Bond Scam ? Another Perspective.

The Central Bank 30 Year Bond Issue. - By Ajwad Shariz.

I have 2 questions for the individuals who say "Bond Scam, Bond Scam".

Q1: Explain to me where is the scam in the bond issue.

Q2: Who stole the money?

Now come the pundits, be reminded 145 Members and Ministers of
our parliament under UPFA has not passed the A' levels, and of that 95
so called pundits who ran our country for 10 years do not have O'
Levels. These are the parliamentarians crying "scam, scam, scam. Let
me quote some of them.

Bandula Gunewardene: This is the Minister under UPFA who said that
Rs. 2500.00 a month is enough for a family of four to live comfortably in
Sri Lanka (Where did he come up with this figure??). He has said the
loss in the 30 year bond issue Rs.50 billion. How did he come up with
this figure, only God knows. The guy who can't calculate the stipend for
a family of 4 to live in Sri Lanka, is now is talking about bonds and in
billions. Even a Tri-Shaw driver will tell you how much it costs a family
of 4 for a month.

Wimal Weerawansa: I don’t have to write to you about his and his
wife's fraud, lies and deserting the JVP to rob the public with the UPFA.
He says the loss is 30 Billion. Well these guys seem to pluck these
figures from air… Airheads do it…

Nivard Cabraal: The most corrupt Governor that Central Bank ever had.
This shameless human being (if you can call him one), manipulated EPF
funds to fatten the purses of the stock market manipulators. While we
are on the issue of bonds, this is the ignorant Governor who invested
billions in Greek Bonds knowing that Greece was going bankrupt.
Yesterday Greece defaulted on the interest payable to IMF on monies
borrowed. What about the principal and interest owed to Sri Lanka?
Because of the buffoon Nivard Cabraal we may not see the colour of it.
These are some of the public lunatics that I have quoted. The actual
picture of the 30 year bond that was issued on the 27th of February,
2015. Why did this bond issue run into controversy, The one and only
reason is because the bid was to be 1 billion, but the bids were raised
and accepted to 10 billion. So what happens when the bids are raised?
the average returns was also driven up because of the excess uptake
from 1 billion to 10 billion.

It is understandable if the public outcry is for 2 reasons.

1) The high increase in the issue (10Bill), which also will give a higher
interest rate. 2) The largest beneficiary of the issue was a company
closely connected to the sitting Governor. Creating a conflict of
interest. Sri Lanka doesn’t have any rules on who you should award an
issue or for that matter any tender.

Then came the uneducated politicians, and the ignorant economist on
all media, so called journalists jumped on board to calculate the loss.
Unfortunately the contributions published do not take into account 3
most critical aspects required to calculate the exact loss.

1). You need to compute the value so that you are in the present. You
can't add present monies to future monies, this is a "no no" when you
compute time value money. So what is Computing time value money?
If a person loses Rs.1000.00 today and the interest rate was 10.4%, it is
the same as losing Rs.2000.00 in 7 years, or Rs.4000 in 14 years (This is
called the rule of 72. If you take 72 and divide by the rate of interest, in
this case 10.4, it will give you the time it takes to double the money,
through compounding interest). Therefore losing Rs.1000 today and
losing Rs.4000.00 in 14 years, is not the same as losing Rs. 5000.00
(1000+4000) today, but it is the same as losing 2000.00 today. The
time-value of money is a basic and core principle of financial
calculations, and the newspaper articles and the politicians HAVE
IGNORED IT, I am sure they don’t know it. The result has been the
erroneous calculations that adds up money due in 20 and 30 years with
money due in the present year, without discounting FUTURE payments
to the present value. THE RESULT IS INCORRECT CALCULATIONS THAT
HUGELY EXAGGERATE THE LOSS.

