resolution quotes directly from CODE-NGO's letter.
7On May 31, 2001, BIR Commissioner Rene Banez issues BIR Ruling No. 020-2001 stipulating that the PEACe Bonds are tax-exempt certificates of indebtedness. On July 12, 2001, Treasurer Edeza wrote a memo to Secretary Camacho questioning the legal personality of CODE-NGO to enter into negotiated purchase/sale of Treasury Notes, as well as some aspects of BIR/Banez Ruling of May 31, 2001. On August 8, 2001, Treasurer Edeza writes BIR Commissioner Rene Banez for further clarification of his May 31 ruling.
8Banez is Rene Banez, Commissioner, Bureau of Internal Revenue (BIR)
9On October 2, 2001, the Bureau of Treasury announced a trial auction for the zero-coupon bonds subject to a 20% final withholding tax.
10Not true. A later report from PCIJ's blog “Vanishing trade in PEACe Bonds: The truth, the banks, and the BIR” shows that a portion of the PEACe Bonds (around PHP 11.3 billion in face amount) had definitely been sold down by RCBC as shown in the Bureau of Treasury's Registry of Scripless Securities. PCIJ's chart of PEACe Bond sales can be found here: In addition, RCBC Treasurer Jaime “Jimmy” Panganiban also confirmed that the bank had sold 10% of the PEACe Bonds in 2001: “Raid on the Treasury - JPE on the PEACe Bonds Scandal, by Butch Fernandez and Erik de la Cruz, Reporters, February 13, 2002, Today Newspaper.
11In this case, the DOF and the BTr were telling the truth. RCBC, as a government securities eligible dealer or GSED bought the bonds on CODE-NGO's behalf. RCBC Capital then simultaneously bought the bonds from CODE-NGO, ensuring that CODE-NGO did not have to put up any cash in the transaction. See this diagram for the flow of transactions:

12Prior to his government service, Secretary Camacho was Chief Country Officer of Deutsche Bank, AG Manila
13Liling Magtolis Briones was a former Philippine Treasurer

Wednesday, January 4, 2012

RCBC's 2002 Internal Office Memo on the PEACe Bonds



FROM : Financial Markets Group


DATE : January 30, 2002

What are the PEACe Bonds?

Peace Bonds are 10-year zero-coupon (no recurring interest payments) treasury bonds with certain
eligibilities designed to raise funds for poverty alleviation programs. These funds are raised from
proceeds of the sale of government securities in the private secondary market. The bonds were
conceptualized by the financial advisers of CODE-NGO, the largest network of development NGOs in the country.

What government securities are used for the PEACe Bonds?

Ten-year zero-coupon bonds issued by the Bureau of the Treasury on October 16, 2001 were the securities used for the PEACe Bonds. The Bureau issued P 35B worth of zero-coupon bonds from total bids of over P 135B.

What are the eligibilities attached to the PEACe Bonds?

PEACe Bonds have the following eligibilities:

Tax Exempt status by law per BIR Ruling 020-2001 issued May 31, 2001
Eligibility as Liquidity reserves issued by the Bangko Sentral ng Pilipinas per Resolution Nos. 878, 1261 and 1545 dated June 7, 2001, August 9, 2001, and September 27, 2001 of the Monetary Board later consolidated under BSP Circular No. 307 dated October 18, 2001.
Eligibility as capital and reserve investments of insurance companies under Sections 203 and 204 of the
Insurance Code issued by the Insurance Commission dated November 16, 2001.

How were the PEACe Bonds offered?

The bonds were offered to authorized securities dealers in an open public auction conducted by the
Bureau of Treasury on October 16, 2001. The notices were issued one week in advance of the auction as compared to the usual 3-day notice required by law.

Who can request for eligibilities with the above regulators? (BIR, BSP, IC)

From time to time the BIR, BSP and the Insurance Commission receive requests from government,
quasi-government and private corporations for certain eligibilities to be provided to certain instruments and/or transactions. The merits on whether to grant these eligibilities/requests are deliberated upon by these agencies on a case-to-case basis in their regular meetings. It is therefore not unusual for private corporations to request and be granted eligibilities by these agencies.

How was CODE-NGO able to sell the PEACe Bonds?

Following the concept of their financial advisers, CODE-NGO then proceeded to engage the services of an underwriter, RCBC Capital Corporation to purchase (underwrite) the bonds at a pre-determined price at a future date.

How was CODE NGO able to acquire the bonds?

In an auction administered by the Bureau of Treasury, CODE NGO was able to purchase the entire zero-coupon offering through its authorized government securities dealer, Rizal Commercial Banking Corporation.

Was the winning bid disadvantageous to the government?

No. On the contrary, CODE-NGO?s winning bid in the open auction for the 10-year zero-coupon bonds resulted in interest savings for the government. At the time of the bidding the prevailing rate for 10-year government securities was 16.93% gross or 13.544% net. The winning bid that enabled CODE NGO to purchase the bonds was 12.75% or .794% lower than the prevailing rates. The auction itself attracted P 137B in bids from various bidders in the financial market.

How was CODE NGO able to subsequently sell the PEACe Bonds?

CODE NGO subsequently sold the PEACe Bonds through an underwriter for eventual resale in the secondary financial markets thus raising P 1.3B currently held in trust for the permanent endowment of the PEACe foundation. The underwriter is RCBC Capital Corp., the investment arm of RCBC.

Was it unusual for RCBC as a Government Securities Eligible Dealer (GSED) to bid on behalf of CODE NGO?

Not at all. Most if not all GSEDs bid for resale in the secondary market. In fact, in a clarificatory note published in Businessworld on January 22, 2002. National Treasurer Sergio Edeza said: “Only GSEDs can participate in an auction. However, these GSEDs sell bonds in the secondary market after every auction. Any interested party can always buy government securities in the secondary market from Government Securities Eligible Dealers. The BTr does not in any way exercise control or regulate the trading of government securities in the secondary market. All transactions in the secondary market for government securities are the business of GSEDs.”

What was the nature of the funds that were raised through the PEACe Bonds?

The funds that were raised were ALL PRIVATE FUNDS. During the auction the funds that were delivered to the Bureau of Treasury were ALL PRIVATE FUNDS. The funds subsequently raised through the secondary sale of the PEACe Bonds were ALL PRIVATE FUNDS. NO Government Funds were used in the entire process.

RCBC does not engage in questionable transactions. Neither will it involve itself in a “scam” nor engage in “insider trading.” The auction was conducted by the Bureau of Treasury and was open to all Government Securities Eligible Dealers (GSEDs). The secondary private placement of the PEACe Bonds was done after the auction. It was a normal, private secondary market transaction using private funds.