CL Financial bailout – The Final Solution?

The new bailout formula was approved, as two new Acts, by our Parliament on 14 September –

The first one prevents any lawsuits against the Central Bank by claimants, while the second gives the Minister of Finance the right to borrow up to $10.7Bn and places the Republic Bank Ltd. (RBL) shares formerly held by CLICO into a new investment vehicle, NEL 2.

These seem to represent what I am calling the Final Solution, in that the clamour and protest which had marked the last year seems to have been fading away.  There have been queries from the various ‘Policyholders’ groups’, but those have been limited.

Whatever one thinks of the actual bailout, which I maintain is a perversion of our Treasury, there are valuable lessons to be learned from all this.  The main lesson for me is the Power of the Few.  In that although only about 16,000 investors were affected, they were able to mount a successful campaign to improve their position.  We need to note that lobbying and campaigning can be effective in gaining benefits for limited groups.  To all the weak-hearts who say nothing ever changes, please take note.

We also saw the position set out by the PM in her important speech on 1 October 2010 being reversed, in that the claimants’ rights to sue the Central Bank have been extinguished.  There are rumblings about a challenge to the constitutionality of that restriction, but we will have to wait on that one to play out.  The fact that the right to challenge the Central Bank’s actions in respect of the bailout has been removed opens fresh dangers in terms of the payout process.

We have all had bad experiences of what usually happens when serious unrestricted power is held by someone who does not have to answer for their actions.  My concern is that there does not seem to be any avenue for oversight of or appeal/redress against the Central Bank, in the event that claimants feel they are receiving unfair treatment.  That concern will have to be addressed at some stage.

Even as an account of the payout, we have deficient reporting with no true profile of the wealth being returned having been presented for public consideration.  The Central Bank and Ministry of Finance is in possession of this critical information as to the amounts of money to be returned to claimants, but that is being suppressed, for whatever reason. This episode has been a real stain on our stated ambitions towards accountability, transparency and the ever-distant ‘Good Governance’.

A related point is that the PM gave a clear commitment to revealing who benefited from the first wave of bailout funds, said at the time to be of the order of $7.3Bn. The PM’s speech is at pages 19 to 34 of Hansard – at pg 24 –

The previous administration injected $5 billion into Clico and they spent $2.3 billion to bail out the other distressed entities such as CIB in particular, so coming to a total of $7.3 billion has gone into that hole and yet today the Government and, therefore, the taxpayers of this country have been called upon to come up with another $16 billion to $19 billion. So what happened to that $7.3 billion? Where did it go? Who are the people that were paid? How was it utilized? What happened to that $7.3 billion?…

The concern here is that we are not at all sure that this new arrangement will in fact yield the required information as to who are the real beneficiaries of this bailout.  In view of the fact that the entire deal is a burden on our Treasury, this opaque arrangement is unacceptable.

After all –

Expenditure of Public money – Accountability – Transparency = CORRUPTION

Quite apart from those concerns, the fact is that provisions should have been made for Anti-Money Laundering and Tax Evasion screening.  The Treasury must not be used for Money-Laundering and the proper safeguards need to be put in place to prevent this.

The lack of accounts for the CL Financial group, after 31 months under State management, is also unacceptable.  The essential terms of the bailout are being sidelined, since the original agreement was for the State injections of cash to be repaid via asset sales.  Both 2009 agreements – the January MoU and the June CL Financial Shareholders’ Agreement – also spoke to the preparation of accounts and provision of information.

The perturbing aspect is that there continues to be a uniform silence as to the preparation of these overdue accounts, so the taxpayer must wonder just how, or if ever, these vast sums of bailout money are to be recovered.  This is the burning question which is at the root of my outrage.

The new arrangement is also silent as to the position with respect to other creditors of the CL Financial group, so there is no certainty as to how those claims would be treated.  On 31 October, Trinidad and Tobago Newday reported on ‘CLICO Bahamas seeks $365M from CL Financial’.  There are substantial regional and local claims outstanding, so the entire cost appears is an unknown quantity at this time, given the lack of accounts.

