‘Wash sales’ had DBP brass’ blessing

The decision for Development Bank of the Philippines to engage in so-called “wash sales”—an activity prohibited under banking and corporate laws—that resulted in a P717-million loss for the bank was approved at its highest levels.

According to documents obtained by the Inquirer, no less than DBP’s risk oversight committee, chaired by bank director Alberto Lim, along with several other board members, senior officers and consultants sitting as members, gave the green light to the strategy proposed by DBP senior vice president Mariquita Agena.

The minutes of the risk oversight committee’s meeting, held on Feb. 12, 2014, highlighted “Resolution No. 0001,” the subject of which was to “gradually sell our holdings of long-dated ‘available-for-sale’ peso government securities worth P20 billion and buy for the ‘hold-to-maturity’ portfolio to avoid increasing the mark-to-market losses and preserve the accrual income.”

As it turned out, the bank had already started selling its government securities several weeks before the meeting was convened and, on the same day that each tranche was sold, bought them back from the only financial institution that DBP dealt with for the entire deal—First Metro Investment Corp. (FMIC), which is the investment banking arm of the Metrobank Group.

After 28 transactions that started on Jan. 29, 2014 until March 3, 2014, some P14.3 billion worth of government securities were sold by DBP to FMIC and bought back on the same day with total losses of P717 million.

In its findings, the Commission on Audit said the move was symptomatic of unsound banking practices and noted that the losses incurred were unnecessary because the bank was in a very liquid cash position, thus negating the rationale for selling the assets involved.

In a resolution it proposed to DBP’s risk management committee, the treasury group pointed out that adopting the strategy of selling the securities and buying them back to be lodged in a different account—something prohibited by the Bangko Sentral ng Pilipinas to prevent banks from hiding big losses in their books—would entail losses of up to P940 million.

The minutes of the meeting further revealed that DBP’s risk management committee “approved the treasury group’s strategies to prevent further mark-to-market losses.” The strategies involved the implementation of illegal “wash sales,” which led to a staggering amount of realized losses, as opposed to paper losses on its portfolio before the sale.

The committee also set a maximum loss limit of P800 million for the treasury group.

Apart from Lim, other members of the risk management committee are bank director and committee vice chair Jose Luis Vera, Vaugh Montes, and ex-officio members Jose Nuñez Jr. (DBP chair), Gil Buenaventura (president and CEO), directors Lydia Echauz, Reynaldo Geronimo and Cecilio Lorenzo, executive vice president Fe Susan Prado and senior vice president Fritzie Tangkia-Fabricante.

Also present during that meeting were consultant Bernadine Siy, corporate secretary Danny Bunyi, chief risk officer Alexander Patricio, internal audit group head Cris Cabalatungan, treasury group head Mariquita Agena, chief compliance officer Rafael Danilo Ranil Reynante, strategic planning group head Marietta Fondevilla, market risk department head Roda Celis, asset liability management department officer Rustum Corpuz, market risk department manager Jamie James Javier and credit risk manager Mark Jerome De Leon.