5 December, 2020

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The Bond Scam & The Story Of Selling Govt Securities Directly

By W.A Wijewardena

Dr W.A Wijewardena

Dr W.A Wijewardena

The Central Bank has been telling the public again and again since March 2015 that the sale of government securities directly to primary dealers is faulty. According to the Bank, the system helps only a select crowd of primary dealers. Since the sales are made through telephone conversations and not through public auctions, the Bank further charges that the system lacks transparency.

If it is not transparent, it further argues, that it is fraught with room for abuse, malpractices and corruption. Since the prices are determined by officials of the Public Debt Department at their discretion, it also impedes, says the Bank, market development.

This is contrary to the primary requirement of market efficiency for which prices should be determined by market forces. Hence, the Bank has labelled the direct sale system a ‘demon’. It is a demon, it has to be annihilated at any cost.

The belated demonstration of wisdom

This is obviously good wisdom on the part of the Bank. Since the Bank has no legal existence and is owned by the Monetary Board, it is demonstrative of the wisdom of the Board as well. However, the Board thought of demonstrating that wisdom only after it was accused of being a party to a massive Treasury bond scam.

The first bond scam

In this bond scam, the Bank had offered Rs. 1 billion worth of 30-year Treasury bonds carrying a fixed interest rate of 12.5% to the market but ended up selling bonds to a value of Rs. 10 billion. This was 10 times the original offer.

Under normal circumstances, the Bank would have accepted up to 2 to 3 times of the original offer and not more than that. Hence, the market was not ready for such a jumbo issue. Then, it was revealed that a half of the jumbo issue amounting to Rs. 5 billion had been issued to a Primary Dealer company belonging to the son-in-law of the incumbent Governor of the Bank.

However, this issue had been done to this primary dealer at a price of around Rs. 91 per Rs. 100 bond whereas the prevailing market price of a bond of those attributes was as high as Rs. 120. The particular primary dealer company had bid Rs. 2 billion on its own and a further Rs. 13 billion through another primary dealer, Bank of Ceylon, at around the same prices.

All these had happened during the last half an hour before the closing of the auction arousing suspicion that this primary dealer company had got some inside information about the possible jumbo issue of Treasury bonds. Thus, had the Bank accepted the entirety of the Rs. 20 billion at the auction as had been instructed by the Governor, this primary dealer company would have ended up with Rs. 15 billion or 75% of the total issue. Since it would have got the bonds at around Rs. 91 per bond, it would have made a market killing out of the bond issue given its existing price of around Rs. 120 per bond.

Crying foul by market participants

When the other market participants started crying foul, the Bank immediately justified its action on the grounds that the Government had an urgent cash requirement of around Rs. 20 billion to pay out to the contractors.

When it was pointed out that the Bank could have accepted up to about Rs 2.5 billion from the auction in question without disturbing the interest rates and obtain the balance through a direct sale, the Bank announced for the first time that it had decided to abolish the direct sale system.

It was later revealed, however, that just three days before the scandalous bond auction, the Monetary Board had decided, going by a paper submitted by the Public Debt Department, to issue Treasury bonds in a combination of both auctions and direct sales. When this piece of information became public, it was further revealed that the Governor had regularised his decision by informing the Board of the termination of the direct sale system. But that had been done one week after the controversial bond issue. Thus, procedurally, the Board is yet to approve of it formally.

A passive Board nodding its head to an ex-post termination

The termination of the direct sale system was, therefore, a reversal of the earlier decision of the Board. A Board conscious of its duties and responsibilities would not have accepted such a reversal without getting into a serious discussion of the rationale and subsequent implications of its abrupt termination.

This reminds of the categorisation of a bad economist against a good economist by the 19th Century French economist, Frederic Bastiat in 1850. Bastiat said that a bad economist would see only what can be seen whereas as a good economist will see not only what is seen but also what is foreseen. The Monetary Board which is supposed to be the economic advisor to the Government thus degenerated itself to the status of a bad economist.

A defensive Board becoming offensive

The Board did not stop at that. During the next 15 months, the Board continued to defend tooth and nail its decision arrived at without any serious analysis. It will continue to do so in the future too under the reign of the new Governor unless he is careful not to fall into the trap.

Terming direct sales as ‘private placements’ which connoted a bad taste, it even got the Prime Minister Ranil Wickremasinghe to justify its decision in Parliament denouncing the so-called direct sales.

Said the Prime Minister: “Private placements were usually as large as ten times bigger than the amount of Government bonds sold through the auctions. This led to an unhealthy link between some of the officers of the Central Bank’s Public Debt Department, Primary Dealers and large Corporations who benefited from such private placements. This practice only enriched a handful of cronies of the previous Government.”

The demonised direct sales had in fact been beneficial

The Prime Minister further said:“Records confirm that private placements had become a norm rather than an exception. In just one instance in 2013, Rs. 16 billion worth of five-year bonds were sold through auction at a yield of 10.9% and thereafter Rs. 76 billion of the same bond were sold through private placements at a higher yield of 11.42%. Who stood to benefit from such acts? The answer is obvious.”

It appears that the Prime Minister has been informed by the Monetary Board that it was a crime to issue five-year bonds in 2013 at 11.42% through direct sales. What the Prime Minister has not been informed about by the Board is that the prevailing market rate for 8.0% – five-year bond in January 2013 was much higher at 11.63% and 11.45% in March 2013.

Hence, if the bonds had been sold at 11.42% under direct sales it would have been at a beneficial rate for the Government since the bonds in question had been sold above the prevailing market prices. Those who had bought the bonds at those prices could not have made a profit immediately as alleged by the Prime Minister since the bond prices remained at around the same low levels almost throughout the year. It is not comprehensible why the Monetary Board, the objective, impartial and impassioned advisor to the Government, chose to supply only partial information to the Prime Minister.

Public Debt officials defend direct sales

According to the Lawyers’ Committee (also known as the Gamini Pitipana Committee) appointed by the Prime Minister as he pledged in Parliament, the officials of the Public Debt Department of the Central Bank have defended the direct sales system now christened as the private placement system.

