Why Worry About The Oil Hedge Scam?

[Az]

Something I received via email... seems to sound true & shows how screwed up our country is.

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Firstly, all patriotic Sri Lankan are shocked by the biggest foreign exchange scam in the history of the country with a lead foreign bank making use of the poor risk management skills of the chairman of CPC.

Nationalistic Sri Lankans are shocked and traumatized due to the following reasons.

What is the impact?

1. My country's foreign reserves will shrink by a massive USD 400 million.

With USD 400 million the government can provide the entire country 100% FREE fuel for 45 days.

2. With USD 400 million, I can fund the war for more than 3 months.

3. With USD 400 million, I can provide the population of 19 million a subsidy of Rs 2,300 each month.

This includes for you and me.

4. My country has never been in need of foreign exchange more than now.

Recently, our foreign exchange position has depleted from USD 3.5Bn to USD 2.5bn due to the intervention by Central Bank to maintain rupee stability.

5. The biggest financial challenge for any Country amidst the on-going global financial crisis is to save the own foreign exchange.

Not to pay for a scam.

6. If we lose USD 400 million, then the US Dollar against rupee will move from 110 to 125.

The country will go into an economic crisis and this will be the starting point.

7. Why not spend the USD 400 million, we can fund the new port or the coal power plant projects.

We do not even get USD 300 million of foreign grants every year.

How Did CPC get exposed?

This was started by Standard Chartered Bank.

SCB operates in more than 65 countries and was awarded with the Global Energy Risk Innovation Award for beginning this transaction in 2007 in Sri Lanka.

This indicates no other country was stupid to buy such hedge products except Sri Lanka.

SCB started selling unfair deals using unethical means (explained later).

Later Citibank and Deutsche and Commercial also followed the party influenced by the greed for profits – "why not we also make money." was the desire also for these banks.

The smart Bank of Ceylon and HSBC refused to enter into such agreements as they understood the unfair structure.

Here are the reasons why it is unfair deal and why we should feel sorry for the Government.

You decide whether you would enter into such a structure or even gamble against such odds.

This is only a financial instrument and not a contract to buy oil.

It is a huge wrong gamble that oil price will only go up up up and never down.

The hedge was one sided in favour of the bank – meaning there was NO floor for CPC to protect the down sided risk but, with a nice cap to protect the banks risks.

Unfair, unfair and this is not even a gamble but a cheat.

2. Any benefits the banks pay only for 2 months but, CPC has to pay banks for 12 months.

Sounds stupid but, it truly happened.

Again, not a gamble but, a cheat structure.

So, if oil prices went up even double, CPC gets peanuts USD 3 Million per contract.

Amazing isn't it!!

So, how can CPC say if price went up I would get the blame for not hedging???

3. CPC pays for double the quantity hedged, if price goes down.

Whereas the bank pays only for half the quantity hedged, if price goes up.

Have you heard of such deals before?

4. Banks maximum exposure is USD 3 (THREE) million per transaction and CPC's unlimited, as much as USD 400 million.

You decide if this is a good deal!

5. Finally, the deal is CPC paying for double the quantity, for 12 months with no floor to cover the down risks.

For the bank, its half the quantity, for two months with a cap on the upside payment.

This is not gambling but cheating.

Because, CPC is betting on a card pack where all the cards in there favour are removed from the pack.

6. This structure was called zero cost.

Actually the banks should have paid an up-front premium to CPC for entering into such transactions.

Alternatively, the banks have reported more than US dollar 35 million (3.6 billion rupees) in profits from such transaction and the head offices of these branches have earned more than USD 52 million. (5.4 billion rupees.)

Central Bank and published financial records will indicate that these banks have already repatriated more than 27 million dollars during the past 9 months from the country to their head offices.

And the big payments have not started yet....SLR 40 billion.

How Did CPC get scammed?

Good question and we all wonder why?

You decide, if these are ethical practice and good governance.

1. The Chairman of CPC and a top decision maker travelled to Singapore, Dubai & USA several times on first class.

The tickets were purchased by the foreign bank.

The CEO of the foreign bank also joined them during these visits for entertainment and the travel never related to do with hedge.

Although Mr. Asantha De Mel told recently at a press conference that he travelled globally to learn about hedging.

Dubai and Singapore are the most entertaining places in the world and you can imagine the fun.

It's a shopper's paradise with lots of other activities.

2. The expenses during the travel were millions of rupees for entertainment plus – plus –plus.

These were paid locally and also via the foreign branch offices.

A scrutiny of the local bank records will reveal this.

One of the marketing head responsible for selling this product in a foreign bank is the local pimp to the foreign CEO.

He was given a handsome bonus including a vehicle for Rs 25 million, which he even travels today.

Additionally, he was promoted as Head of the Corporate structure despite his own records for fraud in the bank.

3. Accounts were opened to the local decision makers in Singapore (Orchard Branch) and Dubai (Al Mankhool) which is the usual practice to say thank you for very large deals by international banks.

As a matter of fact government officials were employed by the bank.

4. The bank not only employed government officials but also their family members.

Miss Stephanie De Mel the daughter of the Chairman of CPC was provided employment at the Standard Chartered Bank dealing and Forex room a highly restricted area.

