The audited accounts for CMMB for 2006, 2007, 2008 and 2009 were obtained from the SEC. They allow a view of CMMB’s financial affairs for the 5-year period 2005 to 2009. I have included some selected ratios drawn from those accounts.
There has been a challenge to my assertion that CMMB failed, reaching to the stage of my having been requested to provide the Business Guardian with an indemnity against possible legal costs and damages. I was unable to persuade the Editor to accept my conclusions and agreed alterations to my prior column on this matter. Regular readers will know that my concern was triggered by reports in the pages of the Business Guardian that some of the key people in CMMB have now opened a new investment house, KSBM.
Since 22nd October 2010 I have been trying to obtain the official Terms of Reference for the Colman Inquiry into this financial fiasco, but those several enquiries were fruitless until the Secretary to the Inquiry faxed me the requested document on the first working day of the New Year. Thank you. The Terms of Reference were published in the Trinidad and Tobago Gazette of 17th November 2010 – No. 144 in Volume 49. Here is the first sentence in the second paragraph, for any of those who still have doubts –
…And whereas the President on the advice of the Cabinet has deemed it advisable and for the public welfare that a Commissioner be appointed to enquire into the failure of CL Financial Limited, Colonial Life Insurance Company (Trinidad) Limited, CLICO Investment Bank Limited, British American Insurance Company (Trinidad) Limited, Caribbean Money Market Brokers Limited and the Hindu Credit Union Cooperative Society Limited with a view to ascertaining why such events occurred…
So there we have it – the President on the advice of the Cabinet – but there is more, if anybody needs more signs of a failure. The Central Bank issued a Press Release on the day of the Bailout – 30th January 2009. The first objective stated in that document is –
- To stem the increasingly serious liquidity pressures being faced by the financial services companies within the Group – i.e. CLICO Insurance Company Limited (CLICO), CLICO Investment Bank (CIB), British American Insurance Company Limited (BAICO) and Caribbean Money Market Brokers Limited (CMMB)…
I am not going to spend any more time stating the obvious, but it would be interesting for the other side to give a public opinion on all this. Can anyone seriously claim that CMMB did not fail? Well, I guess we will have to wait and see. The sheer boldfaced attitude of certain people knows no bounds and with the Carnival Season starting-up, anything could play.
In my view, there are substantive issues beyond the obvious failure and those would include –
- CMMB’s role in the CL Financial group. In the 5 years I examined, there was a very low rate of profit earned by CMMB.
Year 2005 2006 2007 2008 2009 Return on Assets 1.22% 0.97% 0.0015% 0.0043% 0.0094%
Given the very low profits earned during CMMB’s operations, there are two inescapable questions arising – What is the real reason for the CL Financial group to hold onto this company? and What was in it for them?
It was certainly useful for the parent company to be able to secure advances of $1.8Bn from CMMB on what were no doubt good terms. So CMMB was a useful subsidiary for CL Financial to be able to draw on when there was the need.
- The JMMB (Jamaica Money Market Brokers) element. But then also we need to consider the sidebar item on the acquisition by CL Financial of the JMMB block of shares in October 2008. What could have been the rationale for CL Financial to spend $262M on securing its ownership of a company that was about to fail? No doubt that would have been a period of considerable cash-flow pressure within CL Financial itself, so it does seem to be a bizarre decision. Given all of those elements, why would CLF pay such high multiples to buy the remaining shares in a failing subsidiary? This is one of those intrigues which makes me wonder whether there was more in the mortar than the pestle, so to speak. Given that the purchase of the JMMB shareholding was only 3 months before Duprey wrote that fateful letter requesting financial assistance,what was CLF’s rationale? Could there have been a prior agreement as to the price to be paid for those shares? Was a valuation of those shares ever done? If so, by whom, on what assumptions and with what result?It seems that a huge sum of money (over $260M, by my calculations) was drawn out of the collapsing parent company, on what was virtually the brink of the meltdown, to buy the remaining shares in yet another collapsing company. It is staggering to conceive of a situation in which a financial company could spend over $260M without such elementary due diligence, which is why this aspect is an important one. At the very least, the quality of judgment of the CL Financial chiefs seems suspect. Could it be that the reporting systems of the group were so poor as to be unable to foresee the impending collapse at either the group or CMMB level?
- The First Citizens’ Bank purchase. The FCB price of $1.00 shows the evaporation of CMMB’s shareholders’ capital. The apparent request by FCB’s auditors for a specific confirmation of the State guarantee is important since it is reasonable to assume that PwC, also CL Financial’s auditor, would have been aware of the fragility of the imputed security for those massive advances.
Kalicharan’s explanation. The former CMMB Managing Director, Ramcharan Kalicharan gave a version of events in these pages on 16th December 2010? He was trying to contend that the liquidity pressure on CMMB developed as a result of the bailout of the parent company. Of course the fact that they were both in trouble at the same time – hence their being mentioned repeatedly at the time of the bailout – lends the lie to that one.
- Leveraging. One of the features of the failed firms elsewhere has been the extent to which they were over-leveraged i.e. the amount of capital they had borrowed greatly outweighed the amount the firm’s owners had invested from their own money. The conventional thinking is that an over-leveraged firm would be likely to act in a more risky fashion if a smaller proportion of the partners’ own money is likely to be lost. Some of the findings of the ongoing global meltdown are causing those formerly settled principles to be re-examined. In the case of the Wall Street firms which were bailed out in the US crisis, the leverage ratios were in the 35 to 40 times range. That means that those firms had borrowed 35 to 40 times more than the capital they had committed out of the shareholders’ funds.
Year 2005 2006 2007 2008 2009 Leverage (Gearing ratio) 28.7 20.1 36.4 34.5 240.8
So, the CMMB gearing ratio exceeded the 20-times range since 2005, with that startling 240-times as at the date of collapse. It seems that CMMB was run far over the ‘redline’ for a substantial period and what is worse, that this steep level of risk was disclosed in their filed audited accounts. Which leads right into the second point, which is, of course, the role of the regulators in all this. To return to the issue I raised in writing about AIC a few months ago, this speaks to the question of the proper role of the regulators of our financial system. Are they to fulfill a virtually clerical function, to ensure that statements and accounts are filed on time and in the correct fashion? Or do they have a more pro-active and forward-looking role and responsibility in identifying firms which may have all their filings in order but, by virtue of their actual behaviour in the market, may be posing serious risks to the entire system?
- The medium-term implications for FCB. Finally, when I consider the levels of volatility and the cost of ‘fixing-up’ CMMB for FCB to take it, this,together with FCB’s exposure to Home Construction Limited (as evidenced in FCB’s 2009 Annual Report in which they disclosed that 9% of their entire loan portfolio (an amount in excess of $1.0BN) had been advanced in a single instrument at favourable rates to Home Construction Limited) would have the combined effect of the FCB group itself now being significantly exposed, seemingly more so than other banks, to an element of CL Financial risk.
SIDEBAR: Jamaica Money Market Brokers (JMMB)
JMMB and CL Financial established CMMB in 1999. In October 2008, CL Financial purchased JMMB’s 45% share in CMMB at a price of $41.37M USD ($262.7M TTD). That equates to a value for the entire enterprise in the range of $580M and given that CMMB’s Total Profit in 2008 was $35M, that is an earnings multiplier in excess of 16-times. See – http://jamaica-gleaner.com/gleaner/20081015/business/business1.html