“We are not serious,

Very few conscious,

So I cannot agree wid mih own chorus!”

from ‘Trinidad is Nice, Trinidad is a Paradise’ by Brother Valentino (Emerol Philips)

The 12^th June agreement is to be voted on by CL Financial’s shareholders on Wednesday 15^th July.  By the time this is published, there ought to have been a decisive vote on the matter.

I maintain my position that the 12^th June agreement is taking us in a completely different direction to that outlined in the original MoU of 30^th January.  I am also saying that the new direction is a detrimental one for this country with not even an attempt being made to explain the underlying rationale.

The flagship of the CL Financial group was CLICO, according to the Central Bank Governor, on 13^th February – “In the CL Financial business model, Clico was a major source of cash much of which was used to finance investments held in the name of other entities in the Group.  In this model, Clico has ended up as guarantor for many of the Group’s assets most of which are heavily pledged.”  CLICO’s most successful product in this model was a high-interest one which promised more than any other investment available in the market.  Even at those high rates of interest promised to their investors, it was cheaper for CL Financial to raise funds in this way than to borrow.

CL Financial is no longer able to rely on CLICO for a source of cheap funds, so we are all thrust into a new, perilous position.

CLICO is now unable to offer the highest rates of return which once distinguished its products and is suffering an unwelcome migration of its better sales agents.  What future for CLICO?

We were often regaled with stories of Lawrence Duprey’s prowess, as a commercial negotiator, in securing the best terms.  It seems to me that CL Financial has arranged a new line of finance from the Treasury to go forward.  We are not told what, if any, interest rate is being charged by our Treasury for this massive line of unsecured borrowing.  Overdue Tax payable to the BIR attracts a punitive interest rate of 20% per annum, being rightly regarded as the taxpayers’ unsecured borrowings from the Treasury.  Are we seeing a plain case of double-standards?

As part of the new agreement, Lawrence Duprey has resigned from his Directorships of the companies in the CL Financial group.  He has retained his significant shareholding and it is clear that Michael Carballo, the group’s finance director, continues as his representative.

Some of you may think this is all OK, since the public funds being advanced to clean up this fiasco are ultimately protected by CL Financial’s agreement to sell assets so as repay.  Time to think again.  The assets which were pledged in the original MoU, were already pledged elsewhere.

Yes, the CL Financial chiefs tried to sell the same thing twice.

But what about the assets which were not pledged?  Oh, those were treated differently.  For example, CL Financial agreed to sell its majority shareholding in CLICO Energy Company less than a week after agreeing to seek the State’s prior written approval to any asset sales.  That action triggered the Central Bank’s legal action to both halt all further assets sales and demand a declaration of all assets.

Yes, CL Financial chiefs tried to sell off one of the remaining assets, contrary to the terms of the MoU.

So we have Republic Bank and Methanol Holdings shares being effectively unsaleable, since they are reliably reported as having been fully pledged before the original MoU.  Next we have the aborted attempt to sell other assets, not yet pledged.

So what is left?  Wait, what about the Liquor and spirits brands, the Angostura and Jamaican rum companies and such?  Well, according to its most recent Notice to Shareholders, Angostura is itself owed some $633M by CL Financial.  Given that its 2007 accounts disclose sales of $818M, that is a colossal amount of money for Angostura to be owed.  So much for that.

As for those Jamaican Rum assets, Lascelles de Mercado is Jamaica’s leading spirits company, controlling the top rum brands of Wray & Nephew and Appleton.  CL Financial owns about 87% of Lascelles de Mercado, which still has some 1,500 minority shareholders.  The Jamaica Gleaner of 17^th June (at http://www.jamaica-gleaner.com/gleaner/20090617/business/business1.html and http://www.jamaica-gleaner.com/gleaner/20090617/business/business4.html) contained two instructive reports on that CL Financial subsidiary.  The first one highlights the payment of dividends to holders of ordinary shares for the first time in 2 years – “Lascelles de Mercado said Monday it would pay dividend amounting to $14 per share, ending a drought for ordinary shareholders who have received no returns for at least two years.” That subsidiary appears to be doing well.  The second report tells us  –

• “Duprey…has bowed out as chairman of CLF, but remains chairman of Lascelles.”
• Referring to the 12^th June agreement – “Carballo said the government was in control of the management and running of the Caribbean conglomerate, but what has not changed is the ownership.

“The shareholding hasn’t changed. There is no intention to change the shareholding. It’s an agreement for about three years whereby the assets are managed and restructured and then the company will be returned to the shareholders,” he said.

• There is more – “”So the question of selling does not arise,” he (Carballo) added, referring in this instance to Lascelles.”

So there you have it.  If we are to believe Michael Carballo – and I see no reason to doubt him – the good assets which are not pledged are to be retained by CL Financial.

