Estimating RCBC/Yuchengco Group's Profits from the PEACe Bonds

Editor's Note: This is an update to a previous post entitled "Estimating RCBC's Profits from the PEACe Bonds" that incorporates new and better information.

Much has been written about how CODE-NGO has extracted PhP 1.827 billion in gross profits from the PEACe Bonds. From this bonanza, the PhP 1.338 billion Peace Foundation was born. Yet there have been hardly any articles in the mainstream press as to how much profit RCBC, CODE-NGO's financier, extracted from the transaction. RCBC Capital did extract a PhP 239 million underwriting commission. But this amount is peanuts when you consider the fact that RCBC Capital's parent, namely RCBC itself, risked PhP 11.996 billion or roughly 90% of its capital to earn a measly PhP 239 million or 1.8% of its capital. Given that interest rate fluctuations could cause the value of the PEACe Bonds to decline by PhP 1.275 billion over the course of a year, this seems foolhardy. Why? Because RCBC's risk was more than five times the potential reward. If its profits were limited to underwriting commissions, the transaction's rewards were definitely not worth the risk.

But RCBC and/or RCBC's parent, the Yuchengco Group of Companies, did make money on the transaction. Lots of money. As much as PhP 4.0 billion! How? By reselling the PEACe Bonds to institutional investors at even higher prices.


According to Jaime “Jimmy” Panganiban, RCBC's Treasurer,

“We have a contracted sale for PhP 1.2 billion [out of the PhP 35 billion worth of PEACe Bonds, which is the issue's face value upon maturity], Panganiban said. But given the publicity about the PEACe Bonds, we're not aggressively [selling them in the secondary market]. He admitted that there is demand or keen interest in the bond.¹

The bonds were sold to RCBC's corporate clients outside the Yuchengco group of companies.² Mr. Panganiban said that RCBC has been selling the bonds, which RCBC acquired at an effective cost of 34 centavos per bond unit (PhP 1.00 at maturity in 10 years), for 40 to 45 centavos to undisclosed corporate buyers.³ This translates to an effective yield to maturity rate (YTM) of 8.170% to 9.370%.

In terms of profit, this means that RCBC, by selling PhP 1.2 billion or 10% of the PEACe bonds it acquired from CODE-NGO for PhP 11.996 billion, realized a trading gain anywhere from PHP 201.32 million to PhP 374.94 million from this one transaction alone. If it continued to sell the rest of its holdings at this price, it would reap an additional trading gain ranging from PhP 1.812 billion to PhP 3.374 billion, bringing its total potential profit on the entire PEACe to PhP 2.013 billion to PhP 3.749 billion, just from reselling the PEACe Bonds. If you add back the underwriting commission, RCBC could have earned as much as PhP 4.0 billion on the PEACe Bonds.

But here's the kicker. There could have been even more profits in the offing for RCBC! Why? Two reasons. Time and Interest Rates. The prices of zero coupon bonds go up as the bond nears its maturity date. The closer the bond is to its maturity date, the closer the zero-coupon bond's value approaches par or face value. Interest rates also significantly affect the prices of zero-coupon bonds. The lower the interest rate, the higher the bond price. And interest rates did go down substantially after the PEACe Bonds transaction. And as interest rates go down, bond prices go up. So estimating RCBC's profits are also very dependent on when RCBC sold down the PEACe Bonds to other institutional investors because the bond's time to maturity and prevailing interest rates would have changed.

According to RCBC Treasurer Jimmy Panganiban, RCBC did not aggressively sell the PEACe Bonds in the secondary market because of the controversy they generated. Given that they held at least 90% of the bonds in October 2001, it is safe to assume that all the subsequent PEACe Bond transactions registered with the Bureau of Treasury's Registry of Scripless Securities were RCBC's.

Based on this chart of PEACe Bond Transactions sourced from the Registry of Scriptless Securities, it seems that RCBC had rid itself of its entire PEACe Bond inventory by March 2002.  Or given that RCBC had recently admitted to holding on to PhP 1.388 billion or roughly 4% of the PEACe Bonds Issue (See "With a PEACe Bonds Tax, PBCom is Left Holding the Bag"), they could have disposed of the inventory they wanted to dispose of even earlier, possibly by February 2002.  However, it is not clear if the PhP 1.388 billion in PEACe Bonds held by RCBC were held until maturity or were repurchased from other institutional investors.

