by Ray Auxillou
Making Money off Money in Belize. As Belize grows there are many imaginative ways of making money off money in Belize.
Today, in the Independence Day weekend newspapers, was an advertisement for Series 4 Debentures for BEL. Like any person who saves, I am always seeking a way to make my savings make more money, and balance this against risk of loss. The BEL Debenture Bond caught my eye, because they are offering a 10% interest rate. What was not stated was the term of commitment. Banks currently for example, offer between 5 % on savings accounts, to anywhere up to 9 % interest on Bank Certificate of Deposits. Is there a difference between say a BEL Debenture Bond and a Bank CD? Not much! Both are loans to institutions that have cash flow. In the case of BEL, it is a utility that enjoys a government monopoly along with a guaranteed profit of 15%, over and above any operating costs. There doesnít seem to be any oversight of such a private utility accounts? They can create innovative ways of showing an operating cost, then add on their government guaranteed 15% profit as part of their fees. A Debenture Bond is simply a loan, that is not guaranteed by anything, simply by the credit of the utility company. In the case of a utility monopoly, with a guaranteed 15% profit, their credit is very good. A Bank CD on the other hand, is solely based on the profit and loss capability of a privately owned Bank to work the money machine. Their CDís are based on their credit also, just like the utility; without the safeguard of a guaranteed government profit. Banks can and do go broke! If one was to bet, or accept risks, the BEL loan, called a Debenture of your savings investment, is probably a more secure bet than that of a bank. However, banks that follow rigid well tried and proven guidelines of investing, rarely go broke. Banks make their money primarily on loans, using the interest rate spread, secured by real estate assets that usually increase in value over time. They also do some investing. It is only when the Board of Directors of a bank veer off tried and true principles of loan banking, to enhance profits, that they increase their risks and can go broke. A well run bank will never go broke. To mind comes the Coconut Grove Bank in Coral Gables, Florida. Probably the strongest privately owned bank in the whole USA. Not a single director is under 70 years of age and they simply mine the money machine and keep their risk at low odds, even at the loss of what could be riskier investments returning higher profits. To their fame, is the fact that they put RISK at the top of their investment priorities; than the need to make a profit and will accept smaller profits, for less risk. They are the strongest private bank in the USA as a result and the richest. The Queen of England lost hundreds of millions of dollars of her savings in her bank, I forget the name, when that bank ventured into futures trading. A sort of gambling that can return fantastic profits and did for a while. But all such gambling, runs in streaks and when the losses started, this bank lacked controls to limit the losses and eventually was reported going bankrupt, in huge losses they could not pay, and took the Queen of Englandís hundreds of millions in savings with it.
In recent years, I have watched bank statements put out by the Central Bank of Belize in the newspapers. One bank I was watching in Belize, after some five years of loan investing around the Caribbean, was only earning a net profit return of 4%. They would have been better off, in investing in other Banks Certificate of Deposits with the millions under their loan portfolio, instead of making risky loans. Certainly BEL Debentures would give a better return and safer, with lower risk.
Years ago, I once had my own private Mutual Fund built on stock investing, using foreign money, of friends. The catch in basing a mutual fund on stock investing, is the matter of redemptions. The ability of a customer who has savings, who chooses an investment based on liquidity, or the ability to cash in their investment immediately. Instant liquidity, or the redemption rate, means lower returns usually. In Mutual Funds built around stock investing, the problem is the number of redemptions increases, to draw down your ready cash in Bear markets; as savings customers switch the emphasis on their investment portfolios. Mutual Funds I found by sad experience, find themselves locked into stocks that have dropped temporarily in value, during bear markets. Which are basically like the ocean tides, and when the tide goes out in a bear market, nearly all stocks sink in prices to sit on the bottom until the tide comes back in, like boats at anchor in a harbor. A Mutual Fund can find themselves caught in a bind therefore, or a high risk situation as savings investors call in their investments; when you, the Mutual Fund lack the liquidity, or ready cash, to redeem investor savings, as your ready money of theirs is invested in sinking stocks.
I notice a new Mutual Fund based in Belize, based on attracting the small savings investor in competition with banks. Since itís inception, their idea has been to compete for the small savings customer like a bank and pay higher interest. They seem to have started paying around 5% and gradually it has increased to 7% return for the savings investor. A small investor with $20, or a few hundred dollars, or a few thousand, will get relatively good interest returns, that cannot be received any other way. Bigger institutions would not offer such a high interest rate on such a small amount of money. Banks for instance are currently paying about 5% on small savings accounts. Credit Unions are often paying less than banks. These latter offer the inducement of easy character loans, based on your ability to save book record. The fairly new local Mutual Fund, while paying a good rate for a small investor, at 7%, probably works the interest spread? By giving you the small guy 7%, they charge a 2% fee which works out as a profitable management fee for pooled small savings of around $30 million, which they in turn can invest in Bank CDís returning 9%, or Debenture Bonds of BEL, returning 10%. The profit and the management fee is in the spread between interest rates, less operating costs in a private for profit venture like this They need to pool a lot of small savings up into the hundred million dollar mark, to make it worthwhile. At the moment, I figured the five investors or so, owning the Mutual Fund are earning, after costs, about $20,000 a year personally each, on the $30 million value of the current portfolio. The Mutual Fund is offering instant redemptions, or your money back like a savings bank. That could hurt them, if they had a run on the Mutual Fund, for instantaneous customer cash for any reason. As I found to my own consternation years ago. As they usually have to invest and lock up your money in 3 month, six month, or one year periods with a bank certificate of deposit, and wouldnít have the cash to give back investors, if there was a run on the need of money in a hurry, for some reason, like a Hurricane damage situation to rebuild. The redemption rate, is the bug bear problem of Mutual Funds, whatever they invest in. To compete they need riskier investments.
