CL Financial Bailout – Lessons from the Financial Crisis

This is an edited version of my address to the 4th Biennial Business Banking and Finance Conference (BBF4) held at the Trinidad Hilton from 22 to 24 June, 2011. The session I participated in was devoted to ‘Lessons from the Financial Crisis: The Resolution of Failed Entities.’ [See the acknowledgement letter from the conference convenor here.]

Thanks for the invitation to speak at this forum, it was last-minute, but welcome, since our local Institutions of Higher Learning have not spent the necessary time to explain and analyse this financial fiasco.  I have been very critical of the Institute of Business, the Institute of Social and Economic Research, the Faculties of Economics and Management and the Caribbean Centre for Money & Finance, so it is great to see you making a start on this overdue work.  It is my pleasure to participate in these proceedings.

I want to start by shifting focus to the arena of the mind and the existence of elements such as moral and ethical values, as well as social standards. In 1971 there was a famous series of psychological experiments in which selected students entered a two-week role-play as prison-guards in control of other people who were playing the role of prisoners.

That experiment was conducted at Stanford University in California and the results were that most of the prison guards adopted cruel behaviour with most of them being upset when the experiment was stopped after only six days. The entire experiment was filmed and the prisoners suffered from regular acts of wickedness, abuse and sheer perversity – one-third of the guards acted sadistically.

The Stanford Prison Experiment as it is now known, was heavily criticised as being unethical and unprofessional.  Of course the other aspect is that it re-opened the perennial discussion into the nature of things.  The nature of our nature, as it were – ‘Are we humans naturally evil and cruel?‘  The learning seems to be that well-adjusted and reasonable people can very quickly lose their moral compass in a situation with a lack of the conventional controls such as disapproval and laws.

No surprise to those familiar with history and politics, but the lesson for us in T&T is that if you let people get the idea that they can never be punished, there is virtually no limit to the rules they will break.  Asset-stripping, Bribery and Corruption can become the new norms of a governing class and that is what has happened in our country.

We have never had a strong tradition of detecting and punishing White-Collar Criminals, so if we are to make a start in terms of the resolution of failed entities, that has to be the starting-point.  We cannot reconstruct or resolve the failed entities if we do not change that aspect of our culture – the absence of consequence has to be abolished.

The absence of consequence is inimical to any development – personal, national or regional.  It is no point bringing new regulations or ‘approaches’ to this huge problem, until and unless the basic culture changes.

So that is the challenge for us – we have to change the way we think and behave around these issues of White-Collar Crime.  It is a very damaging type of crime which can affect the lives of many, many people – as we have seen in the CL Financial fiasco.  But we have to make that choice to change our culture around these issues.

The current financial disaster amounts to the greatest ever destruction of capital in peacetime – these are literally epochal events, but we do need to be careful as there is yet another big lie out there.  It suits the CL Financial chiefs to promote a version of events that has the blame attached to the Wall Street events of 2007/2008. The people promoting that version are buffoons, whose story is unable to withstand serious examination. I call it the Wall Street hoax and it is useful since it allows the CL Financial chiefs to escape the reality of their failure, to put it charitably, by blaming events way beyond their control.

Nothing could be further from the truth. We need to be very clear on the scale of this particular lie and the public mischief it represents. Even close examination of CL Financial’s 2007 audited accounts shows only tiny exposures to Wall Street  But what is worse is that the entire CL Financial pattern of behaviour and the burning question of the extent to which the CLF chiefs were ‘fit and proper’ are not new issues.  If we consider the 15 July 1996 ‘Circular Letter to Shareholders‘ issued by Republic Bank Limited under the hand of then Chairman, the late Frank Barsotti, it is all there. Fifteen years ago we knew the threat to which we were exposing this country by letting CLICO take over Republic Bank…it is 66-pages long, but very important to read – it is on my blog.

We don’t have a Wall Street problem, what we have here is a St. Vincent Street problem.  Yes, from the Central Bank (at the foot of the Street) to the Treasury (paying for the whole entire wretched bailout) to the Red House (where the real discussion has never taken place), right up to #29 – the CL Financial headquarters. Yes, is a real St. Vincent Street problem we suffering from. This is we own creation we fighting with.

