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November 09, 2006

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those 4 people should be indicted and prosecuted. how many innocent people's lives are affected by this? i know my family for one. and for management to advise certain individuals to withdraw...that kinda sounds like the martha stewart case..hmmmm...

Ollekiang...I'm about to get a red-hot burning arse! This is starting to bear resemeblance to the Enron tragedy!

Could somebody with reliable source or constant monitoring of political developments (esp through following of media reports) tell me that I missed reading last month about a public announcement that CSPP will lend a million bucks to PSB?? I am certain that if the CSPP board approved the loan, there should have been some kind of consultation with our govt leaders and the public (those who own the money in CSPP accounts). This sounds like a "milkolk el omeruul."

Ke de mekekerei el chad e mesuub a tekoi me ka mokellomes el mei ar mengetekled...

Ng ngera me a Presidents a uasei ng diak a udoud er a gov't el bail out er a PSB - e a Senator a uasei ng ngerchelel a gov't el revive er ngii.

I understand that it is wise to support locally owned businesses, but there's that part of me that understands as well that the leaders who insist on the gov't bailing out the bank once more may be shareholders. Once again, it seems that particular leaders are looking out for their best interest (protecting their investments) while the citizens are bewildered and left to fend for themselves - in the meantime, as they prolong the process for the customers to retrieve their $$, business and individuals will suffer under such condition.

Ores,
I, too, read the newspaper regularly and missed the $1M from CSPP. Does this mean the gov't once again may need to subsidize CSPP? PUC? PNCC?

Chesbad,
From Omdui's updates and my not having read about CSPP's government-sanctioned loan of $1 mil to PSB, I suspect this was done discreetly to avoid public outrage. There should be some investigation into this reported "bailout" loan. The CSPP board either was oblivious to the larger mess out there or knowingly submitted to pressures from "higher-ups" to approve the loan.

The OEK, which annually authorizes large amount of cash to subsidize the nearly insolvent CSPP (pension) ought to look into this separate incident. The CSPP board and management had failed and seems to continue to fail the people in upholding their fiduciary responsibility.

I smell something bad here, and I would really be disappointed (and so would our CSPP contributors) if this is swept under the rug!

Having its bank go under is surely a tragedy. But drawing the wrong conclusions could make things worse


Although it has been acted quickly by shifting the blame to “certain individuals” making them look like the scapegoat, a broader underlying problem has not been named so far: the lack of monitoring.

Banks are inherently fragile businesses as nearly everything depends on their ability to establish and maintain public trust: They promise to give depositors all their money back on demand. As soon as depositors ask a bank to make good on that pledge, the bank (which retains only a fraction of its deposits in ready cash) goes bust. Depositors at other branches of that bank may then want their money back too and cause a run. In such a case, even the biggest and healthiest bank can be brought to its knees. And, as banks provide the infrastructure of payments in modern society, that comes under threat as well.

There are different ways to dealing with that. Developed countries have set up institutions such as America’s Federal Reserve to supervise and regulate banks which keep an eye on depositors’ money boosting both the system’s credibility and efficiency. In developing countries, which are usually not prepared institutionally to oversight and regulate its banking sector properly, it is often left to the government or its agencies to fill the gap. But this sometimes comes with sneaky side effects. One lies with its size.

Whereas in the United States even the biggest financial conglomerate does not exceed the size of 1% of GDP, Palau’s Pacific Savings Bank deposits accounted for more that 16% of GDP. Is a bank within a community with weak financial regulation big enough in terms of GDP, its potential crisis or failure starts to become costly. From a certain point, it becomes simply too big to fail. This leads to the assumption, among its customers as well as bank operators, that when a financial institution gets into trouble government will, in one form or another, prop it up or bail it out.

This can be compared to a deposit insurance in which it is guaranteed that if a bank gets in dire financial straits, or is even at the brink of failure, the government (i.e. the taxpayer) will pick up the bill. This leads to the perverted outcome that a typical depositor does not need to worry what the bank is doing with their money and turns hence a blind eye to what banks are doing with their deposits. They think they will get their money back anyway.

It is, however, vital to a system which lacks proper regulation to have depositors taking an interest in what banks are doing with their money because it exerts discipline for prudent lending on them. Without it, banks tend to take on much bigger risks than they otherwise would be and will be able to take bigger chances with the money they lend. They will be able to lend to bad risks, charging more in interest and therefore earning bigger profits. Higher lending rates will allow them to pay depositors more too (or here in higher interest rates for checking accounts), enabling them to bid for a bigger share of the market. So once depositors stop caring about the soundness of their banks, bad banking quickly crowds out good.

