On Friday 12^th June, the Acting Minister of Finance, Conrad Enill, signed a new agreement with the CL Financial chiefs.  That agreement has not yet been published, so we have to rely on the Ministry’s press release and news reports. A further new spurt of information has been the story in the Sunday Express of 21^st June, which detailed huge campaign donations by CL Financial to the ruling PNM. We have also seen a strong denial from PNM Treasurer and Minister in the Ministry of Finance, Mariano Browne, that CL Financial enjoys any undue influence over government policy as a result of those donations.

Those events form the background to this week’s column –

Change of Course

This new agreement has been presented to us as a supplement to the original one, intended to facilitate its implementation.  The Ministry’s press release informs us that “….This new agreement is designed to give substance to the Memorandum of Understanding (MOU) of January 30^th 2009…“  Having considered the available material, I have come to view this new agreement as a complete change of course from that outlined in the original MoU.    The original MoU spoke to the crisis at 4 of CL Financial’s subsidiaries – CLICO, Clico Investment Bank, British-American Insurance and Caribbean Money Market Brokers.  The process outlined was one of immediate State financial support of those companies, with CL Financial to pay back the taxpayers’ funds advanced by agreeing to sell their best assets.  Those assets included majority shareholdings in Republic Bank Limited and Methanol Holdings Trinidad Limited.  The stated goal at that point was to stabilize the entire financial system against the loss of confidence which would surely have followed a collapse of those companies.

The striking features of the new agreement are –

• New CL Financial Board – The new agreement installs a new Board of Directors for CLF: stated to comprise 4 Directors nominated by the State and 3 nominated by CL Financial.  Michael Carballo is CL Financial’s Group Financial Director and has been retained as a Board Director under the new agreement.  Carballo has been reported as stating that the CL Financial group will be returned to the control of its shareholders after a maximum of 3 years.  The State is now taking over the strategic management of the CL Financial Group.  That was never part of the original MoU.

• Asset Sales – The Ministry’s press release also states that– “…The MOU imposes requirements on CL Financial to sell its assets in order to repay GORTT for advances and other costs arising from closure of CIB and the restructuring of CLICO and BAT. The achievement of this objective requires continuing goodwill, cooperation and participation by CLF over a period of several years since there is no intention of engaging in a fire sale of CLF assets…”  The emphasis is mine.  For some time now I have been critical of the obscure official rationale for deferring the asset sale agreed to in the original MoU.  I have gone so far as to label that rationale as being a stupefying one.  Here is official confirmation that that is the new policy.  No attempt was made in this rounds to give a rationale for deferring the sale of these assets.  Dry so.  That was never part of the original MoU.

• Shareholder Value – The new agreement seems to have, as one of its central features, a mission to rescue the CL Financial group on behalf of its shareholders.  Readers should note that CL Financial has only 325 shareholders.  Angostura Ltd. is an important part of the CL Financial group and their Notice to Shareholders published on Saturday 27^th June is instructive – “…Shareholders should also note that on June 12^th 2009, a formal agreement was signed between CLF and the Government of Trinidad & Tobago (GORTT), whereby a new Board has been constituted at CLF.  The mandate of the new Board, empowered by the GORTT will be to restructure the debts of the CLF group to ensure that they are properly satisfied and also that the Parent company and subsidiaries are placed on a proper and sustainable path to achieve growth and value optimization…”  The restoration of shareholder value was never part of the 30^th January MoU.

Entirely new objectives are being presented as ‘giving substance to’ the original MoU.  The examples cited here are enough and one expects to find more food for thought when the document is published.  The 30^th January MoU was published on the Finance Ministry’s website on 9^th April – about 10 weeks after its execution – which means that this second agreement is not yet, on that basis, overdue.  However, given the increased burdens being imposed on the Treasury and the silence on critical aspects of this unfolding fiasco, I am calling for it to be published without delay.

Let us re-cap how we got here, so that we can understand the moment.

Our Treasury was originally pledged to bail-out savers in 4 troubled finance houses.  The use of public funds to stabilize the financial system by ensuring that depositors and policyholders were safeguarded was itself questionable on grounds of moral hazard, but at least the Treasury was to be repaid by sale of the assets held by the parent company.

We have now learnt several new things –

1. CLF assets, specifically pledged in the original MoU, were already pledged elsewhere.
2. CLF, having agreed not to sell or pledge any further assets, agreed to sell assets to German investors, less than one week later.
3. CLF, having written on 13^th January for urgent financial assistance, issued dividend cheques to shareholders 3 days later.
4. The Minister of Finance is herself a shareholder in CLF.
5. The CLF group is a major donor to the ruling PNM, even during those years when the CLICO Statutory Fund was in deficit.

We are now being told that the government is to restore shareholder value.  Cool so.  As yet, we have no report from the KPMG team or the Bob Lindquist team examining the books.  No attempt at explanation or providing background information.  Our Treasury has now been pledged to assist the 325 shareholders of the CL Financial group.

Now that the State is in control of the CL Financial board will they now be obliged to submit the affidavit identifying all their assets?  Will the ongoing Court case between CL Financial and the Central Bank be abandoned, now that shareholder and taxpayer interests are so completely aligned?

The Governor of the Central Bank, speaking at the press conference on 30^th January made a penetrating point – “…In the Bank’s view however, the current financial difficulties being faced by CIB and Clico have more to do with…excessive related-party transactions which carry significant contagion risks …”

‘Excessive related-party transactions…’ – I could not agree more, Governor.