The CMMB story

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  –

  1. 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 –

  1. 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.

  2. 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?
  3. 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.
  4. Ramcharan Kalicharan

    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.

  5. 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?

  6. 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

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13 thoughts on “The CMMB story

  1. Afra
    I see that you have hit the ground running for 2011. This is a very hardhitting, insightful and informative article. The financial movers and shakers of our time seem to be very adept at the game of ‘Monopoly’. We could even start our own version of this game right here in T&T.
    Great job.
    Looking forward to future postings.

  2. Afra

    Keep up the good work, I hope it leads to some kind of resolution/consequences/charges/convictions etc. However my experience with Caribbean affairs is that NOTHING will come of this issue, except a lot of investors will lose their money.

  3. Glad that you provided accounts Afra. Now we are not talking in a vacuum. The financial situation was a lot more dire than you suggest. Let’s look at the last three years. The “profit” reported on the income statement for 2007, 2008 and 2009 was $11m, $35m and $66m respectively. However, during the same time period there were $224m, $13m, and $275m respectively, of fair value losses on their investment portfolio (i.e increase in fair value reserves) that were passed through shareholders equity and did not hit the income statement (???). The presentation of these financials may be technically permissible but they are grossly misleading. The general US practice with which I am familiar is to disclose these losses on the income statement.

    These accounts suggests, to the untrained financial eye, that the company is profitable and it is not. No financial analyst can examine an investment firm’s financials and not consider all portfolio losses when calculating the profit. Portfolio losses are in the ordinary course of business for an investment firm. Therefore the aggregate “profit” for the three year period 2007-2010 is not $112m but a loss of $400m after taking into account these losses. That is why you can have an absurdity like a profit of $66m in 2008 but equity declining by $210m.

    So to sum Afra, CMMB did not have “a very low rate of profit”. They in fact incurred substantial losses. As always, keep up the good work..

    1. Thank you, Gerry,

      I am waiting to see how the ‘CMMB Supporters’ Club‘ respond to this one…

      Please spread the word and Best Wishes for 2011.

      Afra

    2. Hello Gerard,

      I have been discussing/considering that point you made on the proper treatment of the decline in the mark to market value of CMMB’s investments and it seems that shifts in those values went to reserves, not the Income Statement. For instance in 2006, that figure is shown at page 4 as $42.3M being ‘Net change in available for sale investments net of tax not recognised in the profit and loss account‘ – that figure is the shift in fair value reserve shown in the Balance Sheet, per note 15. Which means that the proper place to locate any losses accruing to that portfolio would also be in reserves.

      The overall point about the collapse of CMMB is sound, since those substantial losses eventually evaporated the Shareholders’ Equity, which of course only thickens the mystery over the motivation behind the CLF purchase of those JMMB shares.

      Thank you for joining-in again.

      Afra

      1. The point I am making Afra is that those losses did indeed go to the reserves which formed part of the calculation of shareholders equity and not the income statement. There is no substantive difference between these two accounting treatments. However, not everyone is a CPA or financial expert and this paints a misleading picture as to the company’s true profitability. To be fair to CMMB, most investment firms the world over took significant losses on their portfolio during this time period. Their problem was that they had concentrated risk in CLICO and we know what happened. Let’s put this another way, by FYE 2009, CLICO had already gone to the GOvt. What strikes you as more accurate – a FY 2009 income statement that reflects a $66m profit or a loss of $209m after the reserve.

        I have gone way in the weeds but we can both agree that accountability is in order here and that there has been a back door bailout of CMMB’s depositors also. It is amazing to me that Harnarine is the only person to come forward to defend his stewardship. Take good care Afra.

      2. Absolutely correct again, Gerard, since for a company with a $66M profit to seek a bailout is indicative of deeper issues, which manifested in the erosion of Shareholders’ Equity.

        BTW, did you see this article in yesterday’s Express – ‘Nizam should quit as PSC head, says Mayers‘…http://www.trinidadexpress.com/news/Nizam_should_quit_as_PSC_head__says_Mayers-113146574.html – in which he is quoted as saying “…the ethical thing for him to do is resign, because to whom much is given, much is expected. If we are talking about new politics and new governance and all those nice words, I think the honourable thing for him to do…”

        Are we being asked to believe that there were no signs of the impending collapse when Mayers retired on 7th December 2008?