The officials had said that if the department announces the full amount of fund requirement of the Government, the primary dealers would submit bids at “competitively higher interest rates” (p 3). Hence, reports the Committee: “Therefore, the PDD announces a bond which is lesser than the actual fund requirement of the Government and usually accepts around two to two and a half times more than the value of the bond auctioned. Thereafter, the PDD was planning to call for Direct Placement (private placement) to satisfy the balance requirement of Government funding.” (p 3).

Hence, the Committee further reports that the officials were of the view that the private placement was a “healthy mechanism”. However, the Committee has reported that Deputy Governor P. Samarasiri, who was functioning as the Senior Deputy Governor or CEO of the Bank, and Governor Arjuna Mahendran had differed from this expert view of the officials of the Public Debt Department. They had objected to it on the grounds of a lack of transparency in the private placement system which had been echoed by primary dealers who had been interviewed by the Committee on the issue.

Hence, it appears that the decision to terminate the direct sales system had been taken by Governor Mahendran without proper investigation or consultation with the staff at the Public Debt Department. The Monetary Board too had blindly accepted this decision when it was informed of it one week after its termination.

Monetary Board’s misinformation campaign

The Monetary Board has misinformed not only the Prime Minister but also the general public on the issue of direct sales. In a statement which it issued in June 2016 in response to the critique of this writer it has once again provided incorrect information.

Says the Board in its statement: “Wijewardena, during his tenure as Deputy Governor, introduced the so-called private/direct placement window for issuance of government securities in 2008 by justifying it to the Monetary Board in view of circumstances of unwarranted increase in interest rates on government securities prevailing at that time.”

Direct sales were started in 1997

The system of direct placement was introduced not by this writer but in 1997 when the primary dealer system was introduced to the country during the tenure of A.S. Jayawardena as Governor. At that time, this writer was simply the Superintendent of the Employees Provident Fund and not the Deputy Governor.

However, as the largest investor in government securities on behalf of the Monetary Board, this writer recalls attending a meeting chaired by Governor Jayawardena to map out the strategy for the smooth functioning of the primary dealer system. The others who were present at the meeting were S. Easparathasan, Deputy Governor, G.M.P de Silva, Executive Director and T.S.N. Fernando, Superintendent of Public Debt.

The need for Central Bank regulation in the absence of a competitive market

It was noted at this meeting that there was the possibility of some primary dealers acting in collusion and seeking to jack up interest rates. It has to be prevented because the duty of the Central Bank is to raise money for the Government at the cheapest cost while avoiding sudden increases in interest rates.

Hence, it was decided that the Central Bank should use its discretionary power as the borrower of funds to decide on the optimal amount it could raise through auctions without causing an unwarranted increase in interest rates and getting the market participants to invest in the remaining quantum of bonds at the weighted average interest rate available at the particular auction or if all bids at that auction had been rejected, at the weighted average rate of the previous bond auction. This system would not give an undue advantage to any primary dealer since they were required to invest around the prevailing market yield curve.

When it was pointed out to Governor Jayawardena that it would be against the market, his reaction was sharp and clear. Said Governor Jayawardena: “There is no competitive market here because the licensed primary dealers are a group of oligopolists who can drive the rates to their advantage. The Central Bank, while seeking market development in the long run, has a right to prevent a situation that would lead to unfair trade practices by a few primary dealers who might have access to inside information. Hence, market development means market taming too.”

History vindicates direct sale system

These direct sales, demonised by the Monetary Board just one week after it had decided to adopt it as a healthy mechanism, did not allow any primary dealer to corner the market at the expense of others.

Since the Public Debt Officials were prevented by Governor Mahendran and the Monetary Board from actively regulating the market through direct sales, what was feared by Governor Jayawardena in 1997 had in fact happened after March 2015. Governor Jayawardena, who is an ardent advocate of market development, knew very well that in actual practice there were no perfect markets; in the case of the government securities market, his reading was that it was an oligopoly controlled by a few primary dealers. If the Bank throws away an important weapon available to it to regulate the market, in this instance the direct sale system, it cannot help being preyed upon by a few predatory primary dealers who could have access to inside information.

This is the professional due diligence which is expected of the Governor and the Monetary Board of the Central Bank. The Auditor General in his report to COPE on the bond scams has remarked that he did not observe professional due diligence on the part of Governor Mahendran. Since the Governor is directed by the Monetary Board, this unsavoury remark applies to the Monetary Board members as well.

Central Bank’s credibility at a crucial level

The direct sale system was terminated by the Monetary Board claiming it has benefited a few primary dealers at the expense of others. The Monetary Board obviously wanted to keep the Bank’s credibility undented. Yet, what happened in the auction system was far worse than that; it dented the Bank’s credibility irreparably by allowing a single primary dealer to corner the market, this time at the expense of the state-owned investment funds.

This is the story of the second bond scam that shocked the market in March 2016; it is now learned that the Monetary Board could have avoided it had it been equipped with a powerful market regulatory weapon – direct sales.

The Monetary Board was just a sitting duck watching helplessly when a powerful and well-connected primary dealer hit it on the head. The Auditor General who examined the issue has reported to COPE that the Government making a bigger amount of losses due to the termination of the direct sale system cannot be ruled out.

The abrupt termination of the direct sale system without proper analysis or inquiry caused a Governor to lose his job, a Government that came to power on the promise of good governance to lose its credibility and the ruling party to opt for damage control measures that are far worse than the damage itself.Worse still, the Monetary Board, toward which every eye is turned, has to regain its lost credibility by demonstrating that it is worth its salt.

Newly-appointed Central Bank Governor Indrajith Coomaraswamy, in his inaugural address, pledged to staff at the Bank that his prime duty was to regain the financial institution’s lost credibility. If he is true to his word, he should get the Bank’s staff to reexamine the cost of the abrupt termination of the direct sales system, regulate primary dealers properly in order to prevent them from abusing the system under the umbrella of making markets and discipline his own staff, who are accused of collaborating with certain primary dealers.

