Closure on the bond saga

Friday, 3 February 2017 00:00 -     - {{hitsCtrl.values.hits}}

The fires keep burning and the pot keeps simmering. But by itself this is not useful. There has to be some end to the saga. An end that meets three objectives. 

It must satisfy the many who fell deeply angry about what has happened. It must put an end to the political shouting match, so that the political debate can move to debating and resolving the pressing economic issues and it must provide the comfort to all those who depend on their EPF funds to live in their retirement, that their funds are safe 


A short while back I wrote a piece on the bond saga to set out in sequence what happened at the now famous auction which was 27the issue of concern at that stage.

The Government borrows funds by selling Government bonds. They are sold at auction. Only licensed bond traders and the EPF can bid at auction.

The Central Bank informs those who can bid of the quantum that will be put up for auction. The traders were informed that one billion was to be put up for auction. However on the day 10 billion was put up for auction. The primary dealers present at the auction did not protest, nor did they ask for the auction to be postponed for a day so that they could arrange finance.

The auction went ahead and Perpetual, one of the primary dealers, bought a large parcel of bonds at rates of interest that were higher than the prevailing rates. They were able to do this as none of the other primary dealer bid at lower rates.


My conclusion was that Perpetual had not done anything wrong. They went to an auction, bid, and got the bonds

The question dangling in the air was whether Perpetual had prior information that 10 billion and not one billion would be up for auction. One will probably never know the answer to that question.

I said the person in the Central Bank who decided on the day to put 10 billion for auction should be sacked and the Governor too should be removed for incompetence in managing a Central Bank where such things could happen.

What happened next?

So my story ended with Perpetual holding a nice bundle of bonds all purchased quite properly. I could not proceed to venture and comment on what happened next, as at that time there was no definite information on what happened next. Now we know what happened, and it is possible to continue the story.

To continue the story 

After the auction Perpetual had a large parcel of Government bonds at attractive rates of interest. This did not make Perpetual rich. They had bonds, and a liability to the banks that lent them the money to buy the bonds.

Perpetual would be able to make a profit only and only if they could sell the bonds to someone at a price higher than what they paid for the bonds at auction. This is exactly what Perpetual did.

They sold the bonds at a price higher than what it cost them and thereby made a handsome profit. The buyer that enabled them to make a profit was the Employers’ Provident Fund.

 Was it all kosher?

Yes it was!

There was nothing illegal in what happened. Perpetual which had bought bonds openly at an auction sold them to a customer, the EPF, who was a buyer of bonds who also had a large portfolio of bonds. So that is that. 

How much profit did Perpetual make?

A very accurate calculation can be made when the Governor of the Central Bank provides the information the JVP has requested. The price Perpetual paid for the bonds is known. As the EPF comes within the purview of the Central Bank, the Governor can find out exactly what the EPF paid to buy the bonds from Perpetual.

The Governor was a good rugger player in his youth and he was a forward. He would know that in this maul the ball is lost, and definitely coming out on the other side, and no amount of pushing and shoving can prevent this. I hope the Governor will remember this from his rugby playing days, and without shilly-shallying put the information into the common domain, and give the price at which the EPF bought the bonds from Perpetual. 

Then it will be possible for any Dick, Tom or Harry (even if GCE O Level failed) with a calculator to compute the exact profit made by Perpetual. The sums are enormous and have more zeros than normal people ever see in their bank statements, and it will send the blood pressure soaring. What will provide closure and restore normal blood pressure? Will the answers to the difficult questions set out below achieve this? I don’t think it will.

The difficult questions

The EPF like any primary dealer has the right to buy bonds at the auctions. They did not bid at the auction at which Perpetual got the bonds. Why did the EPF subsequently buy from Perpetual at a price that gave them a fat profit? Who made the decision in the EPF to buy? Did that person do it on his own initiative or did someone instruct him to do so, and did that person give a guideline on the price they should pay?

The commission of three wise men may find the answers. They may name the two people. But did the person at the EPF who made the decision to buy commit a crime? If the CID search his pockets and cannot find any evidence of being bribed, can he be charged for any criminal offence? Probably not. But I am not a lawyer and we must wait now for a legal opinion on this.

A solution that will lead to closure 

The real anger is about the vast profits made by Perpetual. Then this bounces off on to those who are deemed to have had a hand in helping Perpetual to make these ugly profits. The solution that will lead to closure is to tax these profits. 

As the Government and the Opposition have joined hands in condemning what has happened, it should be possible to get unanimous approval to add a new tax on to the Inland Revenue Act with retrospective effect. This should be to tax at 95% all profits made by any person or organisation by selling bonds or any other type of security to the EPF, the ETF and the NSB. Such tax revenue should be credited back to the relevant organisation.

When Perpetual has to pay 95% of the profits they made by selling to the EPF, it will satisfy those who are rightly concerned by the ugly profits made by Perpetual. It will also give comfort to the public, who contribute to the EPF and ETF, when they know that they have not been robbed.


Only by taking away from Perpetual the profits they made, will it be possible to reach closure. The simple remedy is in the hand of our Members of Parliament. Mr. President, it is up to you to pull the levers and push the buttons to make this happen.

(The writer has done this, that and the other here and abroad, including being Chairman of First Capital Plc, a primary dealer.)