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Fumble

DEMAND AND SUPPLY - Boo Chanco - The Philippine Star

The good news is, they have backtracked. Rep. Stella Quimbo announced that they have decided to drop SSS and GSIS as sources of funding for the proposed Maharlika Sovereign Wealth Fund.

They were surprised with the loud public outcry. Rep. Stella was blaming the economic managers for not consulting the public before sending their draft bill to Congress. I guess she means Finance Secretary Ben Diokno.

But the congresswoman from Marikina is a summa cum laude graduate with a PhD from the UP School of Economics. She and self-proclaimed economist Congressman Joey Salceda should have known better to vet the proposal before jumping in feet first in their mouths.

Rep. Stella says they will just tap Landbank, DBP and the BSP. She proposed using what she called the windfall profits made by BSP when it sold dollars to defend the peso.

But BSP profits are sent to the National Treasury and helps finance the budgetary needs. By carving out BSP profits for funding Maharlika, the Treasury will have less funds to support the budget. So, why did she emphasize we need more funds to support the budget as the reason for having the Maharlika SWF?

In her interview with Karen Davila on ANC, she also gave the strong impression that investments in Maharlika SWF will generate higher returns and is a sure thing… so there will be more funds to support the budget.

Wow! No investment, specially the kind of risky investments contemplated by Maharlika SWF, is a sure thing.  She is misleading the general public.

I also noted Rep. Stella kept on saying excess funds. She knows, I am sure, there are no excess funds. Those are investment funds that GFIs need to perform their functions as mandated in their charters. There are no excess funds in government or we wouldn’t have the budget deficit she wants the SWF to fill.

Let me correct myself. There are excess funds in the budget that can be put to better use: congressional pork barrel, confidential and intelligence funds. Let us dare them to include these in Maharlika’s funding.

So, President Junior only belatedly realized that creating the SWF carries a lot of political risks for him. Can you imagine the political impact for Junior if that Maharlika Fund, as originally conceived, lost a substantial amount of funds contributed by SSS and GSIS members because the international investment climate turned sour?

The first thing an investment adviser told me is: big returns from big risks. Also, invest only money you don’t need immediately and can afford to lose.

The managers of Maharlika will likely take bigger risks than the investment managers of GSIS and SSS are comfortable with. They can earn big or lose big.

The proposed law already tells us Maharlika’s managers can take big risks. Among the investments it could make, according to the proposed bill include: foreign currencies, metals, tradable commodities, domestic and foreign corporate bonds, listed or unlisted equities, and the most dangerous of them all, financial derivatives.

Financial derivatives and variants were the primary instruments that blew up Lehman Brothers and Bear Stearns and triggered the 2008 Financial Crisis. Warren Buffett, the ultimate investor, has called derivatives “weapons of mass financial destruction.”

The proposed bill also authorizes the Maharlika Fund to issue debt and debt-like instruments. That’s like giving them the power to create their own money.

With authority to borrow, Maharlika managers can then invest the debt proceeds in risky ventures. Pension funds are normally managed with some degree of conservatism. Their fund managers worry about mistakes in investment decisions that can shorten the life of the funds.

Rep. Joey Salceda says that GSIS and SSS contributions to the fund are covered by sovereign guarantee so the pensioners are kept free from any risk. That’s intellectual dishonesty on the part of my friend Joey.

Sovereign guarantee means if shit hits the ceiling, the national treasury will cover the contributions of GSIS and SSS members. But that means it is the Filipino taxpayers who will suffer the loss and must pay the pensioners.

I wish to remind Rep. Joey that GSIS and SSS members are also Filipino taxpayers. So, they actually get no protection from the disastrous mistakes or bad luck of the investment managers of the Maharlika Fund.

I wonder too how the international debt rating agencies will react to the heavy contingent liabilities the Treasury will take because of all these, on top of our heavy debt load. There goes our investment grade rating.

Maharlika Fund managers will play around with people’s money like in a casino. The managers can’t even be questioned as the proposed bill limits our access to information on how they make their decisions.

As for the claim that the fund will be safe because Junior, the country’s president, will be the chairman of the fund… Tell that to the Malaysians who experienced the loss of $4.5 billion in 1MDB sovereign fund who had the prime minister as principal boss, and as it turns out, principal culprit.

Indeed, 1MDB became a corruption conduit. Prosecutors alleged that Goldman Sachs bankers helped 1MDB raise $6.5 billion through bond sales — only to divert $4.5 billion of it to themselves and their co-conspirators through bribes and kickbacks.

The Maharlika Fund proposal is making Rep. Joey Salceda’s thinking seem fuzzy. He told Ted Failon that, among others, the fund would be used to buy back NGCP from the Chinese owners and finance public works like bridges.

If the objective is to bring back NGCP to full Filipino ownership, don’t renew NGCP’s franchise when it expires or shorten its life as ERC recently threatened. Government gets back control for free.

As for making the Maharlika Fund finance infrastructure projects, that is a national budget matter unless all bridges constructed by the fund become toll bridges.

Maybe the proposed law should require all officials of the fund to invest 90 percent of their net worth and all legislators voting for the bill to do the same, then they can say they have skin in the game. Matapang sila with other people’s money.

 

 

Boo Chanco’s email address is [email protected]. Follow him on Twitter @boochanco. Follow me on twitter @boochanco.

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