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Conscience examination on Trust Consciousness Week
(Article published in the March 19, 2001 issue of TODAY, Business Section)

March 19 to 23 is Trust Consciousness Week. As in previous years, the trust industry this week will proclaim the good news, exhorting us not to put our trust in money but, instead, put our money in trust. In light of the recent developments in the industry, however, it might as well be Examination of Consciousness Week.

Consider: (1) The trust loans of Urbancorp Investment Inc., described in charges filed in court against Urban Bank executives as "garbage receivable", caused the voluntary shut down of that rich man’s bank. (2) The welfare of the beneficiaries of the Philippine National Bank was piously invoked in paving the way for Lucio Tan’s more secular control of PNB. (3) The leaders of the trust industry were unable to muster the courage to publicly support one of their own as she told the truth about a certain "Jose Velarde."

All these call for a critical reflection on just what role the trust industry is fit to play in the national balikatan for the country’s recovery.

Omission 1: Taking out trust placement?

The PDIC had exposed that after the voluntary bank holiday of Urban Bank, billions of pesos of past due and nonperforming loans were transferred from the trust department of Urbancorp Investment Inc. to the Urban Bank for the purpose of paying off the preterminations and withdrawals of trust clients. Teodoro Borlongan, chief executive of both institutions, admitted he authorized the transfer.

Borlongan, denying that the loans were "garbage," reportedly justified the transfer, saying it was industry practice." In other words, everybody was doing it. Ergo, the bright executive implied, if not bragged, there was nothing wrong with massively transferring assets from an investment unit to the bank proper in order to meet the former’s obligations with trust clients.

Borlongan’s lawyer must have squirmed at this public admission of what every junior bank officer knows to be not only an imprudent banking practice (since a significant portion was in fact nonperforming loans) but also, in light of the magnitude of the amounts transferred during Urban Bank’s last days, an obvious fraudulent act.

The BSP examiners, for their part, must have clenched their fists at this open challenge to their authority. After all, it is their duty to ferret out practices that endanger not only the solvency but the ability of banks to meet their obligations in due course. If this was industry practice, how come they did not spot it?

But those whom one expected to rise in vehement protest and wounded pride were the trust officers. Every day of the year, and not only during Trust Consciousness Week, they must affirm a principal tenet of trust investments that they, as the investor’s fiduciaries, are duty-bound to manage trust funds with exemplary prudence.

But instead of asserting that most trust loans were current and payments up to date, instead of taking exception to the assertion that the trust departments, as a matter of general practice, do transfer loans (whether garbage or not) to the banking side of their institution, the trust industry chose to remain silent.

What are we to make of such silence? Is the trust industry’s silence and admission, indeed a public confession, that it does call, as a matter of practice, on the banking side of their business to meet preterminations of their clients?

Omission 2: Employer’s retirement funds?

In 1999 former secretary of finance Edgardo Espiritu invoked the social character of the PNB retirement funds to get former President Joseph Estrada’s approval to waive the government’s right o pick up its share of the PNB rights offering in favor of the PNB’s retirement fund. This was symptomatic of how managers of retirement funds exercise flexibility and imagination in investing employee retirement funds.

The PNB retirement trust fund managers suffered the belief that the fund had the resources to pay for what the government itself could not afford. That they were able to bend their backs over to form special purpose companies, which had nothing special about them but the unique ability to borrow funds without any visible sources of repayment from companies that turned out to be associated with Tan, was an amazing display of flexibility.

In the end, what was approved, at least on paper, by the former President on the basis of its being for the good of the PNB’s work force turned out to be, at least for now, in the private interest of Tan.

This exploitation of the retirement funds, unfortunately, is not an isolated case. Urbancorp Investment Inc., as trustee of the Urban Bank Management Incentive Plan Trust, borrowed money from the investment house’s common trust fund to take out William Gatchalian’s investment in preferred shares of Urbancorp Investment Inc. itself. In fact the Urban Bank Management Incentive Plan became a stockholder of Urban Bank itself. In the not so distant past, retirement funds have been known to have made possible the purchase of property which the relevant employers could not economically or legally acquire.

This Trust Consciousness Week is as good a time as any for the industry to ask itself where its loyalty actually lies. In the employees for whom the retirement trusts are set up? Or the employer companies that provided the contributions to the plans? The Industry’s response is crucial both for defined-contribution plans, where the employees’ benefits depends on the trustee’s investment performance, and for defined benefit plans, since recent employer shutdowns have shown how fragile the continued life of business enterprise can be.

Omission 3: Forever dependent

Finally, the trust industry would do well to determine how much longer it intends to be subservient to the dictates of the banking side of their business. The trust regulations had long ago mandated that the trust department should be organizationally and administratively separate and distinct from the other departments of the institution. It seems, however, that the trust industry never had been able to cut its umbilical cord from the bank proper.

During the impeachment trial of Estrada, it had a singular opportunity to show that it had a mind of its own and the resolve to stand by a colleague who was in effect asserting the principle that the premise of all trust relations is legitimacy of purpose. Instead, it balked.

When Clarissa Ocampo, as the subpoenaed custodian of the trust documents related to the savings-cum-checking account of then-president Estrada, took the witness stand on December 22, 2000, and told the nation that, in her presence, the former chief executive signed as "Jose Velarde," she did what every trust office was expected to do. She complied with a lawful order of a court of competent jurisdiction to submit information about an account under her management

When during the Christmas recess of the trial, it was suggested to the trust officers that they publicly give moral support to one of their kind, to encourage her to tell the truth, and to exhort the players, the regulators and the constituencies of the trust industry to take measures to ensure that trust is not misused nor misplaced, the collective decision, it turned out, was for each of the trust officers to consult with and secure clearance from their respective seniors in management.

On the most basic issue that is are the core of its calling, the trust industry could not take a stand of its own.

That was a grievous cop-out. The trust industry that presents itself as a worthy repository of trust, of being its client’s keeper, was unwilling to trust its own judgement.