As I pointed out previously, the Directors and Officers of the CL Financial group and its subsidiaries ought to be subject to the provisions of the Integrity in Public Life Act, by reason of its being a State-controlled company.  The Integrity Commission needs to demand the required declarations from those persons, if we are to secure the required level of transparency.

The continuing failure of the Central Bank to make rulings as to the extent to which CL Financial’s Directors and Officers at the time of the collapse are ‘fit and proper persons’ is the final piece of the sorry picture.

The State’s period controlling the CL Financial group, ends on 11 June 2012 – a mere 7 months away – at which time the group will return to its owners.  Given the fact that the Central Bank has not made an adverse ‘Fit & Proper’ finding against Lawrence Duprey, in the absence of accounts and with a significant part of the RBL shares divested in this fashion, what will be the out-come?  Is the stage now set for Lawrence Duprey to return?

I spent last Wednesday afternoon in New York’s Zucotti Park, with so many points to share on that experience.  For now, I leave this striking slogan of the Occupy Wall Street movement –

If you are not outraged, you haven’t been paying attention…

The Colman Commission – Cloudy Concessions

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.

HCU Investors were allowed by the Colman Commission not to state investment amounts. They seemed to set the agenda.

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 –

  1. 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.
  2. 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.

Property Matters – Taking Stock

As part of this pre-budget series, I am going to ‘take stock’ of some recent, significant happenings in relevant areas.

Given the unstable situation in relation to the State and its operations, many examples of which have been set out in previous ‘Property Matters’ columns, it is very important that a critical stance be maintained.  That said, it is also important that any progress be properly recorded and acknowledged.

The notable items were –

Housing Development Corporation (HDC)

hdc-logo
I was very pleased to read of the success HDC was having in collecting the serious rent arrears owed by its tenants, reportedly in excess of $240M.  Of course this is not the first time there has been an effort to rectify this situation, so hopefully this will be a sustained program as it is vital that housing be treated with proper responsibility.  That responsibility would extend from the quality of the designs and construction, the treatment of contractors and suppliers all the way to housing policies which respond to the needs of the needy.

Last week, there was a report in this newspaper that the Housing and Environment Minister, Dr. Roodal Moonilal, disclosed a new housing policy.  According to that report, the new policy will favour distribution of serviced lots, with foundation slabs, over the provision of new homes.  I have been calling for a review of our housing policy for some time now, so it was very disappointing to read that Cabinet had recently approved this important new policy without some formal process of dialogue or seeking wider views, much less a thorough examination of the shortcomings of the 2002 policy.  Yes, a new housing policy was sorely needed, but there are solid benefits to wider dialogue.

Housing is too important an element of our Welfare State to ever become solely a creature of Cabinet, whatever the credentials of the current crop of Ministers.

This leads directly into my point about the poor flow of basic information, which can be detrimental to the best intentions.  The 2002 housing policy disappeared from the internet about 6 months ago, but despite several written requests I have had no success in having those links restored, for whatever reason.  The new housing policy is also not available online.  In contrast, last month the Ministry of Finance issued a revised State Enterprises Performance Monitoring Manual and that is available online, together with the 2008 Manual it replaced.

Building code

Dr. the Honourable Roodal Moonilal, Minister of Housing and Environment
Dr. the Honourable Roodal Moonilal, Minister of Housing and Environment

The impending new Building Code is to be welcomed, having been developed in collaboration with key stakeholders.  There needs to be a solid commitment by all parties to establishing proper enforcement of those critical standards.  The Building Code will cover important areas such as earthquake and fire hazards as well as other quality issues.

The initiative is being piloted by Dr. Roodal Moonilal, Minister of Housing and the Environment.  UDECOTT and the HDC both form part of his responsibilities, so that is a good fit.  We will have to be vigilant to ensure that all State construction conforms to the new standards.