	Number of Transactions	Face Amount	Cumulative Face Amount
Date	#	(In PhP Billions)	(In PhP Billions)
October 2001	8	10.96	10.96
November 2001	20	3.82	14.78
December 2001	17	3.83	18.61
January 2002	29	7.41	26.02
February 2002	34	5.65	31.67
March 2002	22	3.53	35.20

Jaime Panganiban, RCBC's Treasurer, said that RCBC sold at least 10% of their PEACe Bond holdings at YTMs ranging from 8.170% to 9.370% soon after the PEACe Bond auction, meaning October 2001. If RCBC had sold the last 90% of their holdings at the upper end of this YTM range, meaning at 9.370% YTM by October 2001, RCBC would have reaped PHP 2.013 billion in gross profits. But they didn't. Instead, they held on. Holding on to the bonds proved beneficial to them. The bonds accrued interest and went up in value. Even if interest rates or YTMs remained constant, at the 8.170% to 9.370% YTM range, the bonds would go up in value. By how much?

If YTMs remained at 9.370% (the upper end of its previous selling range) and the bonds were fully sold by March 2002, the profit would have been PHP 2.00 billion.

	PEACE Bond Sales	Price to Institutional Investor	Cost to RCBC
	Face Amount	At 9.370% YTM	At 11.000% YTM	RCBC's Profit
Date	(In PhP Billions)	(In PhP Billions)	(In PhP Billions)	(In PhP Billions)
October 2001	10.96	4.39	3.76	0.63
November 2001	3.82	1.54	1.32	0.22
December 2001	3.83	1.56	1.34	0.22
January 2002	7.41	3.03	2.61	0.42
February 2002	5.65	2.33	2.01	0.32
March 2002	3.33	1.38	1.19	0.19
Total	35.00	14.23	12.23	2.00

If YTMs remained at 8.170% (the lower end of its previous selling range) and the bonds were fully sold by March 2002, the profit would have been PhP 3.71 billion.

	PEACE Bond Sales	Price to Institutional Investor	Cost to RCBC
	Face Amount	At 8.170% YTM	At 11.000% YTM	RCBC's Profit
Date	(In PhP Billions)	(In PhP Billions)	(In PhP Billions)	(In PhP Billions)
October 2001	10.96	4.92	3.76	1.16
November 2001	3.82	1.73	1.32	0.41
December 2001	3.83	1.74	1.34	0.4
January 2002	7.41	3.39	2.61	0.78
February 2002	5.65	2.61	2.01	0.6
March 2002	3.33	1.55	1.19	0.36
Total	35.00	15.94	12.23	3.71

This profit calculation assumes that interest rates remained constant.  But interest rates didn't remain constant.  Instead, to RCBC's great benefit, they declined.

If the YTMs at which the PEACe Bonds were sold to investors declined with interest rates (with a floor of 7% - the yield of reserve eligible securities at the time of the PEACe bonds auction), RCBC's interest rate spread would be as follows:

	Bureau of Treasury	Institutional Investor	Cost to
	YTM	YTM	RCBC	RCBC's Profit
Month	(In %)	(In %)	(In %)	(In % Spread)
October 2001	12.750%	8.170%	11.000%	2.830%
November 2001	12.750%	7.459%	11.000%	3.541%
December 2001	12.750%	7.000%	11.000%	4.000%
January 2002	12.750%	7.000%	11.000%	4.000%
February 2002	12.750%	7.000%	11.000%	4.000%
March 2002	12.750%	7.000%	11.000%	4.000%

At these rates, RCBC's profits on the PEACe Bonds could have been as high as PhP 4.91 billion or 30.97% higher than the PhP 3.749 billion estimate had the PEACe Bonds been sold in October 2001 at an 8.170% YTM.