2) Inaccurate Stipulation of the base rate: All calculations of loss are
based on estimating the "extra interest" that was paid for the 30 year
bond.
Various rates are used by all and sundry pundits in the media. Some of
them well under 10%. Well, such speculations are not necessary as the
actual bids are known. Public Debt Department (PDD) document shows
that the market was not offering the low rates to the bank. If the bids
were not prorated The 1 billion mark would have meant accepting
1,308 billion (including 0.5 bill from EPF) THE AVERAGE WEIGHTED
REURN WOULD BE 10.465%. The leaks of the COPE report says the PDD
decided to take bids up to 2,608 billion. This recommendation does not
ring an alarm, because 2.358 billion of this total will come from
government controlled entities - Rs. 1.5 billion from EPF and the rest
from Government banks, and NONE from Perpetual Treasuries, which
has been identified as the dubious bidder where the governor has a
conflict of interest. Even though the PDD recommended more than
double the uptake of what was announced (which is not a good
practice) it has been done before on short term issues when Nivard
Cabraal was the governor. So the bottom line is that the weighted
return recommended by the PDD from the 2.6 billion uptake was
10.724%. SO THIS IS THE ACTUAL BASE RATE RECOMMENDED FOR THE
ISSUE BY THE PDD. Which takes all the guesswork. So far no one has
used this information therefore they have not been able to set the
appropriate base rate of 10.724%. The governor has absolutely no
input into this. The PDD does not admit him into their meetings while
discussing bids.

3) so called "LOSS" in deviating from the initial PDD recommendation…
The PDD said ok to issue 2.608 billion at the rate of 10.724. If the
governor had issued this amount, there would be no scam talk, also if
he did not give Perpetual securities. Well what the governor did was
increased the bid to 10 billion. This final 10 billion bid came at the rate
of 11.727%. So the loss calculation will be between this rate and the
rate for 2.608 billion. The excess interest rate paid by the increased
uptake is 1% (to be exact 1.003%).

Lets calculate the loss. The present value of the loss for over 30 years,
in taking 10.058 billion at this higher rate rather than the lower base
rate is equal 0.9 billion (896,430,491 to be precise) THIS IS THE LOSS (if
you can call it a loss, I don’t)
However it is only a fraction of the loss of 8.7 billion erroneously
calculated on the 30 year bond by the ex governor the goat Nivard
Cabraal. Of the 7.8 billion difference between Cabraals calculation and
the actual, Rs. 5.7 billion comes from computational error and 2.1
billion from the speculated base rate.

In closing let me tell you this. The 10 billion in bonds issued are bought
by the EPF and the government banks. So the difference in the rate
from 10.724 to 11.727 an increase of 1 percent is also beneficial to the
EPF and the banks which will get a higher rate of interest. I ask the
dumb politicians who are not O'level qualified this question. If Central
Bank is owned by the government, the Central Bank is the trustee for
the EPF, the bank of Ceylon, Peoples Bank and the NSB is owned by the
government. Who benefits by the increased rate?? So where is the loss
as the money is channeled back to the government.

Talking of losses, take the Hambantota harbour, Mattala airport, Mihin
Air, and all the commissions paid for the building of highways….can you
even compare the loss…Oh and the US$ 10 billion which was found in
Dubai…..compares nothing to the 30 year bond..
Please be kind enough to educate the rest.

Compiled and written from some information from Verite Research.

Conclusion

1. if an uneducated guy rob thats bad and if educated guy do white collar crime thats good...

2. Under money laundering who ever hide his asset anywhere , the nation that own it can claim it.. but no such claiming happened so far...

http://www.sundaytimes.lk/130714/news/cpcs-hedging-blunder-finally-the-people-pay-52925.html

http://www.sundaytimes.lk/120506/News/nws_01.html

The truth is during the previous Deshapremi regime we lost massive amounts in all sorts of economic activities,

-Bond Market - Greek and other junk bonds
- Stock market - EPF horrible investment stratergy and related deales which we discussed in other threads
-Derivative market - Hedging deals that we lost billions

Interesting thing is we never had COPE reports or any debates , media discusions ,about accountability or responsibility of those scams. Who was responsible ?, Who was the finance minister during that period ?



What about substandard petrol issue, Did the then minister take the responsibility ?

Thanks Al.
(This should have been titled " නොදන්නා දේ දන්නාබව පෙන්වන්නට සමාජ වෙබ් අඩවිවල කතා දාන බයියන්ගේ දැනුම වැඩිකරගැණීම් පිණිසයි ! ")

කිත්සිරි ද සිල්වා wrote:Thanks Al.
(This should have been titled " නොදන්නා දේ දන්නාබව පෙන්වන්නට සමාජ වෙබ් අඩවිවල කතා දාන බයියන්ගේ දැනුම වැඩිකරගැණීම් පිණිසයි ! ")

Api paksgrahi wenna hoda nehe. weradi weda UNP.UPFA,JVP, TNA, Helaurumaya kawru kalath wereddak nam weradiya kiyanna idripath viya yuthuya. Baiyya toyya wadayak mokataada?