I can scarcely believe that the very Minister who understands the importance of collaborating with stakeholders on the new National Building Code, would state a week earlier that the new Housing Policy had been agreed by Cabinet, with no visible attempt at consultation.  Incredible, but true.

A Culture of Consequence

I have consistently stated that the absence of consequence is inimical to any development and that consequence has to be restored to a proper place if we are to progress.   Up to last Thursday, 11 August, I stated at a public meeting that I was unaware of any government in this country taking decisive action against its own appointees in the State Enterprises.  The pattern has been one of charging people from the last political administration in what almost always looks like revenge.

Dawn Annamunthodo, former chairman of the National Schools Dietary Services Ltd. Photo © Trinidad and Tobago Guardian
Dawn Annamunthodo, former chairman of the National Schools Dietary Services Ltd. Photo © Trinidad and Tobago Guardian

The Sunday Guardian headline of 14 August ‘Cabinet fires Chairman of School-feeding Programme’ was as welcome as it was surprising.  It was reported that the Cabinet had taken decisive action to fire a Chairman who had been appointed about 6 months before and that is a positive step, the first time any government in this country has done that, as far as I am aware.

According to that exclusive story, the fired Chairwoman of the National Schools Dietary Services Ltd (NSDSL)—Dawn Annamunthodo – had obtained extensive and expensive security guards for herself, due to some alleged death threats.  There were also details of what seemed to be deceptive attempts by that individual to become a signatory to the bank accounts of that State-owned company.  If those reports are true, there are two serious implications –

Firstly, it is extremely unlikely that this is the first time that this individual was involved in acts of that kind.  Grown people do not just change their behaviour in a few months’ time, we all know that.  My point being that this episode calls into question the screening which is carried out in relation to these appointments.  Whatever screening processes now exist, will definitely have to be made stronger, together with ongoing reviews of Board performance.

Given that the Prime Minister is widely reported to have approved the Chairpersons of State Boards, that screening process needs to be reviewed urgently so as to preserve the integrity of that office.

Secondly, this individual is reported to have attempted to convince Republic Bank’s Ellerslie Plaza branch to make her a signatory and that matter must be promptly investigated by the Fraud Squad, with charges to follow if those allegations are true.  It is an echo of the point I made here last week about a dutiful police officer allowing a motorist with a defective vehicle to just drive-off after a ticket is issued.  Not good enough, if we are serious about road-safety.  We have to restore a Culture of Consequence if White-Collar Crime is to be challenged.

But, even though no money appears to have been stolen in that School-Feeding episode, the saddest part was the bold-faced question that individual asked the Guardian reporter, when invited to give a comment

How did you get hold of those documents? Those are state documents.   These questions are state business.

It reminded me very much of the response of Jewan Ramcharitar, former PriceWaterhouseCoopers partner, who suddenly resigned as eTeck Chairman almost a month ago.  That entire affair remains mysterious, with Stephen Cadiz, the line Minister, stating that it was due to a ‘difference of opinion’ and the departed Chairman reportedly stating –

I am actually working on a project in the public service arena on a full-time basis and my time at eTeck is eroding the time and attention I pay to that.

“Just what that project is, he won’t say.”

I wonder if Ramcharitar would have found that dismissive answer to be acceptable when he was a partner at PWC?  Probably not, yet we are continually beset by these evasive attitudes in public affairs.  We need to hold our leaders to a high standard.

The latest twist is the sudden resignation of George Nicholas as Chairman of Caribbean Airlines and the opaque statement by the Minister of Transport, Devant Maharaj – “…Yes. I can confirm this. I am in receipt of his letter but I cannot say anything more…

In the three cases, bare-faced conflation of State Business with Business which is private, personal or confidential.

