Legacy

Too bad. The closure of 15 rural banks last month blighted the fact that our banking system was generally sound despite the storms that swept through the global financial system.

In a tense financial environment, the closure of the rural banks created large ripples. A couple of those banks closed were besieged by bank runs. Two others declared bank holidays after a sharp spike in the volume of withdrawals from their clients.

The shuttered banks suggested that their fate was due to tough economic times.

That is simply not true. I looked at an analysis of our rural banking industry this week and it is clear that while this sector is robust, the closures were due to incredibly bad management of a few banks.

Of the 15 rural banks shut down by the Bangko Sentral and put under the receivership of the PDIC, 11 were part of or were linked to the Legacy Group. The Legacy Group is controlled by Celso G. de los Angeles, who is currently mayor of Sto. Domingo town in Albay province.

The Legacy Group controls 13 banks with 29 branches nationwide. Assessment of the operations of these banks show that they offered unsustainably high yields to attract deposits. Many of the deposits were linked to other businesses of the Legacy group.

For instance, when one purchases a car from Legacy Motors, the amount paid for the vehicle in entered as a deposit, the yield from which is used to cover amortization costs for the car. That is, from any angle, reckless banking practice.

Unsurprisingly, when the banks of the Legacy Group were shut down for insolvency, the other businesses of the group immediately filed for dissolution. That magnifies the adverse economic consequences of improper banking practices.

Among the related businesses of the Legacy Group that filed for dissolution with the SEC are: Legacy Card; One Realty Corp.; Galaxy Realty and Holdings; Legacy Consolidated Asset Holdings; Fusion Capital Corp.; Conventional Realty Corp.; Shining Armor Property; Legacy Motors; and, Scholarship Plan Philippines.

Tens of thousands of Filipinos were left holding the bag after the Legacy Group’s banks were shut down and after the Group’s other related businesses filed for dissolution. These are ordinary Filipinos who entrusted their hard-earned savings to Legacy on the lure of higher interest rates, whose dreams for a house led them to invest in the group’s property development schemes and whose hopes for educating their children led them to scrimp to pay premiums for the pre-need insurance offered by this group.

These ordinary Filipinos who invested their hopes in what has turned out to be a badly-run business are now left with nothing.

The US, in the closing months of 2008, was rocked by a major financial scandal. A guy named Madoff just made off with investments estimated to run up to $50 billion. One respected investment broker who put his clients’ money in the Madoff scheme has taken his own life.

Madoff is not some shadowy figure taking money and promising high returns. He was a respected figure in the financial world. He was one of the founders of the Nasdaq exchange. And he is now facing charges of financial fraud.

Now it is clear that the Madoff fund has been nothing more than a more elaborate Ponzi scheme — or what we more familiarly know here as a pyramiding scam. In such a scheme, the money from new investors is used by the unscrupulous broker to pay returns on the earlier investments. No new value is really being created here. At some point, schemes like this one are bound to collapse like a house of cards.

When the investigation is done on the activities of the Legacy Group, I suspect we will see a variant on the Ponzi scheme. Revenues from a network of businesses were plowed in to support unsustainably high rates paid on deposits — until everything collapses like a house of cards.

In the end, the proprietors make money on their other businesses and then turn over the mess to the PDIC. That means turning over the mess to the account of the taxpayers.

The PDIC insured the money of small savers to the amount of P250,000. When a bank fails, depositors may file claims with the PDIC in the amount of their trapped deposits up to the maximum mentioned above.

Through the entire breadth of the domestic banking system, over 90% of deposits are well under the maximum amount insured by the PDIC. This is one of the reasons raised by those who oppose a recent Palace proposal to raise the limit of insurance coverage for bank deposits.

In the case of the Legacy banks, nearly all the deposits were just under the insurable limit. It is as if the management of these banks made sure of that.

Therefore, nearly the entire amount of deposits in the Legacy banks will be eventually covered by the PDIC. This will add up to several billion pesos.

The large commercial banks are not happy about it. Because of their large deposit volumes, the commercial banks pay the bulk of the premiums on deposits to the PDIC. And yet, most usually, it is small banks, who pay vastly less premiums, that require to be covered because these institutions have been horribly run — or systematically looted.

In the end, those of us who may not have deposits in the closed Legacy banks, or did not buy any of their controversial pre-need products or took out property from their companies will still pay for this scandalous closure. As taxpayers or as depositors in the large banks that pay huge premiums to the PDIC, all of us will eventually shoulder the cost incurred by the highly dubious manner by which the Legacy Group’s businesses were run.

That is most unfair.