Friday, September 24, 2010

PSALM denies failed P100-million investment in Lehman Bros

By Donnabelle L. Gatdula (The Philippine Star) Updated September 24, 2010 12:00 AM Comments (1)View comments


MANILA, Philippines - State-run asset manager Power Sector Assets and Liabilities Management Corp. (PSALM) denied yesterday it had put in money in Lehman Brothers, a major US investment bank which went bankrupt and ignited the global financial crisis in 2008.
In a statement, PSALM said there is no truth to the claim of Eastern Samar Rep. Ben Evardone that the firm lost P100 million in its deal with Lehman Brothers Special Financing Inc., an international investmentcompany that collapsed in 2008.
PSALM clarified that the deal it entered into with Lehman Brothers on July 18, 2007 was not an investment but a hedging transaction. It said the deal was specifically a principal only swap (POS), which can be likened to an insurance purchase where the asset management firm pays an annual expense premium of 2.687 percent on the notional amount of $100 million for 19 years.
In exchange, PSALM, or the government, has the right to buy dollars at P44.788 in 2028 regardless of theforeign exchange rate at that time.
Counterparties for the POS deal, PSALM said, were selected based on a comprehensive selection process under the guidance of the Government Policy Procurement Board, the Department of Finance and the Bureau of the Treasury.
When Lehman Brothers went bankrupt, PSALM invoked the International Swaps and Derivatives Association Inc. (ISDA) agreement and terminated the transaction on Nov. 3, 2008.
PSALM said Lehman replaced it with a new POS with the same terms and conditions.
ISDA is a trade organization of participants in the market for over-the-counter derivatives. It is headquartered in New York, and has created a standardized contract (the ISDA Master Agreement) to enter into derivatives transactions.

In addition, PSALM filed for claims in the New York court for approximately $3.4 million representing the cost of the replacement and other expenses (legal fees, damages, etc) as may be allowed under provisions of the ISDA.
Also, contrary to Evardone’s allegation, PSALM said it did not use the proceeds from the privatization of power assets in the deal, pointing out that until May 2008 it was the National Power Corp. that had paid the required premiums. PSALM made it clear that the hedging transaction was used as an insurance against foreign exchange volatility.

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