Good steps are to be recognized and applauded, but we must always strive for better.  We need to continue onward and upward.  It would be good to have a statement from the Minister of Foreign Affairs and Communications as to the governments’ commitment to a progressive policy in these important matters.  The Housing policy needs to be published for comment and we also need to have a clear statement as to whether there can be any such thing as a confidential state policy.

Confidential State Policy may seem like an oxymoron, but readers will be aware of the reluctance of the Education Facilities Company Limited to publish its new Confidentiality Policy.  I don’t want to say refusal, but when this budget season is over we will be continuing to examine those EFCL operations.

Property Matters – State Enterprise Accounts

State Enterprise Performance Monitoring Manual
In the next few weeks, this column will cover some of the issues which are likely to have a bearing on the 2012 Budget.

In my view the State and its Agencies must perform in an exemplary fashion if we are to progress.  A good example is worth a thousand words.

At page 22 of the 2010-2011 budget statement, the Minister of Finance said –

…Mr. Speaker, no coherent, co-ordinated planning or strategy for state enterprises exists.  As a result we have begun to rationalise the state enterprises, including the special purpose companies, which will incorporate a new accountability system that goes beyond the presently operating company ordinances. It is these loopholes in public accountability that resulted in the UdeCOTT scandal. This must never again happen in Trinidad and Tobago…

The Ministry of Finance has now published a new State Enterprises Performance Monitoring Manual 2011, it is over three times longer than the previous edition, so it will be something to consider in weeks to come.

Certainly, there are stricter requirements in relation to the filing of accounts – at pg 30 of the 2011 guidelines –

3.2.5 AUDITED FINANCIAL STATEMENTS

State Enterprises are required to submit the following:

  1. Audited Financial Statements (2 originals and 120 copies) to the Minister of Finance within four (4) months of their financial year end. These reports are to be laid in Parliament and subsequently submitted to the Public Accounts and Enterprises Committee for consideration;
  2. Copies of their Management letters issued by Statutory Auditors…

At pg 16 of the 2008 edition –

1.3.10 Publishing of Financial Statements by State Enterprises

Government has agreed that State Enterprises be required to publish in at least one (1) major daily newspaper a summary of the audited financial statements within four (4) months to the end of their financial year and a summary of the unaudited half-yearly statements within two (2) months of the mid-year date.

Such summary statements must be in accordance with the requirements of the Securities Industry Act, 1995.

The new guidelines appear to be stricter, but the requirement to publish to the press seems to have been removed.

There are swirling issues on this –

  • No accounts for years – As I have pointed out before, some of the largest State Enterprises have published no accounts for years.  UDECOTT and NHA/HDC are just two examples of this flagrant breach of the shareholders’ instructions as set out above. In the case of HDC, there is a greater concern in my view, since sections 18, 19 and 20 of the HDC Act require the audited accounts to be produced and published.  Anyhow you try to spin it, those are terrible signs.  For a private company to have no accounts, for even a few months, is indicative of poor performance at the very least.  No accounts for years is unacceptable.  One can only wonder how clearly could anyone plan if basic information is being obscured in this fashion.  We expect better from the chiefs of these State Enterprises and certainly we expect better from the Peoples’ Partnership.  In his preamble to the 2010-2011 budget, Minister Dookeran said –

…We must at all times remember who we work for. We must make Government work for the people.  As our Prime Minister always says: serve the people, serve the people, serve the people…

  • Serious debts outstanding – There are continuing reports, despite some efforts, that contractors, consultants and suppliers are owed substantial monies by State Enterprises for extended periods.  That has a disastrous effect on our local economy both on an immediate tangible level and in terms of the more subjective element of confidence.
  • Ambitious new projects continue to be announced, even as the basic accounts are incomplete and substantial bills remain unpaid.

