Avoiding and surviving bank scams

The closure of the Legacy Group of rural banks in the Philippines and the collapse of Madoff’s Wall St. investment /hedge fund couldn’t have come at the worst time, which was a few days before Christmas. With the estimated deposit and investment liabilities of the Legacy Group of over P14 billion, and Madoff’s $50 billion, a lot of people suffered losses made their Christmas not merry at all.

Due to fortunate circumstances, I had worked in a commercial bank, in an investment bank, sat in the Board of Commercial Banks, Trift/Development Banks, and Rural Banks, in various times of my professional career; and was a member of the Board of the Philippine Deposit Insurance Corporation (PDIC) for a number of years. I even headed a team that set up the first private commercial bank in Vietnam after the war, and trained in a Chicago Bank that collapsed and was taken over by the U.S. Federal Deposit Insurance Corporation (FDIC). So I have a fairly good grasp of the banking business.

In an earlier article for The Freeman about seven years ago, I wrote about the Ponzi pyramiding scheme, its origin and its recurrence every so many years, but not relating it to banking. The current Legacy Group and Madoff scam is actually still a Ponzi pyramiding scheme, but a variation in that they used the prestige of a bank to entice and assure the investors or depositors. Of course, in time, it did collapse as every pyramiding scheme will always do. As the pyramid runs out of participants, or the pyramid reaches its limits, it collapses.

Avoiding the above bank scams was not really that difficult if the investors just took the time to analyze or evaluate the deposit or investment proposals. The Legacy Group was offering such high returns, 2% to 3% a month, double your money in 5 years with a free car, double your money in 3 years with a free I-phone, and commissions to the agents. In the span of time that the Legacy Group was promoting these schemes, the rates that they were giving were actually 2 to 3 times what the legitimate banks were giving, so it should have made the investors wonder where Legacy was putting their investments to yield such high returns. I had actually talked to some of the senior officers of Legacy four years ago and they were saying that their loans to teacher and their credit card earnings were giving them the good yields. I could not believe this, eventually I was able to confirm that they did not have this yield but were simply pyramiding, when I was appointed to the board of PDIC. PDIC and the Central Bank wanted to close the Legacy Banks as early as 2004, but were prevented by strong political backing and the lower courts restraining orders. The Supreme Court decision reversing the lower courts eventually allowed the CB and the PDIC to close these banks, but not after burdening PDIC with the payout of P14 billion or one third of PDIC’s deposit insurance fund. This deposit insurance fund is generated from the deposit insurance premiums paid by all banks to PDIC and government money from taxes, so in a way, we are all paying for this fund. What was even more anomalous about the Legacy scheme, was their design and promotion to limit the deposit per name to the limit of the PDIC insurance which was P250,000, even telling the depositors, that PDIC will pay up to that amount in the event that the banks will fail. This should also have been the signal to the investors/depositors that something is amiss or wrong if this is the sales pitch of the bank.

In the Madoff case, the prestige of Madoff as ex-Chairman of NASDAQ, the largest over the counter stock exchange in the world, and advisory position in the NYSE, plus his stock brokerage company, lulled the investors, even as a number of investors and competitors were starting to wonder as early as 2004, how he consistently maintained a dividend payout of 9% to 11% per annum. Madoff also solicited funds through a number of smaller funds which were getting commissions. It had become a Fund of Funds. Surprisingly, even some of the world’s big commercial banks had included Madoff’s Fund in their recommended investments. The financial meltdown in October 2008 made withdrawals from hedge funds more than incoming investments. The Madoff funds pyramid started to crumble, and in a few weeks there was no more money to pay dividends or principal withdrawals. Madoff really had no choice but to confess and face the music.

In both of the above cases, becoming a victim could have been avoided if a little more due diligence was done, or a little more investigation was done. I had actually told a number of people to avoid the Legacy Group Banks as early as 2005, and some of them followed my advice. But others were assured of the political clout of the backers and the P250,000 deposit insurance. Now they have to validate if their deposits were recorded as deposits, or if it was recorded at all, as the PDIC will only pay the recorded deposits.

Surviving these bank scams has to do with what you can recover from the deposit/investments in these banks, and the percentage of the Net Worth that you have invested in these scams. In the case of the Legacy Group, get hold of your original passbook, checkbooks, and certificates of deposits, and bring them to the PDIC personnel assigned in the bank branch where you made your deposit, together with 2 valid IDs. If your deposit is recorded in the bank’s books, you should be able to withdraw your balance or up to P250,000. You are unlikely to get the promised high interest rate, but at least you get back your principal plus some interest. Then invest this money somewhere else safe, as time is money and the sooner you can invest them the sooner it will start earning. In the case of the investment in the Madoff Fund, if the investment was made through another fund, it is worthwhile to look at the obligation and liability of the subsidiary fund to see if you can collect from them. It is also worthwhile to look at the underlying security or asset that is stated in the investment document, to determine if there was a real security or asset. If the underlying asset/security is real and not fake, there is a possible claim to be made on the asset.

Considering the state of the World’s Financial System, I am of the opinion that if you only lost up to 20% of your net worth in these bank scams, you will survive this financial crisis. A lot of people lost more in legitimate investments, and they survived. The painful thing in losing money in a scam is because deep inside, you know you could have avoided it, if not for greed and stupidity. Still it is a lesson learned. As I have said in a previous column, “It is dangerous when we let our greed overcome our need.”