        Thanks again for your participation in this matter.

        Afra

    3. Thanks for the Accounts, Afra. Let me first admit that I concur with the thesis that CMMB was in very dire straits and of course the released financials have shown as much.

      My attempt here is to merely introduce a bit of clarity surrounding the treatment of CMMB’c investment securities.
      CMMB adheres to IFRS as is stated clearly in the audited opinion given by PWC. Under IFRS financial assets (investment securities) have 3 main classifications based predominantly on management’s intent. These classifications are; Held-to-Maturity, Available for Sale and Held for Trading. According to IFRS, assets classified as Available for Sale securities, mainly the type used by CMMB, have the following treatment: Held at ‘Fair Value’ on the Balance Sheet with unrealised gains or losses accumulating within the equity section of the balance sheet referred to as Other Comprehensive Income (Fair Value Reserve for CMMB). Only when the accumulated gains or losses have been ‘realised’ will they then be passed through to the Income statement.

      So Gerard is right in that they are technically permissible under accounting rules. Whether they are misleading or not I think is debatable, since any financial analyst holding themselves out as such must be familiar with the rules of accounting in order to unearth the shenanigans of today’s crop of creative accountants! Be that as it may, the treatment is sound under the rules as stated before. Remember, profits are an accounting artefact because of the rules. Cash, on the other hand…

      One soon realises that their Balance Sheet is dominated by this asset type which up until 2007 was doing well (as a matter of fact they went ahead and reclassified Held-to-Maturity securities into Available for Sale securities which served to increase the size of the equity by 50%.

      What a difference a year makes! The portfolio of these securities began to collapse (much like CMMB) in value straight through to end of year March 31 2009. By this point the losses on the portfolio of these securities were so dire the Shareholders’ Equity almost evaporated dropping a precipitous 88%.

      If it did not officially ‘Collapse’ then CMMB was surely ‘Collapsing’ very fast. I agree wholeheartedly with both you, Afra, and Gerard. Transparency and Accountability are completely lacking here!

      Regards,
      Clive

      1. Clive/Cameron/Gerard/Tony,

        I remain mystified as to the motivation behind the purchase of the JMMB block of CMMB shares in October 2008.

        Of course, I laid out a couple of what seemed to me to be the most likely explanations, but any thoughts on that aspect would be appreciated.

        Afra

  4. Of interest here is how much of the “investment securities” was actually tied up in commercial purchase / investment obligations in CLF entities? There may be parallels to the problems with CIB, where hundreds of millions (if not billions) of supposed assets were in fact worthless.

  5. Afra,
    First consider that the purchase from JMMB was inclusive of the following entities; Caribbean Money Market Brokers Limited 45%, CMMB Securities Limited 45% and CMMB Barbados 50%. (JMMB 2009 Annual Report)

    And get this. Through Clico and CIB, CL Financial owns 40% of JMMB. So CLF pays US$ 41.37M for the above entities to an entity that it owns 40% of. This is very incestuous indeed!

    This is how I see it. JMMB needed the cash, and wanted to move on with its own plans to diversify (banking base) acknowledging the weakness of its business model (overly exposed to securities business). I have a strong suspicion that CLF was raping CMMB as well, if you look at the Related Party transactions (note 23,2009) – Receivables due from Shareholders. Look at the increase from 2008 to 2009. It’s almost as if CLF paid JMMB with CMMB cash. Check that the Balance Sheet cash reduces by an almost similar amount! Circa TTD 282M.

    As majority owner, CLF does have control of the cash flows of CMMB, so it’s not crazy that this could have transpired. So they buy out JMMB with CMMB cash and maintain their 40% interest in JMMB for good measure and full control of CMMB for further pillaging!

    I concede that I maybe speculating here but, with this much corporate incest and lack of transparency I am left with no choice.

    Let me know what you deduce Afra,

    Regards,
    Clive

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