Having lost grip of CLICO and its positive cash-flows, the CL Financial chiefs have now negotiated a new survival strategy.  On the other hand, we have now agreed to finance the recovery of the CL Financial group on terms which are unknown, to restore the value of its assets and return it to its shareholders.

The rueful regulator

The Governor’s statements on 13^th February are really perturbing. On 13^th February, at his first (and only) CL Financial briefing, the Governor of the Central Bank said – “Meanwhile, with the assistance of the Manager appointed to Clico by the Central Bank, we have made much progress in clarifying the present financial position of CLICO, which unfortunately, appears to be much worse than we had envisaged.”  How could it be much worse?  Are we being told, in not so many words, that CLICO’s filings and accounts were misleading?  Or did the regulator make a poor reading of the information?

There is a powerful and circular irony in the entire CL Financial fiasco.  That irony is in the manner in which risk and its twin brother, reward, were dealt with.  CLICO and British-American built an impressive reputation as safe companies with which one could invest for an uncertain future.  That reputation was such that many people in our region held the greater part of their investments with those companies.  The irony, which is now clear for us to see, is that those companies did not do an effective job of managing their risks.  Hence the disaster we are facing.

According to CL Financial’s 2007 annual report, the group held cash or cash equivalents in excess of $8.7Bn at the end of 2007.  That huge sum of money was depleted to the extent that the CLF Group had to write on 13^th January 2009 seeking a massive bailout.

The same annual report also gives cause to question the manner in which the global meltdown has been blamed for the fiasco.  With the audited accounts only being completed in late November 2008, the annual report must have been finalised after that date.  The preface to the CLF 2007 annual report, at page 1 and entitled ‘The Next Wave of Growth’, refers to the meltdown like this –

• “These are foreboding financial times – for Trinidad and Tobago, for the world. At C L Financial we are cautious but unafraid. Leaders in government and business sectors throughout the globe are taking joint action to mitigate this economic crisis, and so are we.”
• “No organisation will be immune from the turbulence but our widespread assets and market penetration are the best shield against these uncertain conditions.”
• “We have confidence in our ability to not only navigate this financial storm but to find fresh and profitable opportunities within it.”

Contrast those statements, finalized in the last six weeks of 2008, with the written appeal to the State for urgent help in the first fortnight of 2009.  Maybe truth really is stranger than fiction after all.

We are now getting reports that some CLF directors have resigned in the last month or so.  In addition, there was a story in another newspaper which detailed the high salary and bonuses (exceeding $2.5M US annually) paid to the CLF General Counsel/Corporate Secretary.  That story also stated that she retired on 21^st April and was making claims for terminal payments of some $5.0M US.  According to the annual report, that person was the third highest officer in CLF.  I have not seen any published correction to or denial of that story.  She is also the officer who signed the Director’s (sic) Report in the CLF 2007 annual report, which declared a dividend of $3.00 per share.  Do these post-fiasco resignations and retirements exonerate directors and officers from their liabilities in this matter?

The MoU of 30^th January specifies, at clause 20, that there are to be no increases in salary, payment of bonuses or share options without the government’s prior approval.  That is good, but it would be interesting to know what salaries and bonuses were paid to the CLF chiefs since the beginning of 2008.  That is a most important question, since it is the period in which the group went from a position of reported strength to one of virtual insolvency.  These directors and officers were in charge of the group’s strategy and operations in that period.  How were they rewarded?  How much of those people’s wealth is actually invested in the CLF group?

The issue is one of transparency, but that is a plastic concept here.  It is interesting to note that Royal Bank of Canada, which purchased RBTT last year, has a totally transparent policy on compensation.  I am right now looking at RBC’s website (http://www.rbc.com/investorrelations/pdf/2009englishproxy.pdf) on which they have displayed the detailed salaries of its directors and principal officers, with the rationale.  If we are going to bailout this fiasco, we need to know what were the rewards earned by the CLF chiefs.

We have seen bold moves being made in the USA to recover bonuses from executives of failed financial giants which are now seeking federal bailout.  Does our government intend to take firm and fair actions to recover those monies?

We also need to consider the role of professional standards in all this, since those exist to provide assurance to stakeholders that they are looked after in a complex world.  Not every question is for the court, since all the responsible professionals – accountants, attorneys and actuaries – belong to organizations with disciplinary codes.  Those codes can be severe in dealing with those who bring their profession into disrepute.  It is absolutely no defense for a professional to say that they were just following client’s instructions, if those instructions are in contravention of one’s professional codes of practice.  None.  Is the State intent on making the necessary reports?

This episode has important lessons for our country at a most delicate time of economic downturn and growing social unrest.  What lesson is this sending to our less-well-off citizens and our young people?  Is it going to be a straight case of business as usual or do we have the belly to make a fresh start?