*W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at waw1949@gmail.com

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Latest comments

  • 5
    4

    Good one Dr. Wije! keep it comming.

    Arjuna Mahendran and Ajith Nivard Cabraal must be held accountable for insider trading and defrauding the people of Lanka.

    Corruption inquiries are essential into Mahendra, Alloysisus, Nivard Cabraal, all those listed in the Panama Papers and others holding off shore accouncts lists.

    These looted funds in off shore accounts should be tracked and brought back to Sri lanka to pay off at least part of the GIGANTIC national DEBT.
    The IMF and World bank should be asked to put its money where its mouth is and help track down the looted funds, rather than giving more useless short term loans to turn Sri Lanka into a Greece like debtor nation.

    • 12
      1

      Can some one inform me as to why all parties connected with the bond scam were not asked to step down.?

      1 CBSL Governor paid the ultimate price
      2 BoC board gave the primary dealer a blank cheque to bid for bonds
      3 Public Debt Dept staff acted inappropriately
      4 EPF staff accepting off loads of bonds in large quantities in the secondary market

      Was Arjun M made scapegoat?

  • 3
    3

    Dr W.A Wijewardena

    RE: The Bond Scam & The Story Of Selling Govt Securities Directly

    “This is contrary to the primary requirement of market efficiency for which prices should be determined by market forces. Hence, the Bank has labelled the direct sale system a ‘demon’. It is a demon, it has to be annihilated at any cost.”take a comission etc.”

    “This is obviously good wisdom on the part of the Bank. Since the Bank has no legal existence and is owned by the Monetary Board, it is demonstrative of the wisdom of the Board as well. However, the Board thought of demonstrating that wisdom only after it was accused of being a party to a massive Treasury bond scam.”

    Yes. Sell to buddies, sell to son in law, sell to others and take a good commission, if possible.

    Who is ultimately holding the big? The country and its people.

    We the People are screwed.

  • 9
    0

    I am not sure I agree with the good former DG here. Please read my detailed explanation and then I hope the Mr Wijewardena will correct me where I am wrong:

    1) The government requirement for funding through the CB for March 2nd had been in the order of Rs 13.5 billion, informed a few weeks before.

    2) The previous practice of 90% private placements for most bonds, with only a couple of auctions (for small amounts, one in december 2014, and one in September the previous year being the most recent – which was against the manual’s guidelines) every couple of years (apparently unusual in modern day central banking) ensured that any such large amounts were broken up and masked through this practice, as they were not often made public except for the rare auction. This requirement was made known with only two or three days left.

    3) As at friday 27th, private placements had only raised Rs 3.5 billion

    3) Arjuna Mahendran aka Bond Mahendran was in favour of switching to 100% auction (which has since been done) and wanted to advertise the full amount required. The corrupt PDD had informed the Governor that this would send the wrong signal to the market so a decision was taken to advertise a 30 year treasury bond of 1 billion and the rate of 12.5% was mentioned (contrary to what most idiots are shouting on the street, I have a copy of the relevant advertisement that appeared in the Daily News on the 26th of February, which was the last working day before the 2nd of March). This is on top of the treasury bill auction conducted on Tuesdays (these are short term and not a suitable instrument for the volume of funding required). The rest would be raised through private placements under the old system in a last Hurrah.

    WHO MADE THIS CALL AND CONVINCED THE GOVERNOR? AND WAS IT WITH AN ULTERIOR MOTIVE? WAS IT NANDALAL? SOMEY? WHO?

    4) When the governor checked later, the private placements resulted in a 10 billion shortfall. The tender committee is supposed to evaluate these bids in order of the rates received, and it was noted that there had been a oversubscription of the required amount – now up to 20 billion.

    The allegation is that when the decision was (collectively) taken to raise the acceptance amount to 10 billion, Bond Mahendran rushed out to inform Perpetual to bid for the rest. Yet that claim can be easily verified by checking his phone records. What about that funny bid from Seylan Bank at 18%? Did someone inform them as well, and if so why?

    What about the tender committee? They make the final allocation as to who the bond goes to (in this case, 50% of the bond to Perpetual). Why did nobody raise this issue to date? Was the tender committee wrong (I don’t think so) but was there a leak in the PDD (notoriously corrupt) to inform Perpetual in a bid to frame Bond Mahendran?

    WHY was there a system that is very secretive system that is away from public gaze. There was no plan by the previous CB governor to repay the bonds maturing in the first three months of 2015?

    Why did senior people like Mr. W.A. Wijewardena not raise the trouble with Private Placements when he was a deputy governor?

    We need answers. Mahendran has has a lucrative career in other overseas banks with far better compliance procedures than the CBSL (which did not have a functioning compliance department until reinstated last year) and with more upto date folks than fossils like Nandalal and Somey.

    Await your answer please Mr Wijewardena.

    • 5
      1

      Bagehot,

      “WHY was there a system that is very secretive system that is away from public gaze.

      There was no plan by the previous CB governor to repay the bonds maturing in the first three months of 2015?

      Why did senior people like Mr. W.A. Wijewardena not raise the trouble with Private Placements when he was a deputy governor?

      We need answers.

      Mahendran has has a lucrative career in other overseas banks with far better compliance procedures than the CBSL (which did not have a functioning compliance department until reinstated last year) and with more upto date folks than fossils like Nandalal and Somey. Await your answer please Mr Wijewardena.”

      I am afraid the old stereotyped central banker will ever answer you. This [Edited out] man has been taken for a ride by the Cabraal and the gang and he does not understand he is barking in carrying out their bids. If this banker has/had so omnipotent knowledge about central banking why did not he make sure that due structural, methodological, process and functional measures were not devised and installed in the Central Bank so that this type of alleged insider trading, operational hitches, lack of oversight and transaction and communication recording systems etc. would not have happened. But alas, until AM took over CB lacked even an audit dept.! But[Edited out]Wijewardenas do not speak about the works AM has done in the Bank to restore normalcy and standard procedures and departments after the Cabraal [Edited out] destroyed it. These [Edited out] go all out attacking AM purely on highly hypothetical grounds but when Cabraal et al were there they did not emit a fart about any of the corruptions that took place there. True, Wijewardena wrote some articles about economy and credit must go to him for that. But in this alleged Bond case he too is in the dark. The bone of contention revolves around the old conventional knowledge of Mr. Wijewardena vs out of the box thought economic model RW wants to implement in which AM has played a part.