	PEACE Bond Sales	Price to Institutional Investor	Cost to RCBC
	Face Amount	At Fluctuating YTMs	At 11.000% YTM	RCBC's Profit
Date	(In PhP Billions)	(In PhP Billions)	(In PhP Billions)	(In PhP Billions)
October 2001	10.96	4.92	3.76	1.16
November 2001	3.82	1.85	1.32	0.53
December 2001	3.83	1.95	1.34	0.61
January 2002	7.41	3.79	2.61	1.18
February 2002	5.65	2.91	2.01	0.9
March 2002	3.33	1.72	1.19	0.53
Total	35.00	17.14	12.23	4.91

1“Raid on the Treasury - JPE on the PEACe Bonds Scandal, by Butch Fernandez and Erik de la Cruz, Reporters, February 13, 2002, Today Newspaper.

2“Internal Revenue bureau defends tax break for PEACe bonds,” by L.M. Gallardo with C.E. Yap, February 13, 2002, Businessworld

3“Enrile sees wholesale ruse in CODE-NGO deal,” by Angie M. Rosales and Jun Vallacera, February 13, 2002, Daily Tribune

With a PEACe Bonds Tax, PBCom is Left Holding the Bag

In a previous post entitled: "A Tax on the PEACe Bonds - Who is Left Holding the Bag?", we estimated the impact of a Final Withholding Tax (FWT) on the PEACe Bonds on the Capital Funds of nine banks that banks that were reported to be the final bondholders of the PEACe Bonds.  In that analysis, we used news reports and the individual banks reported holdings of Government Debt Securities to estimate the size of their PEACe Bond holdings as well as the estimated impact on the individual bank's balance sheet.  Based on those estimates, we arrived at this table:

Affected Banks Analysis of Impact of 20% Final Withholding Tax on Affected Bank Capital As of December 31, 2010
Bank	Total Holdings of Government Debt Securities8 (In PHP B)	%	PEACe Bonds Holdings (In PHP B)	FWT Due (In PHP B)	Capital Funds (In PHP B)9	Capital Affected (In %)
Banco De Oro	143.26	29.58%	10.200	1.416	88.302	1.60%
Bank of Commerce	14.17810	2.93%	1.010	0.140	14.56911	0.96%
BPI Family Bank	17.27912	3.57%	1.75013	0.243	12.56414	1.93%
China Banking Corporation	67.007	13.84%	4.77	0.663	32.221	2.06%
Metropolitan Bank and Trust Company	143.690	29.67%	10.232	1.421	95.772	1.48%
Philippine Bank of Communications	13.988	2.89%	0.996	0.138	4.033	3.43%
Philippine National Bank	69.906	14.44%	4.978	0.691	28.527	2.42%
Philippine Veterans Bank	8.58315	1.77%	0.611	0.085	5.39116	1.57%
Planters Development Bank	6.345	1.31%	0.452	0.063	1.276	4.92%
Total	484.234	100.00%	35.000	4.860	282.656	1.72%

Under this scenario, the biggest holders of the PEACe Bonds were, naturally, the bigger banks like Banco de Oro and Metrobank.  The PEACe Bond Tax would take a bite of the banks Capital Funds.  The most affected banks were, from highest to lowest:

1. Planters Development Bank (4.92% of Capital Funds Affected)
2. Philippine Bank of Communications (3.43% of Capital Funds Affected)
3. Philippine National Bank (2.42% of Capital Funds Affected)
4. China Banking Corporation (2.06% of Capital Funds Affected)

Based on new data from unimpeachable sources, we now have a definitive list of the Final PEACe Bondholders.  They are as follows:

