Payback Time – Moral Hazard, Part II

There is a powerful and circular irony in the entire CL Financial fiasco.  That irony is in the manner in which risk and its twin brother, reward, were dealt with.  CLICO and British-American built an impressive reputation as safe companies with which one could invest for an uncertain future.  That reputation was such that many people in our region held the greater part of their investments with those companies.  The irony, which is now clear for us to see, is that those companies did not do an effective job of managing their risks.  Hence the disaster we are facing.

According to CL Financial’s 2007 annual report, the group held cash or cash equivalents in excess of $8.7Bn at the end of 2007.  That huge sum of money was depleted to the extent that the CLF Group had to write on 13th January 2009 seeking a massive bailout.

The same annual report also gives cause to question the manner in which the global meltdown has been blamed for the fiasco.  With the audited accounts only being completed in late November 2008, the annual report must have been finalised after that date.  The preface to the CLF 2007 annual report, at page 1 and entitled ‘The Next Wave of Growth’, refers to the meltdown like this –

  • “These are foreboding financial times – for Trinidad and Tobago, for the world. At C L Financial we are cautious but unafraid. Leaders in government and business sectors throughout the globe are taking joint action to mitigate this economic crisis, and so are we.”
  • “No organisation will be immune from the turbulence but our widespread assets and market penetration are the best shield against these uncertain conditions.”
  • “We have confidence in our ability to not only navigate this financial storm but to find fresh and profitable opportunities within it.”

Contrast those statements, finalized in the last six weeks of 2008, with the written appeal to the State for urgent help in the first fortnight of 2009.  Maybe truth really is stranger than fiction after all.

We are now getting reports that some CLF directors have resigned in the last month or so.  In addition, there was a story in another newspaper which detailed the high salary and bonuses (exceeding $2.5M US annually) paid to the CLF General Counsel/Corporate Secretary.  That story also stated that she retired on 21st April and was making claims for terminal payments of some $5.0M US.  According to the annual report, that person was the third highest officer in CLF.  I have not seen any published correction to or denial of that story.  She is also the officer who signed the Director’s (sic) Report in the CLF 2007 annual report, which declared a dividend of $3.00 per share.  Do these post-fiasco resignations and retirements exonerate directors and officers from their liabilities in this matter?

The MoU of 30th January specifies, at clause 20, that there are to be no increases in salary, payment of bonuses or share options without the government’s prior approval.  That is good, but it would be interesting to know what salaries and bonuses were paid to the CLF chiefs since the beginning of 2008.  That is a most important question, since it is the period in which the group went from a position of reported strength to one of virtual insolvency.  These directors and officers were in charge of the group’s strategy and operations in that period.  How were they rewarded?  How much of those people’s wealth is actually invested in the CLF group?

The issue is one of transparency, but that is a plastic concept here.  It is interesting to note that Royal Bank of Canada, which purchased RBTT last year, has a totally transparent policy on compensation.  I am right now looking at RBC’s website (http://www.rbc.com/investorrelations/pdf/2009englishproxy.pdf) on which they have displayed the detailed salaries of its directors and principal officers, with the rationale.  If we are going to bailout this fiasco, we need to know what were the rewards earned by the CLF chiefs.

We have seen bold moves being made in the USA to recover bonuses from executives of failed financial giants which are now seeking federal bailout.  Does our government intend to take firm and fair actions to recover those monies?

We also need to consider the role of professional standards in all this, since those exist to provide assurance to stakeholders that they are looked after in a complex world.  Not every question is for the court, since all the responsible professionals – accountants, attorneys and actuaries – belong to organizations with disciplinary codes.  Those codes can be severe in dealing with those who bring their profession into disrepute.  It is absolutely no defense for a professional to say that they were just following client’s instructions, if those instructions are in contravention of one’s professional codes of practice.  None.  Is the State intent on making the necessary reports?

This episode has important lessons for our country at a most delicate time of economic downturn and growing social unrest.  What lesson is this sending to our less-well-off citizens and our young people?  Is it going to be a straight case of business as usual or do we have the belly to make a fresh start?

SIDEBAR

The Governor of the Central Bank gave a press update on the CL Financial bailout on 13th February at which he told us that the financial position of CLICO was much worse than had been originally envisaged.  At that time, the Governor promised that that update was the first of a series.  There have been several incidental releases of information on the issue, most recently at the Monetary Policy Review press conference.  Since then it is fair to say that the entire position seems much worse than we had thought and another specific CL Financial update is now overdue, Governor.

Some of the matters I would like to propose for explanation at the next press briefing are –

  1. CLF’s letter – The CLF letter of 13th January has not been published.  Why not?
  2. CLF Dividends – Did the State negotiators know that CLF paid a dividend after writing to seek financial assistance?  If no, why not?  If yes, why not seek recovery of those dividends as a condition of the MoU?
  3. At what point did the State learn that the CLF assets pledged in the MoU had already been pledged elsewhere?
  4. When is the disposal of CLF assets, agreed in the MoU, to start?
  5. In light of the Governor’s own comments, when can we expect him to make a finding as to the CLF directors’ and officers’ being ‘fit and proper’ under Central Bank guidelines?
  6. What progress is being made in finding the $5.0Bn missing from CLICO’s statutory fund, as stated by their newly-appointed CEO?  Are the CLF chiefs, with whom you are in negotiation, being co-operative in this regard?
  7. The Court proceedings in relation to the Carnival Sunday injunction obtained by the Central Bank against CL Financial are being held in closed session.  Why is there the need for secrecy/privacy on these issues?  Who applied to the Court for the hearings to be closed to the public?
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