  • 0
    8

    Thanks Dr. W.A.W for your great explanation.

    Can IC tell the nation what were the cost for the last two Bond sales (March 2015 & 2016)by auction method Vs direct placement? As promised, if he wants to bring credibility to CB, he must provide the information to the Sri Lankan taxpayers within weeks. He should choose the best method and explain the country as to why. Or is he going to join the ruling elite like his sister Rathika and go with the flow; same old. Ranil (Mr. Clean) loved AM so much because he tasted blood (part of the bond scam loot for UNP). Can IC withstand Ranil’s onslaught and stay on the people side? Remember: My3’s direction; fear no one!!! and your own; good economy is good politics !!!

  • 2
    6

    the man on the street does not care what system is adopted as long as we the country get it at the cheapest price.He can see that under the direct placement it was cheaper than the auction,so the direct placement is better because the central bank was using some of it powers to get the man on the street money at a cheaper rate.All these singapore fuckers come here thinking that the man on the street is a dumb ass yakko who won’t notice the difference because they think he does not know the difference between government bonds and james bond.

    one head has rolled but another has to go,the local collaborater of the singaporean.Now that stage two has to be taken up with the auditing of the perpetual trustees books to see what happenned to the killing made when buying bonds worth 120 for 91.If the profit is not made into cash flow immediately but over a period of 30 years then the CID should be brought in and a court order made to stop that profit going into any bank account until the court case is finished, where the CID should charge mahendran and the local bigwigs.

    I agree that the direct placement is the best where oligopoly is concerned.

    There is no market in a oligopoly as joe perera used to din into us when we were following the CIMA which was called ICMA at that time.

    • 9
      0

      We do not care about what the man on the street thinks. The Central Bank governance manual is very clear that all bond placements must be done via public auction unless extenuating circumstances dictate otherwise. How the hell can you say that it is cheaper to do a private placement if you haven’t had the auction in the first place?

      What the hell does the man on the street know about bond issues versus james bond issues?

      Seems like Mr. WAW has already decided that this was a scam. Yet why did he not raise his voice when these private placements were going on for so many years when he was still a CBSL employee? This is the kind of duplicity I cannot fathom. Now that freedom of speech is there, everyone’s an expert.

      • 1
        2

        bagehot

        “How the hell can you say that it is cheaper to do a private placement if you haven’t had the auction in the first place?”

        because after mahendran started the auction system the interest rates increased compared to what it was under the private placements.

        If you don’t care about the man on the street,he will not care for you too.This is the type of arrogance that kept the UNP out of power for 20 years.Now the man on the street will send you home again i you continue like this thinking he is just a cockroach or something.

        • 4
          1

          What benefit is there to the country by artificially keeping interest rates low instead of allowing the rate to be determined by basic demand and supply?

          • 1
            3

            bagehot

            “allowing the rate to be determined by basic demand and supply?”

            read the article.In oligopoly there is no demand and supply.Collusion will rig it up and the price is not determined by the market.That is why the private placements were brought in.You can see that former governor AS jayawardene was spot on as aloysious and mahendran rigged it.

            as for your argument that why we should have artificially low interest rates,the private placement ones are not artificial.Nobody is forcing the primary dealers to take it at that interest rate.They are taking it because they still could make their profits on it.the lower the interst rate the lower the repayments for the government.

            • 2
              0

              This has nothing to do with oligopolies. What WAW has shamelessly said in the following:

              ” If the Bank throws away an important weapon available to it to regulate the market, in this instance the direct sale system, it cannot help being preyed upon by a few predatory primary dealers who could have access to inside information.”

              Read the last line again. Don’t get thrown by words like oligopoly but the reasons for such a thing to exist in the first place. If there is insider information leaking out from the PDD in exchange for jobs for the kith and kin, is that a fault of the market or of the lax compliance of the central bank?

              And which foreign bond holder is going to trust the rates set by a bank that cannot even control its own flow of confidential information? Must be why yesterdays sovereign bond issue has been such a miserable failure.

            • 3
              0

              moda choon shankar,

              “as for your argument that why we should have artificially low interest rates,the private placement ones are not artificial.Nobody is forcing the primary dealers to take it at that interest rate.They are taking it because they still could make their profits on it.the lower the interst rate the lower the repayments for the government.”

              bagehot,

              Look at the paiththiyan argument this pro against-AM conspiracy campaigner is raising. We all can remember how MARA and Cabraala pickpocketed the EPF/ETF contributors and bank depositors by paying interest rates which were almost below that of inflation rate in the country. They also kept very high lending int. rates vs deposit int. rates. All these were doctored economics in the Madamulana pilikanna. WAW and his moda choon shankar are advocating that corrupt and exploitative practice of MARA’s regime! These fools are rolling on the road uttering about CB making loss but this is not a question of CB making losses or profits but the question is at macro economic scale and it concerns managing the economy in an international perspective in real currency and values.

              • 0
                2

                silva

                you speak an infinite amount of nothing.

                under private placements we had to pay less in repayments.period.

                Auditor general has said that the country has had a loss of 1.6 billion.

                If you want to dispute that take it to court against the AG’s findings.

                you say that i speak like an idiot.Of course i have to,how else can people like you understand me.Now go on and shock me and say something intelligent.The less i say about you the better because that would be animal abuse.howevr the good news is that there is nothing wrong with you that reincarnation won’t cure.

                • 2
                  0

                  I really do think Shankar is exposing himself as a bigger idiot than he would care to admit.