Schedule of Final Holders of PEACe Bonds
As of October 12, 2011
(In Pesos)
PIBZ1011J029 (PEACe Bond)
Date of Issue: October 18, 2001
Date of Maturity: October 18, 2011
Principal	35,000,000,000.00
Price	10,168,961,017.95
Discount	24,831,038,982.05
Holders	Face Amount	Withholding Tax	Net of Tax
Asiatrust Development Bank	248,129,807.00	35,207,548.06	212,922,258.94
Banco De Oro Unibank, Inc.	4,860,000,000.00	689,593,425.44	4,170,406,574.56
Bank of Commerce	4,090,000,000.00	580,336,853.92	3,509,663,146.08
BPI Family Bank	2,500,000,000.00	354,729,128.32	2,145,270,871.68
China Bank Corp.	11,472,000,000.00	1,627,781,024.01	9,844,218,975.99
Metropolitan Bank and Trust Co.	3,000,000,000.00	425,674,953.98	2,574,325,046.02
Philippine Bank of Communications	3,000,000,000.00	425,674,953.98	2,574,325,046.02
Philippine Business Bank	259,000,000.00	36,749,937.69	222,250,062.31
Philippine National Bank	1,650,000,000.00	234,121,224.69	1,415,878,775.31
Philippine Veterans Bank	1,110,000,000.00	157,499,732.97	952,500,267.03
Planters Development Bank	800,000,000.00	113,513,321.06	686,486,678.94
Premiere Development Bank	70,000,000.00	9,932,415.59	60,067,584.41
RCBC Savings Bank	0.11	0.02	0.09
Rizal Commercial Banking Corp.	1,387,896,747.37	196,930,961.35	1,190,965,786.02
Union Bank of the Philippines	522,448,193.00	74,131,036.84	448,317,156.16
Beneficial - PNB Life Insurance Co., Inc.	4,444,444.44	630,629.56	3,813,814.88
Philippine First Insurance Co.	4,000,000.00	567,566.61	3,432,433.39
BMS Rural Bank	13,000,000.00	1,844,591.47	11,155,408.53
Yu, Francisco O/ Lester Joebert	1,000,000.00	141,891.65	858,108.35
Pacific Plans	8,080,808.08	1,146,599.20	6,934,208.88
Total	35,000,000,000.00	4,966,207,796.41	30,033,792,203.59

Source: Department of Finance

Based on this definitive list, the banks with the highest holdings of PEACe Bonds turns out to be the smaller and mid-level banks.  Topping the list was China Bank Corp., with a surprising PHP 11.472 billion in PEACe Bonds.  Next on the list is a large bank, Banco de Oro Unibank, Inc., with PHP 4.860 billion in PEACe Bonds.  Bank of Commerce is third on the list, with PHP 4.090 billion in PEACe Bonds.  Tied for fourth place in terms of PEACe Bonds holdings are Metrobank and PBCom, with PHP 3.000 billion each.

Impact on Bank's Financial Statements

As mentioned on this blog before, the surprise imposition of the 20% Final Withholding Tax will affect each of the banks financial condition to varying degrees.  What is clear is that:

1. None of the banks have properly accrued for the presumed tax liability
2. None of the banks have prepared themselves to receive less cash from the redemption payment of the  PEACe Bonds.

The imposition of the tax will definitely take a bite out of the bank earnings and capital funds.  Based on their latest available Published Statements of Condition courtesy of www.bsp.gov.ph, the most affected banks are as follows:

1. Philippine Bank of Communications (10.41% of Stockholders Equity)
2. China Bank Corp. (4.88% of Stockholders Equity)
3. Bank of Commerce (3.37% of Stockholders Equity)
4. Philippine Veterans Bank (2.95% of Stockholders Equity)
5. Asiatrust Development Bank (2.89% of Stockholders Equity)

Affected Banks
Analysis of Impact of 20% Final Withholding Tax
on Affected Bank Capital
As of September 30, 2011
	Final	Stockholders Equity	% Impact on
Bank	Withholding Tax	As of 9/30/2011	Stockholders Equity
Philippine Bank of Communications	425,674,953.98	4,088,965,572.94	10.41%
China Bank Corp.	1,627,781,024.01	33,346,295,133.54	4.88%
Bank of Commerce	580,336,853.92	17,216,195,258.88	3.37%
Philippine Veterans Bank	157,499,732.97	5,338,983,472.43	2.95%
Asiatrust Development Bank*	35,207,548.06	1,217,067,800.00	2.89%
BPI Family Bank	354,729,128.32	13,215,459,607.20	2.68%
Planters Development Bank	113,513,321.06	4,699,048,148.39	2.42%
Premiere Development Bank	9,932,415.59	768,276,843.83	1.29%
Philippine Business Bank	36,749,937.69	3,078,009,090.67	1.19%
Banco De Oro Unibank, Inc.	689,593,425.44	88,975,509,887.06	0.78%
Philippine National Bank	234,121,224.69	31,740,513,590.20	0.74%
Rizal Commercial Banking Corp.	196,930,961.35	40,739,143,784.29	0.48%
Metropolitan Bank and Trust Co.	425,674,953.98	98,546,088,987.74	0.43%
Union Bank of the Philippines	74,131,036.84	33,802,457,673.54	0.22%
RCBC Savings Bank	0.02	7,350,378,695.23	0.00%
Total	4,961,876,517.92	384,122,393,545.94	1.29%
*Latest Financial Statements: June 30, 2009

