It's the regulators fault that the Legacy Group's businesses collapsed, controversial owner of the embattled and bankrupt financial services group said in an exclusive TV interview.
Celso de los Angeles, in a two-part interview with ABS-CBN News Channel's "Big Picture," said that if the Bangko Sentral ng Pilipinas (BSP) did not intevene, his business would still be running smoothly.
The Legacy Group's collapse, now considered a coordinated and one of the major pyramid scams in the country's financial services history, has left thousands of depositors all over the country scrambling to recover their P24 billion funds in the bankrupt 14 Legacy-linked rural banks.
Taxpayers have to shoulder P14 billion of that amount through the state-funded Philippine Deposit Insurance Corporation, which is mandated by law to cover deposits amounting to P250,000 and below.
In a domino-effect, even the Legacy-linked pre-need firms' thousands of plan holders, who invested about P7 billion for their future educational, pension and memorial needs, are also left holding the bag.
The Legacy-linked rural banks and pre-need firms closed shop one-by-one in December and January, after the Bangko Sentral clinched a favorable restraining order from the Supreme Court that allowed the central bank to go after the 14 identified Legacy-linked rural banks.
The BSP has unraveled fraudulent and unsound business practices in the way the Legacy Group's rural banks were conducting business through its special examination team. In early 2008, the BSP was about to submit the team's examination findings and recommendations to its policy making body, the Monetary Board, but the Legacy Group beat it to the draw when it filed court cases against the regulator, in effect buying time for the rural banks to continue operations. (Read how the lower courts handled the Legacy court cases here.)
Fraud is 'relative'
The BSP has said that the Legacy Group's fall was due to fraud. It said the group promised high interest rates to depositors and investors, including double-your-money schemes, sustained by using fresh funds from new investors to pay off maturing obligations to clients.
In the "Big Picture" interview, de los Angeles said the high interest rates his group promised to depositors and investors should not be considered as "unsound business practice" since they had a business plan to back these promises.
De los Angeles said the concept of unsound business practice, or promising high yields to clients, does not apply to them. "It's relative," he stressed.
"It is unsound if we have no outlet for [these sources of money. But we had a business plan," he said.
The mayor of a town in Albay province said that after the public entrusts their money to them, they turn around and invest these in other businesses, which give them returns higher than the promised rates to the depositors and pre-need plan holders.
These outlets include loans to teachers and motorcyle buyers, and to credit card clients.
"We lend to teachers at 36 percent [per year, which is] higher than the 14.7 percent cost of money. Our credit cards earn 42 percent, higher than the [deposit and investment products where we promise] 20 percent [per year] or double-your-money. Our motorcycle [loans] earn 37 percent [and more]," de los Angeles explained.
As long as these outlets continue earning these high returns, the politician-businessman noted that the entire empire would have continued to operate smoothly.
But Legacy's access to these profitable outlets started being closed one after another. The late Raul Roco, who then headed the Education Department, disallowed the practice of businesses like Legacy from earning high rates out of state teachers' salary loans. Roco, who then said these loans rates are considered "usury," imposed that rates charged to teachers loans be reduced to 18 percent from 36 percent.
Policy decisions like the education department's started distorting the flow of money within the empire. The BSP's efforts to close the banks didn't help any.
De los Angeles likened these regulator's efforts to closing the faucets it considered the fund sources that helped pay back the depositors and pre-need holders.
"If you close the faucet, how will we pay [the depositors and pre-need plan holders back]?"
BSP official's ire
De los Angeles also said a former top BSP official was behind the efforts of the regulator to close the rural banks.
The Legacy Group owner said former BSP deputy governor Alberto Reyes wanted to close his banks because he wanted Reyes' brother, Efren Reyes, to pay his loans to the Legacy companies.
De los Angeles said Efren Reyes, who used to head one of his rural banks, availed of P1.4 million in loans.
"It's pure and simple harassment," de los Angeles said of the former BSP deputy official's moves against his banks. "I'm referring not to the insitution but to certain individuals [in the BSP]," he added.
In a statement, former BSP deputy government Reyes said he was aware of his brother Efren's connection with the Legacy Group, which the BSP has been keeping a watchful eye on since early part of the decade.
Reyes said his brother's involvment in Legacy was "a purely professional service work," and that it had "nothing to do with the closure of Legacy by BSP."
“We at BSP continued documenting unsafe and unsound banking practices of the Legacy Banks," Reyes added.
The finances of the Legacy group has been in limbo since 2003. The BSP had asked the Legacy group to infuse fresh funds to ensure it had enough cushion for the depositors' money. The BSP later learned that the group was dependent on additional money from new and existing customers to pay off maturing obligations to other clients since the banks themselves are already cash-strapped.
The Legacy Group has been criticized for banking on connections in politics, judiciary, and in regulators to continue with their financial services operations.
The two-part interview airs February 23 and 24 at 9:30pm in the ABS-CBN News Channel.