                  In the first place, you haven’t replied to my comment on the leaky cauldron at the PDD being the issue, not this mythical ‘oligopoly’

                  Secondly, you forget the rupee depreciates against the USD (the world’s reserve currency) every year, often in excess of 8-9%. Which idiot of an investor is going to accept bond yields below that price (except you perhaps) and knowingly take a loss? They may as well invest in Euro Bonds?

                  You and those screaming about bond scams forget that the primary dealer is just that- the primary dealer, who is just an intermediary. These small bonds are often bought up through local institutional investors such as the EPF, NSB, and the Insurance board (as was the case for the first bond ‘scam’).

                  Can you justify paying these funds (custodians of public money) an artificially determined lower yield just to satisfy the inefficiency of the central bank and poor management of the Treasury instead of a yield determined by market forces? Is this what Mr WAW is also trying to justify?

                  Answer me that.

                  • 0
                    1

                    bagehot
                    “Secondly, you forget the rupee depreciates against the USD (the world’s reserve currency) every year, often in excess of 8-9%. Which idiot of an investor is going to accept bond yields below that price”

                    did you see the previous issues when private placements were done.Investors took them regardless of your contention that the rupee will depreciate.Ask them why they invested,not me.Maybe their thinking it is better to invest in developing economies,because the developed are finding it difficult to grow more unless they do structural reforms,which is unpalatable to their politicians due to the backlash from the public.

                    “Can you justify paying these funds (custodians of public money) an artificially determined lower yield”

                    of course i can.If they want to get a higher yield they can go and get it somewhere else such as our rigged share market etc,or invest in property.That is upto them.we are only concerned about the repayments,because every man ,woman,and child has to pay those one day.

                    besides perpetual securities were bidding with BOC money i believe for more than 60% while the rest was an unknown investor.Now who is this unknown investor,why can’t we know,certainly won’t be the EPF because they don’t need any secrecy.And as for the BOC people are not going to pay more and more taxes to repay the loans to increase the profits of the banks which are in the billions anyway now.

                    since you are insisting on me answering your questions,i thought maybe you also should answer to my comment on the auditor general,hot shot that you seem to be on the macro economic environment.Go on ,go on take on the AG,go to courts and rub his nose into the ground,what are you waiting for hot shot,,bage shot,bage hot,pot shot,shot putt

                    • 0
                      0

                      Er, all of these issues in question are invested in by local parties (this isnt a sovereign bond) and they do invest in the dead duck share market as well (we saw how well the EPF did that). Ever heard of splitting your risk? There’s a difference between having a choice of instruments (they dont, and not internationally) and being forced to accept it as long as it’s above 0. That doesn’t make it the fair rate.

                    • 0
                      0

                      shankar,

                      ““Can you justify paying these funds (custodians of public money) an artificially determined lower yield”

                      of course i can.If they want to get a higher yield they can go and get it somewhere else such as our rigged share market etc,or invest in property.That is upto them.we are only concerned about the repayments,because every man ,woman,and child has to pay those one day.”

                      Bagehot,

                      Ha ha.. No use arguing with this animal brained asshole. Above tells what this asshole thinks about the hard earned precious money of EPF etc. contributors. The silly fucker would just as well advocate EPF custodians can invest in Danduwam Mudalali if they wished!

                • 0
                  0

                  shankar,

                  “you speak an infinite amount of nothing.”

                  I only hear you coughing like influenza. Go to a good economist and stop taking treatments from Bandula Gunawardena [Edited out].

                  “under private placements we had to pay less in repayments.period.”

                  “.period!” Why? Did you undergo economic menopause!

                  [Edited out] hide their head under the sand of desert but the creature of prey capture them. Where did you learn about “private economy (placement)”? Obviously from Cabraal and MARA. Private placement simply means wheeler dealer economics. But at what cost? The cost is today’s economic mess and watershed moment handed down by your iconic economists. I think before you engage in a dialogue on bond, you visit a local fair for a few weeks (being a vegetable vendor for a few weeks would give you lots of learning) and understand how the price is determined by supply and demand. There you will see how a kilo of chilli goes as far up as Rs. 700 and then fall as low as 30! What you say is, and of course what MARA regime did, that you artificially fix the chilli price at may be Rs. 40 whereas it would be 700 if it were allowed to be naturally determined. RW’s government came to being not to implement the kind of closed economy you are advocating jumping up and down like a monkey. But rather it is trying to create a globally universal market conditions here so that more and more foreign investors are coming here in area like bond issues.

                  The only point that must have been raised by all the critiques of bonds fiasco but which they did not do so is that due checks and balances, precautions, process changes and communication recording mechanisms etc. must be put place to prevent insider trading.

                  You stupid fools only somersault only until AM was kicked out but thereafter none of the clown fuckers raised a fart about those structural and operational aspects of the CB, why? That is becuase all of you clowns are utter donkeys who know nothing about these professional matters but only cry to earn some dollars or something.

                  • 0
                    0

                    silva

                    so you are the tamil who uses silva to come on various sites.Can’t even admit that you are a tamil masquerading as a sinhalese,shame to change your race like that,don’t you think.How much have you been paid by the mahendran cohorts for this,because you are a well known bribe taker.

                    If you think i’am going to get angry ad retaliate,you are sadly mistaken.I follow the Lord Bhuddha’s advice,that anger is like having a red cot coal in your hand and intending to throw it.I do not kill my cells unnecessarily,thanks to Lord Bhuddha’s teachings.Why don’t you also become a tamil bhuddhist?You will become human at last.

                    I reiterate what i said earlier,that i do not want to insult you because it will be considered as animal abuse by those on this blog.

  • 2
    6

    Oh lord….. It’s not the system of bond placements…..it’s the people in charge…….whether it’s through direct sales, public auctions or a nice blend of both, if there are entities seeking innovative ways to screw our monetary system, they will surely find many ways. We have to be very, very vigilant!

    One can only speculate on why it was done so openly through the public auction….probably tentatively to see how far they could go in initiating Sri Lanka into the greater regional process and locking us in (so convinced they are of their righteousness….no respect at all for the hard work of the little Lankan man).