So putting it right means moving some of the risks back to the general public. If the ordinary bank depositor – even without deeper knowledge in accounting – keeps kicking the tyre of their bank every now and then, they set a much bigger incentive to prudence than any bank regulator is able to pull off. It might drive up the cost of borrowing a bit as banks will start to look twice or charge higher fees before they hand out money, but it may be worthwhile.

If the current case turns out to be a case of business fraud as it is suggested by the former president of the bank, the perpetrator(s) should be punished. With a case as big as this, Palau’s government is surely tempted to remedy it with new rules and laws. But it is worth remembering that corporate abuse at Enron and elsewhere occurred because companies’ most senior executives overrode rules and controls that were already in place and then plotted to hide what they had done.

So instead of imposing new laws, some more old-fashioned and traditional values, which can easily be forgotten when too much risk is shifted to the government, can come in handy here. One of the oldest maxims of commercial virtue is still the best: Buyer beware.


Thanks for running the blog

S74:
Good points on monitoring and what the US Feds/OCC/FDIC are capable of doing.

In this case, it was the lack of a proper banking law, which does not even call on banks to be audited by independent auditors and require banks to publish their financials at least annually. The FSM requires banks there to publish their reports in newspapers of general circulation. This would then allow for people to see what is going on before they put their money in banks. The law in Palau does not do that, from my reading of it. It is generally weak and does not give the regulatory body enough powers to properly execute its supervisory duties and ensure that public deposits are safe.

The OEK needs to look into this to make sure that this kind of thing does not happen again.

Banks are by nature, public institutions because they require the general public's money, placed in deposits, to make loans for a profit. Therefore, they need to be guided and monitored carefully by regulatory agencies.

In PSB's case, this bank is probably second only to Bank of Hawaii in terms of depsitor size and loans given out. This means that there has to be some sort of Government intervention to try and save depositors and prevent an economic collapse.

This is really bad timing for the closure to happen. Thanksgiving and Christmas just around the corner and Compact Renegotiations to happen soon with the US. Maybe the US can see that we are trying to implement a proper system. We shall see.

In the meantime, I beleive that there has been significant fraudulent activities in the Bank from people at the top...meaning directors of the bank and its officers.

I hope they get thrown in jail. What is the FIC doing about this?

Inform yourselves with following and reach your own conclusions:


The civil service pension plan is estimated to have an unfunded LIBABILITY OF $30 million, which will ultimately need to be funded by the budget or via reduced payouts. The social security administration scheme also has an unfunded liability of atleast $10 million, but a positive cash flow and a recent increase in contribution rates is expected to correct this over the long term.

ADB Country Report
Republic of Palau
October 2005

Please pay attention to those words in CAPS:

PALAU: New Pension Plan Head Vows To Work With Lawmakers
By Agnes M. Abrau For Variety
KOROR (Palau Horizon, Marianas Variety, 5/16/2006)

The new administrator of the Civil Service Pension Plan vows to work with the national legislature to make sure that the plan gets enough money to sustain itself. Presley Etibek, plan administrator, said he will look into different options to sustain the cash-strapped pension plan. On May 29, Etibek will assume the position vacated by now Koror Gov. Yositaka Adachi. Etibek and the Civil Service Pension Plan’a board of directors signed a memorandum of agreement Wednesday afternoon here in Koror. “I’m really eager to take on this challenge,” Etibek said. Etibek is the dean of students of Palau Community College. He has been at PCC for the past 19 years. Etibek said one of his priorities is to move to a new location where there is comfortable office space for staff and the plan’s beneficiaries. The Civil Service Pension Plan has experienced shortfall of funds due to big drawdowns of its investments. Its former administrator, Adachi, said one reason for the shortfall was the implementation of the Service Retirement Fund in July 1999, which gave retirement benefits to those who had completed 30 years of service or those who had reached the retirement age of 60. A drawdown is a reduction in an account from a trade or series of trades or the peak to trough decline during a specific record period of an investment or fund. The Civil Service Pension Plan’s chairman of the board, Evans Imetengel, said there were five applicants for the administrator’s position. In previous interviews, the plan said CONTRIBUTIONS MADE BY GOVERNMENT AGENCIES AND EMPLOYEES WERE LESS THAN THE PAYOUT OF BENEFITS. There are over 1,000 retirees who receive pensions.

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