Apart from the evident confusion, at the very highest levels of the State and Government, the unacceptable part is that there is not even an attempt to explain what is the hold-up or what areas of the accounts remain unresolved.  The few times anyone in authority has attempted to explain the delays in those accounts, it has been a model of vagueness and ambiguity.  That uncommunicative behaviour does not augur well.  These State Enterprises are not building a wartime bunker or a new spy satellite, only new homes and offices.

But there is more, according to S. 99 (1) of the Companies Act 1995

  1. every Director of a company shall in exercising his powers and discharging his duties act honestly and in good faith with a view to the best interests of the company; and
  2. exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

Those provisions make mismanagement of a company an offence.  It is literally impossible to manage or direct the affairs of a multi-billion dollar company in the absence of audited accounts.  So there must be serious concerns as to how the Directors of those State Enterprises without accounts could have properly discharged their obligations under S. 99 (1).

SEC logoApart from these points, there is now the fact that the SEC has made Orders in respect of Contraventions of the Securities Industry Act 1995 and the Securities Industry Bye-Laws 1997.  Those Orders are in relation to the failure of these huge State-owned Enterprises to publish their accounts –

  1. 19th March 2010 against HDC, with fines totalling $121,000 – see http://www.ttsec.org.tt/content/pub100326.pdf.
  2. 15th June 2011 against UDECOTT, with fines totalling $120,000 – see http://www.ttsec.org.tt/content/Order-for-settlement-re-UDECOTT.pdf.
  3. 25th July 2011 against HDC, with fines totalling $400,000 – see http://www.ttsec.org.tt/content/Order-for-settlement-re-Trinidad-and-Tobago-Housing-Development-Corporation.pdf.

I was pleased to see the SEC taking this firm action against these offending State Enterprises, it is an important and necessary intervention.  I am not at all sure what, if any, ongoing penalties are being applied.  If there are no ongoing punishments or fines, this important regulator needs to take a tougher stand.  It is simply not good enough in my view for the regulator to levy these fines and allow the companies to carry on with ‘business as usual‘.  That would be like a dutiful policeman ticketing a motorist for smooth tires, no seatbelt and no headlights – issuing the ticket and then letting that motorist drive off.  The SEC needs to consider heavy daily fines and banning orders against Directors of these companies in breach of the law, if such do not already exist.

The era of irresponsibility in high office needs to be brought to a close.  The role of the Treasury in supporting this grossly irresponsible behaviour is questionable.  The silence on the missing accounts is intolerable.  The chapter of getting away with it needs to be ended.

Expenditure of Public money – Accountability – Transparency = CORRUPTION

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.

CL Financial Bailout – The final AGM

bhoe-knows* In response to a question whether he took part in the reported decision to pay CLF dividends even after the approach to the State in 2009.

CL Financial’s final Annual General Meeting was the most interesting meeting in the saga of its collapse.

That meeting took place at the Trinidad Hilton on Friday 23 January 2009, so consider the timeline –

  • 18 November 2008 – CLF publishes its 2007 Annual Report, including its audited accounts, which showed assets of $100.666Bn and after-tax profits of $1.74Bn.
  • 13 January 2009 – CLF writes, under Lawrence Duprey’s signature, to the Governor of the Central Bank to request urgent financial assistance.  See pg 628 of Hansard of 4 February 2009 for the text of that letter, which specified that CLF’s asset value was $23.9Bn.
  • 16 January 2009 – CLF pays a dividend of $3.00 per share.
  • 23 January 2009 – CLF convenes its final AGM before the ‘official’ collapse.
  • 30 January 2009 – The bailout of CLF is announced at a Press Conference at the Central Bank.  All the speakers at that event stated the CLF asset value at $100Bn.

Given that the normal function of an AGM is to inform a company’s shareholders and stakeholders of its performance and prospects, that timeline raises some intriguing questions.