    • 10
      0

      RTF the Donkey Kong

      There is no place for private placements or auctions or a ‘nice blend of both’. The Act under which the bank is set up AND the governance manual (both are publicly viewable documents) clearly specify that all issues need to be done under auction except in extenuating circumstances.

      What sort of circumstances drove Kabbaraala to continue doing private placements for so many years? Why did he suddenly shut up when it was found his sister was on the board of Perpetual, and why is he not being investigated for the previous dealings with them?

      • 0
        5

        Hey, The Central Banker,

        What part of Dr. W.A Wijewardena’ s report don’t you understand? Direct sales are always allowed with public auction systems to regulate bond sales. It is the push and pull of these two systems that give a regulatory mechanism that ensures optimum performance for the markets.

        Mahendran however, neatly removed the direct dales (primary dealers) just one week before the bond theft, threw it open to public auction, and then sneakily used insider knowledge, to make the final fleecing, in a smug “catch-us-if-you-can” technique (they thought Sinhalese were not clever enough to notice). Or is it that they can’t understand where they did any wrong, for it was to them, after all, just dumb Sinhala bonds that will get more substance if they coalesced with the Greater-Regional set of bonds…..so what are they complaining about?

        This was open bold-faced theft, whilst pretending that it was all done openly and honorably, and therefore not subject to any scrutiny and reprimand. It’s like Comarasamy openly admitting saying that he gave technical advice to Raj Rajaratnam, six months before the end-of-war, and the Galleon enterprise suddenly reduced by 4 million dollars in the subsequent year.

        • 0
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          [Edited out]

      • 1
        4

        You must be very busy trying to clear your name under disguise Central Banker. Put your time & energy for a good cause and show that you are good rather than trying to shame who speaks the truth

        • 0
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          [Edited out]

  • 5
    1

    The scam was done to pay off UNP Debt

    • 2
      1

      No, if it was to pay off UNP dept, Ranil would have easily used the direct-sales system.

      “”Hence, if the bonds had been sold at 11.42% under direct sales it would have been at a beneficial rate for the Government since the bonds in question had been sold above the prevailing market prices. ……It is not comprehensible why the Monetary Board, the objective, impartial and impassioned advisor to the Government, chose to supply only partial information to the Prime Minister.””

      And the market rate for the bonds was already around 11.42% in 2013.

  • 8
    0

    His speech is fair as I see it. There is no wrong with the deal. All the anti men have spread lies but lies. At the time, Maharaja and palhoru handled them secretely, not even us the people were made aware, like Tsunami word became clear to the nation after they met it, bond handlings were made clear by this govt only. Now there are more space people to point the finger at anyone – who introduced the current press freedom, if not current rulers. But people are so unfair by all means, they always stand on the wrong side, stupidity becomes clear with the time.

    • 4
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      Sam Fernando,

      You translated my thoughts in clear and precise words!

      • 0
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        No doubt we have same genetics.

        I geth hurt reading the comments of some on this forum.

        I really do. Not long ago, people knew if they would come out the closet.. abductions, torture, open assults coudl put them into risks. Then all including cabinet ministers – as Reginold made it clear not once dozens of times, stayed as if they were fed with kirimati. But today, in the context all is given a chance to criticise anyone and everytone is disrespected… taking for granted.. our people ( majority grass eaters) would never learn it.

        I love you Silva, Sirimal, Srilal, Nativa vedda for your valuable thoughts exchanged on this forum. Please keep up.
        May god bless you.

  • 0
    4

    Dr WAW,

    Thank you one again.

    “Since the Public Debt Officials were prevented by Governor Mahendran and the Monetary Board from actively regulating the market through direct sales, what was feared by Governor Jayawardena in 1997 had in fact happened after March 2015. Governor Jayawardena, who is an ardent advocate of market development, knew very well that in actual practice there were no perfect markets; in the case of the government securities market, his reading was that it was an oligopoly controlled by a few primary dealers. If the Bank throws away an important weapon available to it to regulate the market, in this instance the direct sale system, it cannot help being preyed upon by a few predatory primary dealers who could have access to inside information.

    This is the professional due diligence which is expected of the Governor and the Monetary Board of the Central Bank. The Auditor General in his report to COPE on the bond scams has remarked that he did not observe professional due diligence on the part of Governor Mahendran. Since the Governor is directed by the Monetary Board, this unsavoury remark applies to the Monetary Board members as well.”

    Good summary.

    • 7
      0

      But what was Mr WAW doing all these years when he was a deputy governor without raising this issue at that time? What is the point in closing the stable door once the horse has bolted and then screaming BOND BOND BOND?

      • 0
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        [Edited out]

  • 2
    1

    Central banker………… Cabraal’s sister have been a director on the board of Perpetual holdings & not perpetual securities.

    She has been there for about one year.

    during her tennure perpetual holding the dealing of perpetual securities have been only Rs 3.5b

    • 4
      0

      Thank for clarifying that. Given that Perpetual Holdings owns Perpetual Securities, I guess there is no issues there then.

      Also, it’s good to know that there is no benefit to any connected party, which kicks in only mysteriously after the 3.5bn threshold is exceeded.

  • 0
    3

    Top stuff Dr Wijewardena. But then, you have the advantage of the inside track.

    However, embedded smartly in your second sentence is a clue applicable to everything in our Miracle of Asia home… the system helps only a select crowd of primary dealers….. As always! How so very true.

    99.99% haven’t a bloody clue as what this professional, smart upper-class scam is all about. When I asked my breakfast hopper Ammay, she said “I don’t know Guv, I just trust that nice Mr Sirisena”

    In the kade as in the house on the lake, the majority haven’t a clue what is happening, and, worse, couldn’t be bothered as long as their little slice of daily bread is well buttered. Actually, on the lake they want jam as well.

    After all, THIS is the Miracle of Asia.s

  • 6
    0

    The comments of an “also ran” in the Central Bank Governer’s stakes.