The CL Financial fiasco is estimated to be costing at least ten times as much, as a proportion of GDP, as the Wall St. crisis.  Yet we still have mischief-makers who want to make misleading comparisons between the two, to justify the bailout.

A powerful parallel with the Wall Street crisis is the fact that the CL Financial fiasco was also characterized by ‘Shadow Banking’, meaning vast sums of money solicited from investors and being traded outside of the conventional regulatory umbrella.

Here are some extracts from the Financial Crisis Inquiry Commission’s Final Report (the FCIC is the US government’s official Commission of Inquiry into the Wall St crisis) –

From pg. XX (20) of the ‘Conclusions’ section –

…Within the financial system, the dangers of this debt were magnified because transparency was not required or desired. Massive, short-term borrowing, combined with obligations unseen by others in the market, heightened the chances the system could rapidly unravel. In the early part of the 20th century, we erected a series of protections—the Federal Reserve as a lender of last resort, federal deposit insurance, ample regulations—to provide a bulwark against the panics that had regularly plagued America’s banking system in the 19th century. Yet, over the past 30-plus years, we permitted the growth of a shadow banking system—opaque and laden with short-term debt—that rivaled the size of the traditional banking system. Key components of the market—for example, the multitrillion-dollar repo lending market, off-balance-sheet entities, and the use of over-the-counter derivatives—were hidden from view, without the protections we had constructed to prevent financial meltdowns. We had a 21st-century financial system with 19th-century safeguards…

Every line of that paragraph rings true to our local situation.  We are grappling with a shadow banking threat to the savings of the nation.  Our national wealth has been pledged to rescue adventurers at the very edge of the financial universe and that is what is wrong with the bailout.

I am no supporter of the Peoples’ Partnership, but what is right is right and the fact is that our Minister of Finance, Dookeran, is spot-on with this part of his analysis and action.  When Dookeran spoke in his inaugural budget speech on 8 September 2010, he took the approach of combining the assets and liabilities of both CLICO and British-American Insurance, which showed an insolvency in the order of $7.3Bn.

More to the point, the approach showed ‘traditional insurance‘ liabilities – i.e. Health, Pension and Life – of the order of $6Bn and ‘non-traditional/investment’ liabilities – i.e. EFPAs – of the order of $12Bn.

So what we are seeing is insurance companies whose non-insurance business is twice the size of their insurance portfolio and what is more, the supposedly guaranteed investment is nowhere to be found, hence the tremendous problem in repaying the EFPA holders.  That is the dilemma facing the country now and that is what Dookeran was explaining to us – a Shadow Banking arena that has grown to eclipse the core business and threaten the entire nation.

Another important part of the false discourse in all this is the promotion of the utter nonsense that there is any such thing as a ‘Guaranteed Investment’.  Absolute and complete lies.  There is no such thing and that is the fact.  Yet we have had CL Financial’s  Boards of Directors of the ‘Great & Good’ promoting that kind of deceptive dangerous nonsense.  You Investment Professionals need to find the courage of your convictions to speak-out on this smartman behaviour.

We had a product being promoted as offering twice the market rate of interest and also your entire investment is guaranteed and blah blah blah.  The Central Bank and the Supervisor of Insurance sat there and allowed that deceptive advertising to take place and it was a campaign, with thousands of letters.  A straightforward assault on good sense and the gatekeepers stood silent.

The final point we need to drive home is that, whatever the temptations, we must not lay the entire blame onto Lawrence Duprey & Andre Monteil.  It took plenty more than the main CL Financial chiefs to get us to this point.  There is a network of lawyers, accountants, agents who pretended to be financial advisers and of course, the many Board Directors.  That network is hundreds of people all of whom share a responsibility, quite probably culpability, for this crisis.

The Colman Commission has to work very hard to preserve its effectiveness.

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2 thoughts on “CL Financial Bailout – Lessons from the Financial Crisis

  1. Not once did you mention the Laws in regards to The Insurance Act.and the fact that the EFPA Policyholder are registered and approved by the laws of Trinidad and Tobago as Long Term Insurance Business Policyholders as per the Insurance Act. The EFPA Holders are in fact Policyholders or the fact that the signed agreement between the Govt. of T&T and CL/CLICO in 2009 is a Law Biding (sic?) Contract.