The BEL Series Four, Debentures seeking your loan money in $100 dollar increments is interesting. At 10% the interest rate is fabulous for such low cash investments. Why would they do it and how do they make a profit? Well a guaranteed 15 % PROFIT company, foreign owned, would prefer to take their money offshore in foreign exchange in case of unexpected inflation, or devaluation. They want the money for new investments in other countries, yachts, vacations and such things. You still, as a utility need local funny money currency for operating costs. Since they have a guaranteed 15 % government profit from our government, if they borrow from you locally and give you a fabulous rich 10% interest rate. I would guess they would still make a 150 % profit on your money, or an add on of 15 % government guaranteed profit. For your 10 % cash investment loan in their debenture, they would earn a gross 25% by the add on government guaranteed 15 % profit in a monopoly. If not that; then at the very least they still would have an excess profit of 15 %, or a net 5 % profit, on top of the borrowing from you. The only danger to a debenture like this; is a stupid Cabinet, full of politicians that run up a huge government debt, that increases RISK by causing inflation, or devaluation on our funny money. Like all money machines, they will be working the interest rate SPREAD, however they do it. The catch in the Debenture Bond, is the time required to lock in your investment and the newspaper doesnít state that, though the prospectus must. If it is a one year BOND, or less, then it is competitive with the banks and beats them out. Most banks locally offer three month, six month and one year Certificate of Deposits to do something similar in the interest rate spread. This is called liquidity, or the time you must wait to get your money back if you need it. Can the local new Mutual Fund invest in a one year certificate of deposit, or a Debenture Bond? The answer would be no! The RISK is too high and the liquidity insufficient. Redemptions are instant demand immediately and money locked into one year, either a debenture bond, or a certificate of deposit, would have to be borrowed at ruinous rates to be able to otherwise survive a rush on the Fund. Banks are currently charging 12 to 13% interest on loans and we have seen, neither our Finance Minister of the Treasury, Said Musa, or his co-signer the Attorney General, Fonseca, read the bank loan agreement, or even bothered, or cared to read the loan agreement; that gave a local bank the right to increase the interest rate due on the UHI loan from 13% to 17% interest, according to the newspapers, should they be in default of monthly payments. A fairly safe bet on the bankís part, as they expected a default and got it and have since initiated the increase on interest to 17%. A margin of a whopping interest raise, of a huge 4% interest. Since it was YOUR tax money, the politicians obviously didnít care anyway, would be the conclusion? If they were investing their OWN money, they would have cared. There are many money machines in Belize and they work on the interest rate spread.
It takes a lot of money to make money, on money this way. You have to balance the interest rate spread, against redemptions, or liquidity ( right to cash in time period ), against RISK. Can you make a money machine in Belize? Of course! It takes a lot of money to make a low risk, fairly safe, money machine worthwhile as a business. About a $100 million. Getting the investment is the trick! Usually, a money machine owner earns 2% of the total earned. This is the management fee. You also have to earn more interest on the interest rate spreads, to pay your operating costs, of about 1% to 2% and then return a profit to your investors. It is the interest rate SPREAD versus the RISK that either builds a solid based money machine, balanced by LIQUIDITY, or REDEMPTION rates. If you canít budget money, donít even try. The operating costs of seeking investors and associated book keeping is your biggest budget cost.
Neither of our major political parties have yet learned to set our government up, on a budget system yet, as an example. Their money machine is different, based on taxing YOU.
One of the most secretive money machines in Belize is run by your government through Central Bank. Over fifteen years, I have tried and tried again to get the last quarterly bid statistics on the Treasury Bills and Notes advertised in the newspapers. Time and again, I have been told these are only for BANKS and not intended for the general public. Nobody ever answers the question. I have never been able to get the interest rate statistics on these bids out of any Central Bank individual. A highly secretive operation, one presumes is reserved on a limited capacity amount of government borrowing, which is probably fully subscribed by a politically owned, or connected bank? Who wins these bids, at what rates is still a mystery after 15 years of trying. A month or so ago, I was fluffed off, by being told they were on their Central Bank web page. Which web page didnít work. Iíd like Channel 7 to look into this and publish their results of investigative reporting. I was going to do a comparison here, on Belize Money Machines, but was unable to include Treasury bills and Notes in this article. From the secrecy and evasiveness, these latter seem to be an exclusive over subscribed, political private money making machine, using private banks? That would be my guess? I canít see any other reason for such secrecy and evasiveness by Central Bank employees?