  • 3
    0

    Bond Mahendran himself has the following response in yesterdays FT to this article of dubious merit by WAW. Suggest all the media seagulls read this first before reacting (special attention to Ramona Fernando, Shankar and the like). I expect more stupid justifications from you

    Mr. W seeks, yet again, to justify the unusual procedure “adopted by the Central Bank after 2008 of privately placing the bulk of Treasury bond issues with primary dealers. This is in complete contrast to the internationally tried and tested method of having open competitive auctions to determine price or quantity of bond issuance, with a limited 5% quantity for post-issue ‘tap’ placements at the weighted average yield posted in the auction. –

    He relies on comments attributed to former Governor A.S. Jayewardena where the latter had cautioned against oligopolistic practices of primary dealers, to justify the curious local obsession with private placements. This prescription seems excessive to me, and worse than the alleged underlying malady. Combating oligopoly is an issue which comes within the regulatory realm of market supervisors. The Central bank supervisory departments have considerable powers to deal with anti-competitive market practices.

    To justify the suppression of market forces on the basis of alleged anti-competitive market practices is to throw the proverbial baby out with the bath water. The fact is that in February 2015, secondary market yields for 30-year bonds had been driven down to unrealistic levels as a result of the public debt department offering them at artificially low yields, viz. 9.5%, through private placements (PPs). Over 80% of Treasury bond issuance in 2014 had been issued through PPs.

    As a consequence, the demand for these bonds had reduced to a trickle. This was why the monetary board decided to hold an auction in the last week of Feb. 2015 to re-establish price discovery on these bonds at the furthest extremity, viz. 30 years, of the SL Rupee sovereign yield curve.

    The Sri Lanka rupee has historically depreciated by 7% per annum against the USD so it would be logical for investors to expect a yield of more than 7% to adequately compensate them for their risk. Hence the yield was fixed at 12.5% pa for the auction using standard formulae.

    It was no secret that the Treasury has large repayments in the month of March. Tax payments start coming in after the new budget proposals kick on 1 April each year. It is therefore not a coincidence that market rates rise aggressively in March each year. This happened yet again in March 2016. To accuse primary dealers of bidding up yields in anticipation of such large funding requirements is to apportion blame on the wrong market participant.

    The Treasury has to come up with an effective cashflow management system to iron-out these lumpy repayments. This is yet to happen. Until such time the alleged oligopolists will cause occasional spikes in yields. That is how a market is supposed to function. Mr W and his ilk prefer to kill the market mechanism to avoid the Treasury paying the price for inadequate cashflow management. This remedy therefore confuses the symptom of the disease with the real underlying malady.

    By forcing the Treasury to pay high yields in periods when its demand for funds surges is the only manner that an independent Central bank can enforce market discipline on egregious government borrowing. On the other hand, the proposal to effectively rob captive investors such as the EPF, SLIC and state banks and force them to subscribe to low-yield private placement of bonds is not a solution; it simply robs depositors in these captive institutions of an adequate return.

    What happened in the last week of February 2015 was that the Treasury had given prior notice of a funding requirement of Rs 13.5 b on 1 March 2015. The private placement window had only been able to raise Rs. 3.5 b in the week ending Friday 27 February 2015. It was thus decided to accept the balance Rs. 10 b from the auction where bids of Rs. 20 b had been placed for the Rs 1 bn. of issuance advertised.

    This decision has come in for much criticism. Suffice to say that the government was severely strapped for cash at the time. In the same week the Cabinet Committee on Economic Affairs requested three Senior Ministers of the Government to visit the Central Bank on 26 February 2015 and explore ways and means of raising an additional Rs. 75 b to re-commence the large number of stalled road construction projects across the country. –

    Furthermore, market participants were already anticipating a large Rs. 122 b repayment of borrowed funds coming due in the third week of March 2015. Thus, the market was acutely aware of the sudden surge in funding needs of the Government beforehand. To allege that this was insider information is to miss the point. Primary dealers and fund managers employ multitudes of research staff to gather such information. Any educated observer could have easily gleaned the real possibility of a funding crunch for the Treasury in March 2015, or for that matter, March 2016 as well.

    It has been contended by some commentators that the Central bank should have taken a massive bank overdraft to raise the large amounts needed. To do so would have raised interbank and prime lending rates and affected ordinary bank borrowers. All such comments, in any case, are made with the benefit of hindsight. They ignore the reality that policy-makers usually have to make quick decisions with a limited amount of information in circumstances such as that which prevailed at the 30-year Treasury bond auction of 27 February 2015.

    Suffice to say that the system of auctioning Treasury bonds has been a success since February 2015. Even as foreign investors sold out of local bond and equity markets in 2015, the bond market was able to tap a large pool of domestic savings to fund the Treasury’s burgeoning funding requirement. Most importantly, the market mechanism has been able to signal market participants’ expectations of future economic variables effectively.

    This can only be construed as a step towards a better functioning of financial markets and the overall flow of funds through the economy.

    Arjuna Mahendran”

    http://www.ft.lk/article/554136/Mahendran-responds-to-Wijewardena-s-article

    If the man can justify his actions in a proper hearing, then what does he need to worry about? What is more interesting is how the media has decided to pass a guilty sentence on him without even understanding what has gone on. Reminds me of the CJ impeachment kangaroo court.

    • 0
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      Seems Gosl decided to use certain diaspora funds (bids of Rs. 20 b) in the face of growing debt especially their election bills….well, if it to build up the N&E and do some ETCA (depending on the amount of ETCA), then there’s no other way; depends on how much that goes towards devolution/separatism……It is either this way, or to work with China….and then US comes in……. Depends on how much 80% of people don’t mind all of this. Situation is hopeless; situation is dire. Guess it’s also debt due to projects taken out during last Gosl tenure. If the US is so worried about China, best is to ask them to settle all debts….then they won’t have to worry too much about string-of-pearls in the long run…….disapora bonds stolen from American people being pervasive and difficult collect, unless through bidding on Lankan bonds…..

      • 0
        0

        Seems in the end, Gosl decided to use certain diaspora funds
        (bids of Rs. 20 b) in the face of growing debt especially their election bills.

