Committee Reports > List of Committees > Dáil > 1974 > Committee of Public Accounts > Report - Appropriation Accounts 1970 - 1971

APPENDIX 8.

SAVINGS BANK FUND DEPOSIT ACCOUNT—STOCK TRANSACTIONS

Mr. C. H. Murray,

Accounting Officer,

Department of Finance.

A Chara,

The Committee of Public Accounts has considered the evidence it received on 18th October, 1973 in connection with Paragraph 11 of the Report of the Comptroller and Auditor General on the Appropriation Accounts for 1970-71.

The Committee is now of the opinion that the matter raised should not be left in abeyance but that further evidence on it should be taken before the Committee prepares its Report.

I am to inform you, accordingly, that the Committee may wish to call you again when it has disposed of the remaining accounts for 1970-71. This would not be before the end of November. In the meantime the Committee would be obliged if you would supply a memorandum setting out (1) the nature of the transaction between the Savings Bank Fund Deposit Account and the assurance company, (2) the stocks exchanged and the amounts involved (nominal and cash value), (3) the stock exchange quotations for the stocks on the date of and for some weeks— say five or six—before and after the transaction, (4) with regard to the particular stocks taken over from the assurance company, the amount of holdings of such stocks already in other Government funds at the time of the exchange and the extent of sales of the stocks from the date of the transaction up to the date of the launching of the new loan i.e. 9¼% National Loan—1989-1994, (5) any documentation that exists in connection with the transaction e.g. formal offer and acceptance of the terms, (6) details of any other instances of the purchase of stock by direct negotiation with the vendor and (7) any other relevant information.

F. GEOGHEGAN,

Cléireach an Choiste,

An Coiste um Chuntais Phoiblí.

30 Deireadh Fómhair, 1973.

Mr. F. Geoghegan,

Cléireach an Choiste um Chuntais Phoiblí,

Teach Laighean,

Baile Átha Cliath 2.

A Chara,

Thank you for your letter of 30 Deireadh Fómhair, 1973, regarding paragraph 11 of the report of the Comptroller and Auditor General on the Appropriation Accounts for 1970-71.

The information requested is enclosed herewith.

An Roinn Airgeadais.

30 Samhain, 1973.

QUERIES BY PUBLIC ACCOUNTS COMMITTEE IN LETTER OF 30/10/’73

1. The transaction was basically a swop of securities, so calculated as to incur very little net cash transfer. From this Department’s viewpoint it was carried through with a view to obtaining particular stocks for departmental funds so that they could be used to activate the market in these stocks. This was necessary because, on the basis of options contained in these stocks to convert into new National Loans, these stocks were undervalued on the market. There was also a more general policy of obtaining adequate stocks to activate the gilt edged market generally, and this was one of the first steps in this direction.

2. Purchased by Savings Bank Fund on 13 August, 1969:

Sold by the Fund on 13 August, 1969:

3. 7½% Development Stock 1988/93

Quotation 6/6/69 to 14/9/69 was 96¼ 16/9/69—98; 17/9/69—99.

7½% National Loan 1981/86

Quotation 6/6/69 to 11/9/69 was 95⅞

12/9/69—95⅝; 15/9/69—95⅜; 16/9/69—97½; 17/9/69—100.

6½% Exchequer Stock 2000-2005

6/6/69—75; 9/6/69—74¾; 10/6/69—74⅜; 12/6/69 to 17/6/69—74¼; 18/6/69—74; 19/6/69 to 2/7/69—73¾; 3/7/69 to 23/7/69—73⅝; 24/7/69 to 8/8/69—73⅛; 11/8/69 to 13/8/69—72⅞; 14/8/69 to 13/11/69—72⅜.

7% National Loan 1987/92

6/6/69—81¾; 9/6/69—81½; 10/6/69—81⅛; 12/6/69 to 17/6/69—81; 18/6/69 to 2/7/69—80⅞; 3/7/69 to 23/7/69—80¾; 24/7/69 to 8/8/69—80¼; 11/8/69 to 13/8/69— 80; 14/8/69 to 23/9/69—79½; 25/9/69 to 7/11/69—79¾; 10/11/69—77½ (ex. divd.).

4. Holdings of Stocks as at 13/8/69.

No holdings of the purchased stock were in the Savings Bank Fund. There was £222,000 of 7½% Development Stock 1988/93 in the Supplementary Unemployment Fund; £2 million in the Occupational Injuries Fund and £550,000 in the Redundancy Fund Investment Account. Holdings of these funds are not used for market purposes since, compared with the Savings Bank Fund, they are subject to a number of constraints.

5. The deal, as is normal, was arranged over the ‘phone. The Irish Life letter of confirmation is attached.

6. In the year immediately prior to the transaction now under discussion there were some 15 large transactions between Post Office Savings Bank Account and others which were effected outside the mechanism of the Stock Exchange. The amounts involved totalled some £6 million. In the months following this transaction there were at least 4 transactions amounting to £26 million (including the direct sale to Associated Banks of £25 million of stocks).

7. Attached is a detailed note on the transactions under discussion.

Activating Market.

In 1967 the Central Bank of Ireland set up a committee to study the desirability of having an active money market in Ireland. That Committee whose report was published in 1969 concluded that at that time the market in Government stocks was very weak because of the small scale of institutional involvement in it. Following this report policy was framed towards the development of a more active gilt edged market with a view to:—

(a) Increasing the amount of Government finance coming from the market;

(b) Repatriating funds which were invested in the more active British market;

(c) Improving conditions for investors by making stocks more marketable;

(d) Generally drawing all the other benefits which accrue to the economy through having a money market and an active secondary bond market.

