The Colman Commission held its first session of Hearings in the last week of June, so we were able to have moving reports from witnesses who had lost-out from various investments with the Hindu Credit Union (HCU).
I read those transcripts and it was painful to see the shape of this problem. The most striking aspect for me was that the various attorneys seemed to have struck a compromise as to the parts of that evidence which would form part of the public record.
The main concession was that those witnesses did not have to state the amount of their investments for the record. The reasoning seems to have been a stated fear of crime, but it is my view that this concession will compromise the effectiveness of the Colman Commission. Given that the Commission is scheduled to resume its Hearings on 19 September, it seems timely to put these matters forward now.
To begin with, the two Golden Rules of investment are –
- The Risk and Reward paradigm – Risk and Reward have an inescapable relationship – i.e. the greater the Risk, the greater the Reward and vice versa.
- Investments need to be spread out so as to avoid undue concentration of risk – in colloquial terms, you should not put all your eggs into one basket, or bet all your money on one horse.
From these time-honoured ‘Golden Rules’, we derived the ‘Prudential Criteria’ which guide how financial institutions balance risk and reward.
Yet, despite the ‘Golden Rules’ the CLF and HCU chiefs were able to devise products which tempted tens of thousands of people to abandon those basic safeguards and invest in their products. People who were normally sensible were tempted to abandon good sense and break both ‘Golden Rules’. That is the measure of this tragedy.
Another point is that it was not only individuals who made that type of error, there were other people, with responsibility for managing monies, who also gave into the various temptations. The sidebar has details on that.
Let us be clear that the scope of this fiasco is as broad as it is deep, with boundaries stretching from the delayed and misleading accounts to the mismatched funding/investment practices of the core companies, from the absence of proper corporate governance described by Dr. Euric Bobb to the negative impact of the extensive political donations made by the CLF group. The Executive Flexible Premium Annuity (EFPA) is at the heart of the tragedy – the most successful investment product ever designed and built in the Caribbean, while being, at one and the same time, arguably the most toxic.
The duty of the Colman Commission is to probe how this fiasco occurred, recommend methods to stop a recurrence and also to identify responsible people who are apt for lawsuits or criminal charges.
We are now contemplating an inquiry into a large-scale financial collapse, which appears to have conceded the right of witnesses to withhold details about their investments. We are able to read the name and age of the witness, but effectively barred from information as to the size of their investment or the proportion of their total portfolio that figure represents. A Public Enquiry into a financial failure has conceded the right of the public to the basic financial information. I say basic, because the fact is that without those thousands of EFPA and INC investments, there would not have been the cashflow to allow CL Financial to embark on that fateful journey.
This appears to me to be a cloudy concession, to say the least, since it might represent the thin edge of the wedge in setting a precedent to allow subsequent witnesses to try obscuring or omitting financial details. More importantly, the effect of that kind of concession is that it will almost certainly mask the extent to which the basic financial rules were violated. That is not a philosophical question, because the CLF disaster only attained this scale and consequence as a result of these basic rules being broken. Ergo, it is not at all possible to credibly examine the causes of the crisis, if one has conceded that those are areas which will not be publicly examined.
There was public campaign to persuade people to make these risky investments. That campaign was calculated to have them set aside the norms of good sense – the ‘Golden Rules’ were abandoned. The Agents, many of whom masqueraded as ‘Investment Advisors’, appealed to people to close-off their other accounts and sell other investments so as to put as many eggs into that one basket as possible. After all, the more money you put with them, is the more interest CL Financial was offering. We all know that is how the thing went.
At the same time, these agents were busy telling people that their product offered these tremendous rates of return and complete security of funds, etc. etc. I bet everyone reading this heard those lyrics, at least once.
This concession is short-sighted and I am urging the Colman Commission to reconsider its position urgently. There must be no easy concession to allow less light.
Sunlight is the best disinfectant.
The depth of this tragedy can only be plumbed if we are able to see the true extent to which the ‘Golden Rules’ were broken.
The Colman Commission has to keep its focus. That concession needs to be renegotiated, if it is not already too late.
SIDEBAR: The levels of responsible investors
Apart from the individual investors who suffered from their misplaced faith in the CL Financial and HCU Products, there are others who also need to be examined by the Colman Commission if we are to have a proper picture of those events.
Firstly, there are the Credit Unions, who were acting for many small and relatively unsophisticated investors. Several Credit Unions placed heavy investments into these EFPA products, which of course was a product approved for individual investors. The nature and extent of those Credit Union investments need to be a living part of this enquiry.
Secondly, there were yet another species of large-scale investors who were the chiefs of the State-owned National Gas Company (NGC) and the nation’s largest pension plan, the National Insurance Board. Those two companies were reported to have invested the sums of $1.1Bn and $700M, respectively, in a Clico Investment Bank (CIB) product called the Investment Note Certificate (INC). This was another ‘gravity-defying’ product which offered attractive rates of interest along with the guarantee of being backed by good-quality investments. Like a close relative of the EFPA. In ‘Taking in Front’ published here on 25th April 2010, I examined the NGC’s involvement in those CIB products. At one point, up to 40% of NGC’s money was with the CL Financial group, so it is clear that its own Board policy on the placement of large-scale, short-term deposits did not insulate that State Enterprise from the temptations which afflicted others.
Given that the highest levels of commission were paid to the agents for these products which yielded so much cash for the CL Financial group, Colman has to ask whether inducements were ever offered to these people in positions of trust. Apart from the question of possible inducements, the real question is whether the kind of over-concentration of deposits which exists is at all compatible with the proper execution of one’s fiduciary duty. Colman will never know unless he withdraws that fatal concession.