For whatever reason, there have been no published reports of that final CLF AGM, so I posed these questions to a CLF shareholder in an email exchange –

Q       Did you attend that AGM?
A        Yes
Q       Was it at the Ballroom of the Trinidad Hilton on Friday 23rd January 2009?
A        It was at the Hilton but not in their ballroom. It was in one of the restaurants/meeting rooms that overlooks the Savannah. Can’t remember the name.
Q       About how many shareholders were there in attendance?
A        I would guess about 30-40
Q       Which Directors were present?
A        Clinton Ramberansingh, Rampersad Motilal, Bhoe Tewarie, Gita Sakal and Michael Carballo.
Q       Which Executive Directors were present?
A        Roger Duprey (I think)
Q       What was the ‘tone’ of the meeting?  Was there any clue as to the grave difficulties facing the CLF group?  Was the ‘bailout letter’ mentioned at all?
A        The tone of the meeting was “normal”. There certainly was no indication that CLF  (or the CLF group) was in any imminent danger. The effects of the global downturn was mentioned in light of the reduced dividend (from $5 to $3) and we were told by Carballo that although the group, like everyone else, was feeling the effects of the global recession, it was still performing well and that he expected the performance to improve over the course of the coming year. One interesting “fact” that did emerge (I say “fact” because I have no idea as to the veracity of the claim) had to do with the value of CLF shares. One shareholder had complained about not really being able to derive any value from his CLF shares apart from receiving a dividend. No bank would accept it as security. Carballo advised that CIB would accept the shares as security for a loan………….had I known I’d have taken a big loan and never paid it back!! Certainly the bailout letter was never disclosed to the shareholders.

If true, this account of the events is deeply disturbing.

The question is whether CLF’s Independent Directors were aware of its true position.  Could it be that the Board was unaware of Duprey’s letter and that they were surprised when the bailout was announced?  If that were the case, it would mean that Board of Directors was kept in the dark over this bailout.

If the Board was informed as to the bailout letter, we would be contemplating an even more unacceptable case.  If that is what happened, it would have been fraudulent for the CLF Directors to have carried out that AGM without informing the shareholders of the company’s true position.

Michael Carballo was the CLF Group Financial Director since Andre Monteil’s retirement in early 2008. Given Carballo’s position in the group and the high quality of his professional skills, it is very difficult to accept that he did not himself know CLF’s true position.

Dr Bhoe Tewarie swearing-in
Dr Bhoe Tewarie swearing-in

According to this email exchange, neither Lawrence Duprey nor Andre Monteil attended CLF’s final AGM. With only one week to go, they would likely have been attaching more priority to the negotiations for the bailout.

So, Dr. Tewarie – a shareholder and former Director of CLF – is now appointed to Cabinet at the very moment that it is reviewing the bailout of the same CL Financial group.  That man, noted in the field of business education – his last post, before this appointment, being Director of UWI’s Institute of Critical Thinking – when asked about his attendance and participation in the Board meeting which approved those CLF dividends is reported to have said – “I cannot remember, I may have, I cannot remember the exact timing, I may have—I don’t know…The records would indicate whether I did or not...”.

We are being asked to believe that Dr. Tewarie cannot really remember this meeting, probably the final one before CL Financial folded and likely the most eventful in even a high-profile career such as his.  The old people have a saying that you start as you mean to go on.  Dr. Tewarie’s reply can hardly inspire confidence.  It verges on being dismissive and  disrespectful of the public.  We are paying for all the mess created by CL Financial and yes, that is the same public Dr. Tewarie just swore to serve.  It does not augur well.

The essential questions for Dr. Tewarie include his attendance and participation in this final AGM and what he knew about the state of the group at the time.

It seems unacceptable to me for holders of high office in our country to be persons who would be disqualified under the ‘fit and proper’ criteria.  That practice must be revised as part of the New Politics we are being promised.

Given the tremendous stakes and the complete silence by all the responsible people, we need to ensure that this affair does not carry our country any further into peril.

These responsible and silent people must be banished into obscurity, at the very least.

