Wednesday, 24 July 2013

What if CPF Board files for bankruptcy?

[Individual lapses can happen in an organization despite safeguards and processes to prevent wrongdoing.]

Is it possible? What will be the consequence?

In business world, in investment and even a wrong purchase of property, one will get into trouble and face huge financial difficulties. So, noting is impossible, especially when you see a weaker and less credible leader taking over an important institution likes Temasek Holdings or gaps in internal control and staff competencies at National Research Foundation.

Why is it possible? CPF Board buys bonds from the government and in many ways these bonds are guaranteed by the government.  There is less concern about this link. But the next link about investment is a big concern to many Singaporeans and up till today, CPF members still worry about the CPF Board has no money to pay members.

Why? It is because of the investment and investment risk that the bond monies are being used and invested.  The government entrusts these monies to Temasek Holdings and GIC Pte Ltd to invest.   If they are unable to generate income and make punctual and due payments back to the government, the government will have to default the loans (bonds).

Of course, the government may use the huge foreign reserve to pay CPF Board under special circumstance but the use of reserve is subject to President’s second key.  Of course, the government can quietly use the reserve without informing the President. 

So, there is always a risk that the government may dishonour payments to CPF Board when all the bad timings plus all the bad and wrong investments come together. If you recall the collapse of Barings Bank in 1995:
"Barings' collapse was due to the unauthorised and ultimately catastrophic activities of, it appears, one individual (Leeson) that went undetected as a consequence of a failure of management and other internal controls of the most basic kind".

Comparing this with the above PMO’s statement on CPIB officer, does it look alike? Or, in the case of National Research Foundation, it is again the lack of internal control and staff competencies.

Detroit files for bankruptcy why not an institution

Detroit filing for bankruptcy protection is not a sudden event.  It is forecasted and expected due to the sharp drop in population.

(Reuters) - Detroit filed the largest municipal bankruptcy in U.S. history on Thursday, setting the stage for a costly court battle with creditors and opening a new chapter in the long struggle to revive the city that was the cradle of the American auto industry. The bankruptcy, if approved by a federal judge, would force Detroit's thousands of creditors into negotiations with the city's Emergency Manager Kevyn Orr to resolve an estimated $18.5 billion in debt that has crippled Michigan's largest city.

In fact, CPF Board may escape filing for bankruptcy if Singapore population is allowed to increase to 6.9 million. Under a big population background, the cash inflow contributed by new employees and young members will be bigger than the cash outflow of older members who reach withdrawal age or pass withdrawal age.  So, even the government defaults in loan payments temporarily, CPF Board still has sufficient cash flow to meet the withdrawal demand. 

Unfortunately, 6.9 million is a political issue which is bigger than the cash flow problem of CPF Board now.  It turns the possibility into impossible and advantages into disadvantages.

There are two impossibilities which under normal circumstance should not have happened. Firstly, it is the default of the government due to bad investment management and lack of internal control.  Secondly, without bigger and younger population, the CPF Board cannot raise enough funds internally to pay its members.     

CPF now faces a situation of no external cash flow from the government and no sufficient internal fund to pay members.

What are the consequences?
Under bankruptcy protection, cities, institutions or businesses will have an opportunity to renegotiate new terms and conditions for payments to creditors.  CPF members are the creditors and so full payments or temporary full payments are very unlikely because there are insufficient cash.

CPF Board can also request contributing members’ understand and help by raising the contribution rate to improve its cash positions.
However, it is a difficult option.  The government has always stressed that the current burdens should not be passed to the next generation.  Why should existing members help those old and retired members?  It is against the PAP’s philosophy.

The consequence of a collapse of CPF Board is unthinkable but it is no impossible.  It looks impossible but we cannot deny the risk.

Who can imagine Detroit will file for bankruptcy many years ago even they see the problems coming?

To turn the table around, to avoid CPF Board’s bankruptcy perhaps the best solution is the PAP government has to go or to be removed. 

CPF Board is the pillar of the PAP government.  If really one day CPF Board files for bankruptcy it also means the end of the PAP government. It looks so remote yet possible.

CPF monies, foreign reserve, Temasek Holdings, GIC etc. are all linked together.   Cases in CPIB, NRF, and the comments on lapses by Auditor-General all look impossible in the past but it still happens.  What are the meanings behind all these indications? 

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