The Petrol hedge product was developed in this room.

Central Bank can verify this.

5. The losses started to build up in July 2008 and we all know that the derivative contracts are mark to mark on a daily basis by the banks and it is also a regulatory requirement.

However, the banks did not inform and advise CPC to exit timely given the greed to grapple extensive profits and bonuses for CEO.

6. It is industry knowledge that a few officers who had patriotic feelings towards the country raised the unethical practice within the bank.

But, these employees were treated un-fairly and terminated without any reasons and justification.

A few of these employees have filed litigation.

More Violations!

1. There are violations to Central Bank directions and guidelines on derivatives.

2. The Sri Lankan cabinet never approved this transaction.

It was also mis sold to the cabinet and the Cabinet never knew about the unfair structure and the exposure to CPC.

3. The Attorney General Approvals were not obtained for signing the any documentation including the ISDA Derivatives Contract.

4. The Board of CPC did not know the facts or approve the transactions.

5. The Central Bank did not know the facts or approve the transactions.

The situation now!

1. The CPC is exposed to payment of USD 400 million.

CPC is defending the banks, see why above.

2. The CEO's of the bank are putting pressure on the government, Central Bank and CPC to pay.

If CPC fails to pay, they will loose their jobs.

No one has interest about the country.

3. The CEO's of the banks are pushing to re-structure the debt claiming this is sovereign risk and willing to provide discounts and hair-cuts.

This is not sovereign risk as the Central Bank & Treasury did not approve the transaction.

It is not like a loan or bond.

It is a speculative instrument that has gone wrong like in the USA.

4. If restructured, it will only serve to regularize the scam and still hundreds of millions of $ will have to be paid.

Central Bank should declare transaction NULL & VOID.

The foreign banks are attempting to tarnish the image of the country by putting fear that this is sovereign default.

It is not.

5. Some patriotic citizens are expected to file a fundamental rights case.

The legal fact!

1. CPC need not pay a single penny since this was miss selling.

2. There is ample evidence for miss selling.

3. There are ample court cases where court never favored mis selling and have pronounced that these transactions are null and void.

There are legislative laws in the UK, USA, Canada, Singapore and various other countries against such acts to protect governments and its citizens.

Can the foreign Banks help the country for future foreign Debt?

The CEO's of foreign banks are putting undue pressure and fear on the government and the Central bank saying that this is a sovereign default and the government will not be able to raise any debts in the future.

1. The current global financial crisis is expected to continue for atleast for the next two years.

In this situation several foreign banks are getting bankrupt and in fact, the governments are helping them with bail out plans.

2. Citibank and Standard Chartered Bank shares have crashed by over 60% and they are looking for help for themselves to survive from governments.

They have no liquidity and risk appetite.

3. The three foreign banks involved in this transaction have no commitment to the soils of Sri Lanka. The proof is that all of them do not have a single branch outside Colombo although they have been milking the country for over 100 years.

4. The recent debts raised by the foreign banks are in fact, international syndicate loans and these banks only acted as brokers and there participation is less than 5%.

The Government can do the same structure with other local banks as well as other foreign banks.

5. In the present global financial crisis and Sri Lanka's low credit rating, it is anyway not possible to borrow more overseas at acceptable rates.

So, better save the reserves you already have.

6. Why should the government pay USD 400 million which had no benefit to the country to repay a new USD 200 or 300 million of debt.

First, save what you have in your hands.

What should the Government Do!

1. Appoint an independent committee to investigate into the mal practices.

2. Central Bank has started investigation but, there is severe external pressure on them to close their eyes.

3. The Bribery and Corruption Department and the CID to investigate.

4. Legally punish for the offense and save the country's foreign exchange.

5. Do not allow the opposition parties with vested interest to take advantage and include the government also a party to this scam.

Government didnt know.

6. Do not allow the foreign banks to take shelter under sovereign risk.

This is not sovereign risk but mis selling and scam.

Standard Chartered was involved in a similar case (Harshad Mehta) in India in March 1992.

The Government of India took a serious stand against unethical practice and Sri Lanka should do the same.

We should communicate to the international world that we cannot be taken for foolish financial rides.

7. Take serious action against any institute, person that try to tarnish the sovereign image of this country to shelter from mis selling. We are a trustworthy honourable country.

8. The Government should not under any circumstance agree to any re-structure or hair-cut thinking this is sovereign default.

The Government has no obligation as per proven case laws to oblige for mis selling and corrupt deals as per international laws and practices.

If you love your country pass this on to put pressure to government not to pay out our precious dollars on this treason scam

THIS IS WRITTEN BY AN INDUSTRY EXPERT WITH EXTENSIVE KNOWLEDGE ON HEDGE PRODUCTS AND EXPERIENCE IN FINANCIAL SERVICES BOTH, LOCALLY AND INTERNATIONALLY WITH THE INTENTION OF SAVING THIS COUNTRY'S FOREIGN RESERVES AND THERE BY BUILD A BETTER FUTURE FOR ALL THE CITIZENS OF THIS COUNTRY AND THE FUTURE GENERATIONS.

[Devinda_Z]

all rather worrying