SIDEBAR

PricewaterhouseCoopers
It is a well-established custom that AGMs of large organisations are attended by the responsible partner of the auditor’s firm, who reads the auditor’s letter to the audience.  Did a partner of PriceWaterhouseCoopers attend this meeting?  Which one?  Did a PwC partner read aloud that auditor’s letter?

Real Responsibility
On the one hand, a Cabinet Minister is dismissed over a $100,000 contract and I consider that to be good progress in the correct direction.  The fact that a reasonable suspicion had arisen cost that Minister her job, which is good.  In keeping with the State’s exemplary behaviour, our leaders should not behave in a fashion which causes suspicion or derision.

On the other hand, we are seeing a replacement Cabinet Minister, who at last record was known to be a shareholder of the huge, failed CL Financial group and one of its Board Directors at the time of the colossal crash.  The official version is that CL Financial is a $100Bn group.  There have been recent reports that the Cabinet is about to consider a new approach to the bailout and the public is bound to wonder at the timing of this appointment.

Fit and Proper
The Central Bank’s ‘Fit and Proper’ Guideline (sic) sets out the official position as to the type of person held to be ‘fit and proper’ to be a Director or Officer of a Financial Institution.

It states –

3.1 In accordance with governing legislation a person is considered to be fit and proper if the person essentially is of good character, competent, honest, financially sound, reputable, reliable and discharges and is likely to discharge his/her responsibilities fairly.

Setting the Standard

The PP government is establishing a ‘new normal’ insofar as ethics and acceptable standards of behaviour in public office are concerned.  As with any real-time and complex situation, the signals are mixed, but from my point of view, the direction is a welcome one.

To me, the main positive signs were –

  • Coup Enquiry – The July announcement of the Commission of Enquiry into the 1990 attempted Coup, now underway, was most welcome.  It seems certain that we would still be waiting in vain, if either Manning or Panday were still in power.
  • CL Financial bailout – Dookeran’s decision to review the payout to beneficiaries of the bailout was necessary and long-overdue.  Dookeran has done his cause no favours by with-holding the accounts and seeming to suppress vital information, but the decision to revise the bailout terms was a sound one.  On that occasion, he also took the steps of introducing relief for Hindu Credit Union depositors, which was a step in the direction of equity. Even those of us who did not support any bailout can concede that point.
  • On October 1, the Prime Minister resisted the temptation to use the PP’s Parliamentary majority to force through a new law to limit the legal rights of CLICO policyholders.  The PM chose to set aside that legislative proposal and embark on an act of persuasion.  That was a defining moment in our nation’s development of a democratic culture.  The announcement of a Commission of Enquiry into the entire financial collapse (CL Financial and HCU) was another high point.
  • Nizam Mohammed’s removal as Chairman of the Police Service Commission was overdue in my view, but not because of his ‘last-ditch/red-herring‘ attempts to martyr himself.  His primary and unpardonable offence, given his position, was his bold-faced abuse of power in that traffic police episode.
  • mary king
    Mary King

    Even Mary King’s removal from office earlier this week was a welcome sign despite the doubts over who knew what and when.  That was a good move because it is the first time a Minister has been fired for acting in a manner which causes reasonable suspicion.  Up until now in this country the rule followed by the various Ruling Parties has been the ‘wrong and strong‘ one, joined-up with the ‘do as I say and not as I do‘ one.  To have moved away from those immoral practices is a big step in the right direction, despite the ragged edges.

Even when I consider the disastrous Reshmi-gate episode, that list adds up to substantial progress in the right direction.  Democracy is a messy affair and coalition politics has particular challenges, so progress will be uneven, with some pauses along the way.  But progress we must.

The Prime Minister reportedly commented that there was no pressure from COP to replace Mary King with another of its members, so that the replacement would be chosen on merit.

I am very concerned at the fact that the CL Financial collapse has cast a literal shadow over our country.  Aside from the financial costs, there are significant areas of collateral damage which are now becoming visible.  I referred in an earlier article to one of the main externalities in this episode being the fact that many of the CL Financial chiefs are deeply embedded in our political parties.