    All Insurance Companies doing business in Trinidad and Tobago are regulated and Monitored by the Central Bank, Supervisor of Insurance etc.(Govt),as per the Insurance ACT. (How many of you have even read the Insurance Act)

    All Policies and or plans sold by any Insurance Company has to be registered and approved by the Govt.(Central Bank, Supervisor of Insurance etc.) that includes the EFPA plans sold by CLICO.

    The Govt.even required the agents to be licensed to sell these plans.

    These Government agencies are in place to make sure that the Insurance Companies maintains the Statutory Funds, which can also include Assets to cover their liabilities which is THE DUTY of Central Bank, Supervisor of Insurance etc.(Govt) to Monitor for the PROTECTION THE POLICYHOLDERS MONEY.

    The Insurance Act of Trinidad and Tobago which is for first before all THE PROTECTION OF THE POLICYHOLDERS MONEY As per the Insurance Act. the Govt./Central Bank, The Supervisor of Insurance,etc. has a DUTY to Monitor, Audit and power to take control of any Insurance Company and its Assets that does not maintains its Statutory Funds for FIRST THE PROTECTION OF THE POLICYHOLDERS MONEY. UNLIKE FIXED DEPOSIT IN THE BANKS which are Govt. assured up to $75,000.00 per deposit.

    They the PP/Govt. since coming into power, have broken signed agreements made in 2009 between the past Govt and CLICO/CL Financial while still keeping control of CLICO/CL financial and its Assets. The PP/Govt. stated that it was an agreement made with another party, not with the PP/Govt., and stated that an agreement is nothing but a promise to quiet the fools.

    The Govt.of Trinidad and Tobago is the Govt.regardless of which party that is running the country at any given time.

    1. Hello GDJ7, whoever you really are…

      I did not refer to the Insurance Act at all and that is on purpose. The point I am advancing is that the entire bailout is an impossible and corrupt contract entered into between our government and the CL Financial group in January 2009.

      I say it is impossible because there is not enough money in our Treasury to repay all the policyholders. According to Dookeran’s figures when he read the budget on 8th September 2010, the outstanding liabilities of British-American Insurance and CLICO are of the order of $18Bn, which is almost the entire total of our Heritage & Stabilisation Fund. Although we do not have the accounts, which I will get to, it is clear to me that the CL Financial group was insolvent. Just think about it this way – Duprey & Co. must have looked upon a bailout as the very last choice. In the classic phrase, the Central/Reserve Bank is ‘the lender of last resort’. In this case that phrase is even more telling because CL Financial had control of three banks – CLICO Investment Bank, Republic Bank and Home Mortgage Bank – but yet they were still unable to avoid resorting to the Central Bank.

      On the question of the corruption in the bailout, my position is supported by the fact that when the bailout was being negotiated in the latter half of January 2009, CL Financial had already paid dividends of $3.00 per share, after writing the appeal letter to the Central Bank. What that means is that both the Minister of Finance and the CL Financial team negotiating the bailout knew of that blatant illegal act. We (the taxpayer) ended-up with a bailout which was silent on the dividends – those should have been clawed-back at the very minimum – and also extremely deceptive in pledging to the State, certain major assets which had already been pledged elsewhere – please note that this is according to the very same Governor of the Central Bank. The burning questions for me are whether the Minister of Finance, Karen Nunez-Tesheira, properly briefed her Cabinet colleagues and the negotiating team. You see? But all that will be forced into the light in the Colman Commission.

      Those are just some of the reasons for my having labelled the CL Financial bailout as the most corrupt single act in our entire history. You can be sure that there is plenty more to come out in the Commission of Enquiry and it is unlikely that any of those facts will increase confidence in the bailout and its validity.

      I think Dookeran was right to halt the bailout for review, if only because of the immense strain it put onto our Treasury. His cause was just, seeing that his first duty as Finance Minister is to the wider national cause, but he has cast an unwelcome doubt by his failure to either publish the accounts or explain the delay.

      Even worse, there has been no clear official statement that the bailout itself is a corrupt contract which cannot stand. The closest we had was the PM’s 1st October 2010 statement. It might be that issue is being left to Colman to determine.

      Of course, the entire situation is made more intractable by the fact that certain people have been able to recover their monies, while others have not been that fortunate. That is why I have been calling for a full publication of the details of the monies refunded – names, dates, amounts, instruments – so that this scandal could be exposed.

      Thanks for joining-in.

      Afra

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