The net result of this policy has been that overall sales of Government securities (including National Loan issues) have doubled between 1968/69 and 1972/73. The turnover in Government Stocks on the secondary market has increased from £38 million in 1967 to about £300 million in the current year.

Use of P.O.S.B.

The method adopted for activating the market was based on purchases and sales of securities through the Government Stockbroker on the market. Prior to this, Government stocks were purchased and sold from time to time on behalf of certain funds under the control of the Minister for Finance. It was considered appropriate that one of these funds should be utilised in the proposed enlargement of market activity.

The Post Office Savings Bank fund appeared the most appropriate for the following reasons:—

(a) The rate of interest payable to Post Office savers is based on economic factors and relative domestic interest rates, and is unaffected by investment activity within the fund;

(b) The fund is guaranteed by the Exchequer; there is consequently no risk to investors’ holdings.

Market activity was thus generated by purchases and sales from the Post Office Savings Bank Fund, and, though these transactions were rarely detrimental to the Fund, they were done in the knowledge that any risk being incurred would have no effect whatever on the saver. The benefits which accrued generally—such as the increase in market value of all stocks because of increased marketability—far outweighed any disadvantages to the Fund.

Shortage of Stocks

A difficulty which arose for some years, however, was the shortage of certain stocks which were needed in order to proceed with declared policy. Efforts were generally made to purchase such stocks from large holders.

Reasons for this transaction.

The transaction referred to by the Comptroller and Auditor General was such a transaction. It was carried through in August 1969 with the specific purpose of buying particular stocks. Besides the general purpose of activating the market there was a specific purpose in buying these stocks at just this time. Preparations were in train for the issue of an autumn National Loan. It was apparent that certain stocks which would carry exchange options into the new issue were priced at too low a level on the market, and that persons who acquired the stock with a view to conversion stood to make a handsome profit. The relatively low holdings of these stocks in Departmental Funds at the time made it difficult to activate the market with a view to raising the price to a more realistic level. It was accordingly decided to take steps to acquire supplies of these stocks and, as Irish Life Assurance Company was known to be a large holder, arrangements were made to acquire some stock from that company. As will be shown the main object of the exercise (activating the market) was successfully carried through.

The details of the transaction were as follows:—

Details of Transaction.

The Comptroller and Auditor General has pointed out that:

(a) this deal was not carried out at prices prevailing in the Stock Exchange;

(b) that there was consequently an annual loss of income (£86,000) to the fund.

On the first point it appears that comparison was made with prices shown on the Stock Exchange Official List. This comparison is subject to a number of reservations. The prices listed are normally the opening prices at each session. Transactions continue during the course of the day and in fact for some hours after the floor of the Exchange has closed. Prices of all these subsequent deals do not appear on the list. Moreover, the prices quoted are for normal transactions; it was not unusual at that time that very large deals, which by their very size warrant variation in prices, would not be marked up because of their unrepresentative nature. In this particular case, since very large amounts of particular stocks were being purchased, it would not be unusual to have to pay marginally more than the going rate. In fact, only the true worth of the stock was paid.

Comparison not valid.

On point (b) the calculation showing a loss appears to have been arrived at by comparing the annual income from the stocks sold (641,000) and the stocks purchased (£555,000), giving an annual reduction of £86,000 in interest accruing to the fund. The normal commercial manner for evaluating such transactions is by comparison of yield to redemption, which takes account of capital appreciation. On this basis, taking account of the conversion factor mentioned above, the transaction was a sound one.

Capital appreciation of stocks in short-term.

Even based on short-term gains, the transaction was a sound one. The prices of the stocks involved changed on the Stock Exchange as follows in the month immediately following the transaction mentioned:—

There was, therefore, a capital appreciation of £99,000 on these purchases.

A capital depreciation of £23,625 was, therefore, obviated by these sales. The net result, therefore, was that the market value of the Fund’s holdings was greater by £122,625 as compared with its position if the transaction had not taken place.

New Tranches.

The circumstances which gave rise to these transactions i.e. shortage of stocks, is unlikely to arise again. Since August 1971 with the agreement of the Stock Exchange the Minister for Finance embarked on a policy of issuing new tranches of existing stocks in order to avoid shortages on the market.

Enclosure

Irish Life Assurance Company Ltd.

irish life building

mespil road - dublin 4

telephone 65811

August 9, 1969

Confidential

For attention of Mr. M. F. O’Reilly.

Department of Finance,

Upper Merrion Street,

Dublin 2.

Dear Sir,

We write to confirm that we have sold to you—

£5 million 7½% Development Stock 1988/93 @ 97½

£2,400,000 7½% National Loan 1981/86 @ 99

and bought—

£4 million 6½% Exchequer Stock 2000/05 @ 72⅝

£5,450,000 7% National Loan 1987/92 @ 79¾.

Irish Life Assurance Company Ltd.

Mr. F. Geoghegan,

Cléireach an Choiste um Chuntais PhoiblÍ,

Teach Laighean,

Baile Átha Cliath 2.

A Chara,

I wish to draw your attention to an inaccuracy which appeared in my reply of 30 November to the Committee.

It has come to my notice on further checking of the figures that the Post Office Savings Bank Fund had holdings of £2.1 million of the 7½% Development Stock 1988/93 and £1.4 million of the 7½% National Loan 1981/86 before the transaction under discussion took place.

This does not alter the main arguments made that the transaction was justified because

(a) the stock was needed in order to activate the market generally;

(b) the particular stocks purchased were undervalued on the market and this needed to be rectified;

(c) the prices negotiated were sound when measured in a commercial manner by reference to their exchange value into the prospective National Loan.

An Roinn Airgeadais.

11 Nollaig, 1973.