It must be noted that of the fifteen banks in this list, nine are considered distressed (highlighted in yellow) because their Total Distressed Assets exceed their Total Capital Cushion by a magnitude of more than 1.  Since the level of their distressed assets is so high relative to their capital base, that any significant deterioration in the value of these distressed assets has the potential to take a huge chunk of the bank's capital or even wipe it out completely.

Philippine Thrift Banking System
Total Distressed Assets/Total Capital Cushion
September 30, 2011
		September 30, 2010
Bank	Total Distressed Assets (In PHP Billion)	Total Capital Cushion (In PHP Billion)	Distressed Assets/ Total Capital Cushion (In %)
Planters Development Bank	11,502,781,363.87	4,362,965,164.27	263.65%
Asiatrust Development Bank*	4,638,280,785	1,807,777,528	256.57%
Philippine Veterans Bank	10,879,880,413.60	5,737,758,181.67	189.62%
Bank of Commerce	32,699,114,872.49	18,361,861,626.49	178.08%
RCBC Savings Bank	13,649,319,087.69	7,765,864,931.44	175.76%
Philippine National Bank	64,949,186,122.23	38,021,318,336.45	170.82%
Philippine Bank of Communications	9,291,519,325.92	6,103,760,074.12	152.23%
Premiere Development Bank	1,278,226,045.20	907,972,696.40	140.78%
Union Bank of the Philippines	38,582,465,913.28	38,301,194,129.33	100.73%
Philippine Business Bank	2,097,844,212.18	2,792,487,751.08	75.12%
Rizal Commercial Banking Corp.	27,086,579,563.52	36,598,227,573.49	74.01%
Metropolitan Bank and Trust Co.	63,938,649,304.53	89,510,341,778.10	71.43%
Banco De Oro Unibank, Inc.	67,521,482,859.14	110,621,563,730.79	61.04%
BPI Family Bank	12,378,223,253.81	13,932,797,475.79	58.51%
China Bank Corp.	21,369,318,244.66	36,522,588,097.69	58.51%
Total	381,862,871,367.12	411,348,479,075.11	92.83%
*Latest Available Financial Statement: June 30, 2009

Several of these Distressed Banks have already undergone significant changes in ownership in the last two years.  Asiatrust Development Bank's banking assets were recently sold to Asia United Bank (See a previous blog post: "Asiatrust Bank, Long on PDIC's Life Support, is Finally Sold for Scrap Value").  Bank of Commerce was acquired by the San Miguel Group.  Philippine Bank of Communications was acquired by the Ongpin Group.  Premiere Development Bank was acquired by Security Bank Corp. in June 2011.

Given their precarious state of condition, it is very probable that more asset sales and/or mergers will take place, particularly among the distressed banks.  It is also highly likely that the Ongpin Group will have to infuse more capital into PBCom, particularly if the Supreme Court upholds the Philippine Governments position that a Final Withholding Tax of 20% must be imposed on the PEACe Bonds.

Postscript:

For a more complete list of distressed Philippine Banks, check out the following blog posts: "Export and Industry Bank Becomes Even More Insolvent! - September 30, 2011" for commercial banks and "Thrift Banks Improve Due to Survivorship Bias" for thrift banks.

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” (http://systemisbroken.blogspot.com/2011/10/revisiting-peace-bonds.html)

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” http://pcij.org/blog/2011/10/25/vanishing-trade-in-peace-bonds-the-truth-the-banks-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: http://pcij.org/blog/wp-content/uploads/2011/10/seeking-full.gif 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