Even now, with this new government – their honeymoon will end on the first anniversary, I think – we are witnessing acts which can make one wonder if the CL Financial disaster ever really happened.

The official Terms of Reference for the Colman Inquiry into this financial fiasco 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 –

…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…

robert mayers
Robert Mayers

Caribbean Money Market Brokers (CMMB)
The first example is Robert Mayers, former Managing Director of CMMB up until 7 December 2008 – see here.   Mayers is also a Deputy Political Leader of the Congress of the People (CoP), a leading element in the Peoples’ Partnership government.  CMMB collapsed along with some of the significant companies in the CL Financial group – the Terms of Reference for the Colman Commission refer.

On 20 November, there were reports that Robert Mayers had been offered a position as a Director of our Central Bank.  Mayers is reported to have declined that offer on the basis of a conflict of interest.  The burning question has to be ‘What kind of process could produce such a recommendation?

Consider this arresting headline ‘Investment pros set up new business‘ at page 10 of the Business Guardian of 9th December.  It was reported that a new investment house, KSBM, was launched and it seemed that they were profiling.

Given that all four of KSBM’s Executive Directors are ex-CMMB chiefs, Robert Mayers among them, there are inescapable questions –

How come the former chiefs of CMMB, a financial institution which is known to have failed on this scale, can be permitted to open another one?  We are acting as if we have no capacity to learn from our errors.  Just carrying on as though nothing happened.  What is the role of the SEC and the Central Bank in all this?  Have we learned nothing?

mervyn assam
Mervyn Assam

Clico Investment Bank (CIB)
Mervyn Assam was the Chairman of CIB at the time of the collapse.  Assam had been one of CIB’s founders in 1990 and was reportedly ‘cleaning house’ at the bank, which I do believe to be true.

But the picture is far from a simple one.  On 22 January 2009, CIB hosted its inaugural Investment Seminar at the CL Duprey box at the Queen’s Park Oval – I spoke at that event, together with Professor Patrick Watson.  Now, according to  para 5 of the April 2010 affidavit submitted to the High Court by the Inspector of Financial Institutions, Carl Hiralal, in the CIB winding-up petition, the CIB liquidity problem was disclosed to him in a meeting on the 15 January.  I have serious doubts as to the veracity of that statement, but yes, it is still a full week before the Investment Seminar.

Assam held 7,500 shares in CLF as at 7 February 2009.

Assam also launched a lawsuit to recover $1M he had deposited with CIB, that case went against him in January this year – see the judgment – and he is reported to have filed an appeal.

In October, Assam was appointed as Ambassador Extraordinaire and Plenipotentiary of Trade and Industry.  He has served in the NAR period as High Commissioner to London and as a UNC Senator, both in Cabinet and during their recent spell in opposition.

Dr. Bhoendradatt Tewarie
Dr. Bhoendradatt Tewarie

CL Financial (CLF)
Dr Tewarie was a Director on the Board of the parent company, CLF, which wrote to the Central Bank, seeking a bailout, on 13 January 2009.  On 16 January 2009, CLF paid dividends of $3.00 per share to its shareholders.  According to the CLF Annual Return of 7 February 2009, Dr Tewarie held 1,171 shares.

As I write this, we are informed that Dr Tewarie has been sworn in, to replace Mary King.

To be perfectly clear, I am making no allegation of theft against Mayers, Assam or Dr. Tewarie.

Does the ‘fit and proper’ criteria apply to these CLF chiefs?  Should those criteria apply to the holders of high office in our country?  What do you think?

We need new politics like no time before in our country, but that must involve new thinking.  The State must behave in an exemplary fashion if we are to uplift ourselves without civil disturbance and unnecessary confusion.  The State needs to set the standard.

I trust that the Colman Commission will give the proper attention to these episodes.