Bangko Sentral action needed

There is a need for the Bangko Sentral ng Pilipinas (BSP) to have a watchful eye on certain activities of banks and investment houses due to their grave implications on the state of the economy. One of such activities is the unchecked collusion between some banks and investment houses and the companies that float bonds in the market for their funding needs. 

There are certain infractions that the banks and investment houses do in pushing for the sale of these bonds to unsuspecting bank depositors. Among them is the failure of these financial entities to fully inform the buyers of the bonds on the risks that are involved should the companies keel over and be unable to redeem such bonds.

In a regime of low interest rates, when the bank depositors earn much less than the rate of inflation, there are overzealous bank staffers who proffer these company bonds, especially since these debt notes earn high interest rates of anywhere from 5 percent up to 9 percent. In so doing, these bank staffers, either through their eagerness to move the bonds or by design, are able to sell these without the depositors fully knowing the full impact of their bond purchases.

While it is true that the companies that float these bonds and other kinds of kinds of debts have their own full disclosures when they apply for the flotation of these credit instruments before the Securities and Exchange Commission (SEC), these are not, however, conveyed to the buyers of the bonds, who are usually unsuspecting bank depositors.

It is this same kind of problem that resulted in the global financial crisis of 2008 when investment houses and banks in the United States came up with high-earning collateralized debt instruments so esoteric that even bank staffers did not understand them. Worse, even the topnotch rating agencies such as Fitch and Standard and Poor’s came up with their own buy recommendations and even had glowing assessments of these debt instruments.

What happened was the worst financial crisis to hit the globe, with many iconic financial institutions that survived two world wars and other calamities were consigned to the dustbin of financial history.

It is this same kind of financial hazard that the country’s economy maybe subject to should the bonds so floated cannot be redeemed anymore by the issuing corporations, however good their financial health is supposed to be. The BSP should take to mind the fact that banks and investment houses are oftentimes guilty of not telling the full story behind the issuance of bonds.

Bonds have different forms. Some are preferred shares and with some with so-called convertibility features whereby a buyer has the option to exchange the bonds for shares of stock of a company at a certain time frame. Here, the buyer is supposed to make a huge windfall should the stock price go high as against the so-called exercise price of the buyer.

The problem though is that the possibility of the risks about the bonds are not communicated to the buyer involved, such as the inability of the company to redeem the bonds or when the company goes under. The bank staffers do not apprise the buyers—usually bank depositors who want higher interest rates for their deposit funds—and this is the big question mark for the BSP to look into.

For, as in any investment, there is always the possibility that a company may not be able to sustain its viability and what happens? The buyer/depositor loses his own investments due to the enthusiasm of the bank staffers to push the credit instruments and the failure of the buyer/depositor to ask the right questions.

Ever since noted financial quant Nassim Nicholas Taleb came up with his bestselling book, The Black Swan, which detailed the possibility of a black swan, or a cataclysmic financial event coming up, such as the financial collapse of even iconic financial houses, the financial world has already taken into account this far-off possibility, but a possibility nonetheless.

For when a company enjoying years and years of good financial health succumbs to a big black swan event for which it is not prepared, all hell breaks loose and with it, investors see their money gone.

This is something that the Bangko Sentral has to guard against, especially since it may not be able to fully police the banking system due to lack of enough manpower to do so. Perhaps what it should do is to do what the SEC officials do when they investigate companies suspected of engaging in pyramid scam activities.

These SEC officials pose as buyers or investors and in so doing are able to expose the company for its pyramid scam activities.

Thus, the order of the day is for BSP employees to pose as investors of these bonds and go to some bank offices. When they do, they’re in for a surprise.