        If it is to build up the N&E and do some ETCA (depending
        on the amount of ETCA), then there’s no other way; depends on how much that goes towards devolution/separatism.

        It is either this way, or to work with China. But we can’t
        work too much with China because of US intervention.

        Depends on how much 80% of people don’t mind all of this. Depends on how much people are willing to pay VAT. Situation is hopeless; situation is dire.

        Guess most is debt due to projects taken out during last
        Gosl tenure.

        If the US is so worried about China’s involvement in the Indian Ocean, then best it is for US to settle all debts. Then they won’t have to worry too much about string-of-pearls
        in the long run (diaspora bonds stolen from American people being
        pervasive and difficult collect, unless through bidding on Lankan bonds)

  • 0
    1

    ” Reminds me of the CJ impeachment kangaroo court”

    so to clear his name let us charge him in the real courts.He will have to carry this stigma for the rest of his life so i is in his interest to say “charge me and let the courts exonerate me”,but i have not heard that from him.is he worried that if he is found guilty he will face a minimum sentence of 10 years.

    In my opinion the former cheap justice,the former governor of the central bank,the former former governor of the central bank all should be sharing the same cell,where they can each postulate and articulate their own theories on what went wrong and how they were dealt unfairly by the justice system.

    alas,this is srilanka and that will never happen.The mahattaya’s will never go to prison while the common burglar will.Third world we always will be.

    Fro what i can see change of governments will not make any difference until there is a change in culture among those who govern us.Since that will not happen because culture is very difficult to change we have to reconcile ourselves to the fact that we will always be a third world country.

    • 0
      0

      He could have been charged in the real courts, if the Supreme Court had not thrown out the offer saying there was no case.

      • 0
        0

        Bagehot,

        “so to clear his name let us charge him in the real courts.He will have to carry this stigma for the rest of his life so i is in his interest to say “charge me and let the courts exonerate me”,but i have not heard that from him.is he worried that if he is found guilty he will face a minimum sentence of 10 years.”

        Where do you think this shankar fucker lives? On the moon? This meeharaka does not know the courts has shelved a case against AM even without hearing because it was not even worth looking at becuase it had no substance in it. While the facts remain so, this shankar monkey is wanking on tree tops dreaming to imprison AM for 10 years. I think it is shanker’s father that must be imprisoned and not AM for begetting such a donkey. I know this silly monkey from it’s childhood and this is his nature and job to attack someone on behalf of wheeler dealers to earn dollars.

        • 0
          0

          Where do you think this shankar fucker lives?

          68,sri jayawardenepura mawatha,rajagiriya

          aren’t you worried mr.tamil silva that i could find out where you live.Even if you went to lagos,nigeria i can find you.

      • 0
        0

        bagehot

        that was not a charge brought against him,but a fundamental rights petition made by some citizens.

        Now the Auditor general has made a damning report stating that the country has lost 1.6 billion rupees and mahendran’s work was not upto the standard.To clear his name on that mahendran should take the auditor general to courts for defamation etc,so that his name can be cleared once and for all.Otherwise it will be hanging round his neck,like a billboard for the rest of his life.

        In my opinion mahendran was completely unsuitable for this job.He was the right man for the wrong job.As chairman of BOC or something like that he would have been the right man.His experience in HSBC is completely the opposite of what is required in a central bank of a country.HSBC itself is facing plenty of law suits,for risky ventures that requires decisions to be made quickly without time for consultations with superiors etc.Gleesn brought down the barklay’s because he was given unlimited powers to do as he wants,making split second decisions on the spot.This is the type of environment that mahendran would have worked in the HSBC.

        Our central bank need s different type of person,not a wheeler dealer of a private bank,trying to run it like a private institution,taking risks.

        It requires a captain who leads a team and knows how to get the best out of the whole team.Not a one man show type but a cautious person with a consultative style. There is no more appropriate srilankan other than indrajit coomaraswamy for that.He will be the best governor we ever had and should have been appointed in the first place.

  • 0
    0

    shankar,

    “Where do you think this shankar fucker lives?

    68,sri jayawardenepura mawatha,rajagiriya

    aren’t you worried mr.tamil silva that i could find out where you live.Even if you went to lagos,nigeria i can find you.”

    Eh.. You must be Gota’s leading canine with keen scent. I am shivering ….. Wwwww…. Wwww…. Wwwww….. Ane mata bayaaaaai..

    By the way, be careful of municipality workers because they are on the look out for rabies control.

    • 0
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      tamil silva

      in lagos it wasn’t gota.

    • 0
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      tamil silva

      and gota isn’t a rabies controller.He is a pest controller.He eradicated you eelam pests once and for all,didn’t he.

      • 0
        0

        shankar,

        “tamil silva”

        Who fucked your Kuweni Achchi? Is it tamil, thambi or muslim blood that is running in your veins? But I guess it is beast le of that lion. By the way have you got bool on your skin?

        “and gota isn’t a rabies controller.He is a pest controller.He eradicated you eelam pests once and for all,didn’t he.”

        Really? That may be why they arrested this morning a “(bu)ranaviruvo” for the murder of Lasantha! No wonder you Sinhala beasts consider your own journalists pests!

        • 0
          0

          silva the tamil

          so what is the big deal in masquerading as a sinhalese with this silva nonsense.?Ashamed of your race?Or is it just your devious genes passed down by your not yet fully evolved human mum and dad.

          i’am proud to be a tamil,however unlike your kind i do not hate the sinhalese.In fact it gives me great pleasure to live amongst them.

  • 0
    0

    shankar,

    ““and gota isn’t a rabies controller.He is a pest controller.He eradicated you eelam pests once and for all,didn’t he.”

    “i’am proud to be a tamil,however unlike your kind i do not hate the sinhalese.In fact it gives me great pleasure to live amongst them.”

    Ha..ha..ha.. From the great (bu)ranaviruvo to the greatest humanist!

    I am really proud of you! Ha..ha…haaaa

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