I am no fan of the previous regime, but a couple of things about this article worry me.

First, if all was indeed above board and this article is completely factual, why are we hearing this now from Mr Shariz and not from Arjuna Mahendran, RW, RK or Dr Harsha? Surely RW could have had the matter investigated by industy experts and come up with a similar rejoinder?

Next, I Googled 'Ajwad Shariz' and got this linkedin profile,

https://www.linkedin.com/pub/ajwad-shariz/57/94a/238

The gentleman turns out to be a US based banker of Sri Lankan origin and an old Royalist, who played for CH&FC in '86, which would place him at about the same batch as Dr. H at Royal!

Now this could all be pure coincidence of course, but since he's come up with a reply to opposition claims that no one from government has come up with so far, maybe he can take over from AM?

After all RW, RK, AM and Dr Harsha are all familier with their school motto, Disce aut Discede!

People should read the content and understand. As investors, members here should have adequate knowledge to understand this event, I assume, rather than listen and accept what some one else with less knowledge says.

Pulling political parties, schools and name calling is unacceptable although it has been made political by politicians.

HAL9000 wrote:http://www.sundaytimes.lk/130714/news/cpcs-hedging-blunder-finally-the-people-pay-52925.html

http://www.sundaytimes.lk/120506/News/nws_01.html

The truth is during the previous Deshapremi regime we lost massive amounts in all sorts of economic activities,

-Bond Market - Greek and other junk bonds
- Stock market - EPF horrible investment stratergy and related deales which we discussed in other threads
-Derivative market - Hedging deals that we lost billions

Interesting thing is we never had COPE reports or any debates , media discusions ,about accountability or responsibility of those scams. Who was responsible ?, Who was the finance minister during that period ?



What about substandard petrol issue, Did the then minister take the responsibility ?

Mewa BABALATA therunath nehe wage katha karanawa. Hebei wahaganna Uparima uthsaha karanawa.Kiyanne BOND wala mukuth une nehe kiyala.hebei warana gannawa. A eye?

First Guy wrote:People should read the content and understand. As investors, members here should have adequate knowledge to understand this event, I assume, rather than listen and accept what some one else with less knowledge says.

Pulling political parties, schools and name calling is unacceptable although it has been made political by politicians.

FG, you're right about the school issue, and I do apologise for bringing it up, though the purpose was to point out that the gentleman concerned was not an unbiased independant expert but rather someone with school and possibly personal ties to the people involved in the bond issue.

The article itself was convincingly written, and even with my self-taught and very limited knowledge of bonds, it made a reasonable argument, once one had got past the first six paragraphs of abuse and name-calling.

The reason I dug deeper into the background of the writer was that I was taught that a professional thesis should be devoid of emotion, and in this case the argument seemed definitely tainted by emotion.

What worries me more is that I don't think RW has been very convincing in his defence of the bond issue, and if the matter were as simple as the writer of the article makes it out to be, then why have we got to the point of going into an election with a big question mark hanging over the integrity of the people who have been running the economy over the past six months?

Most voters would not have a clue as to the technicalities involved, but they still have a vote, and 'unuth ekai, munuth ekai' will not give RW the resounding win he so desperately needs.

After all a weak UNP-led coalition with MR as the opposition leader might be as bad as having MR back in power!

http://www.sundaytimes.lk/150705/business-times/cb-governor-visited-public-debt-dept-on-two-occasions-cope-report-says-155737.html

Leon wrote:http://www.sundaytimes.lk/150705/business-times/cb-governor-visited-public-debt-dept-on-two-occasions-cope-report-says-155737.html

Thanks Leon.

The bond in question is the 12.50% coupon 30 year bond that expires on 1 March 2045.

The face-value of the bond is 100 rupees

The current price of the bond is 100 rupees which indicates a yield of 12.50% - this is the same yield that was achieved at the bond auction. Nobody appears to touch this bond at any other price which kills any opportunity for profit