Tag: CLICO

Figuring it out

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

I maintain my position that the 12th June agreement is taking us in a completely different direction to that outlined in the original MoU of 30th 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 13th 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 17th 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 12th 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 13th February are really perturbing. On 13th 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?

Party of Parties

This week’s title is as deliberate as it is appropriate.  The focus last week was on certain aspects of the 12th June agreement with CL Financial to show the fundamental shift from the original MoU of 30th January.

This week, it is time to focus on the parties to the new agreement and the way in which they are dealing with each other.  The differences in treatment are plain and pregnant.

CL Financial are said to have secured the support of about 66% of its shareholders in relation to that agreement.  CL Financial published a Notice to Shareholders of a meeting to be held on 30th June to seek the approval of 75% of the shareholders to the 12th June agreement with the State to appoint a new Board with the mandate described in last week’s column.  The shareholders were to be offered an opportunity to read the agreement and make up their minds as to whether they would vote in support of it.

There was a subsequent Notice to Shareholders which stated that the Board had decided to defer the voting-meeting to respond to certain concerns which had been put to them by shareholders: the shareholders were still invited to attend on the 30th to read and consider the agreement.  It was reported in this paper that a shareholder had written to the CL Financial group finance director, Michael Carballo, to make certain demands in return for his vote in support of the agreement.  There are also other reports of a block of shareholders, led by a Duprey family member, making demands before their support could be assured.

As I write, there is no word as to when CL Financial will be holding the decisive meeting to solicit shareholders votes on the new agreement.

Some serious questions now arise and these would include –

  • The rationale – As outlined last week, the new agreement marks a significant shift from the goals and terms of the original MoU.  What is missing here is the rationale behind the shift in strategy.  It is not to say that there can be no grounds for changing the terms of agreement in the course of large-scale and complex situations, but rather, that there ought to be a cogent rationale for such a drastic shift.  What is the reason to move from a scenario of support with consequent liquidation of assets to match the cost to the Treasury, to one of restoring asset value?  Are we being told, in not so many words, that the assets of CL Financial are in fact insufficient to meet its liabilities?  Is it fair, in all the circumstances, for the public to make that assumption?
  • The new audits – Some time ago, we were informed by the Minister of Finance that audits were being performed on the CL Financial group by Ernst & Young and KPMG.  There have also been several reports that the renowned forensic accountant, Bob Lindquist, was engaged to audit CLICO.  Where are the audit reports of those firms?  Surely, by now the Minister of Finance and the Central Bank would have had those interim audit reports.
  • The New Agreement – Are we to take it that the new agreement is an irrevocable commitment by the State?  Do CL Financial’s shareholders possess the sole right to veto?
  • Lack of Public information – The new agreement remains invisible to the public and there is no word as to when it is to be published.  Given that we taxpayers are to pay for this entire operation, it seems highly unsatisfactory to me that we are not yet in a position to evaluate the agreement.
  • The question of scale – The newly-reappointed AG is reported to have said that he is concerned over how our country will deal with a $97Bn commercial enterprise in the context of a $150Bn national economy.  What is the true nature and extent of the commitment we have now entered?
  • The character of the parties – As explained last week there are legitimate, sobering concerns over the conduct of and relationships between the parties to this huge agreement.  The conduct of CL Financial’s chiefs and the shareholding in that group by the Minister of Finance would give any reasonable person cause to pause.  The huge donations made by CL Financial to the ruling PNM is yet another reason to frown.  The treatment being enjoyed by the CL Financial shareholders at this point, having been paid dividends from a group which would seem to have been essentially insolvent, to now being invited to consider the new agreement, is vexatious.  Hence the title of this week’s column.

Where is the taxpayer in this huge, long-term and expensive set-up?  I am, once again, demanding that we, the public, be given the information necessary to support the new agreement.  This is a glaring case of democratic deficit, in which our elected rulers feel free to enter onerous agreements without affording us the basic information which company law would demand on behalf of shareholders.  There is little doubt that the new agreement will impose heavy burdens on our economy and widespread support will be essential to preserving the investor confidence and legitimacy which is at the heart of this unprecedented mission.  There is no better way to start winning that support than to start sharing information with the public in the same fashion as enjoyed by the CL Financial shareholders.  We do not want a party with General Admission having the worst view and only the VIPs enjoying the best view…especially when we in General Admission are paying the price of the whole party.  Not so.

SIDEBAR

We have all read the public statements by the newly-reappointed Attorney General, John Jeremie, that he is intent on taking the necessary action to enforce the law if wrong-doing is discovered at CL Financial.

We need to determine if our newly-returned AG is indeed a serious upholder of our laws.

Mr. Jeremie, it is reliably reported that CL Financial paid its shareholders dividends of $3.00 per share on 16th January, some 3 days after writing to the Central Bank for urgent financial assistance from the State.  Now that the State-appointed Directors are on the CL Financial Board, it is possible to obtain evidence of that, with or without the co-operation of the Minister of Finance (herself a CL Financial shareholder).  I am putting it to you that, as a matter of urgency, we need to hear from you on three questions –

  1. Firstly, is such a payment of dividends a legal act?  Can such an act be considered to be fit and proper?
  2. Secondly, did that reported act take place?
  3. Thirdly, what steps, if any, are you now prepared to take against the CL Financial Directors who authorized payment of that dividend?

Payback Time – Moral Hazard, Part II

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 13th 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 21st 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 30th 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?

SIDEBAR

The Governor of the Central Bank gave a press update on the CL Financial bailout on 13th February at which he told us that the financial position of CLICO was much worse than had been originally envisaged.  At that time, the Governor promised that that update was the first of a series.  There have been several incidental releases of information on the issue, most recently at the Monetary Policy Review press conference.  Since then it is fair to say that the entire position seems much worse than we had thought and another specific CL Financial update is now overdue, Governor.

Some of the matters I would like to propose for explanation at the next press briefing are –

  1. CLF’s letter – The CLF letter of 13th January has not been published.  Why not?
  2. CLF Dividends – Did the State negotiators know that CLF paid a dividend after writing to seek financial assistance?  If no, why not?  If yes, why not seek recovery of those dividends as a condition of the MoU?
  3. At what point did the State learn that the CLF assets pledged in the MoU had already been pledged elsewhere?
  4. When is the disposal of CLF assets, agreed in the MoU, to start?
  5. In light of the Governor’s own comments, when can we expect him to make a finding as to the CLF directors’ and officers’ being ‘fit and proper’ under Central Bank guidelines?
  6. What progress is being made in finding the $5.0Bn missing from CLICO’s statutory fund, as stated by their newly-appointed CEO?  Are the CLF chiefs, with whom you are in negotiation, being co-operative in this regard?
  7. The Court proceedings in relation to the Carnival Sunday injunction obtained by the Central Bank against CL Financial are being held in closed session.  Why is there the need for secrecy/privacy on these issues?  Who applied to the Court for the hearings to be closed to the public?

Who is Who and What is What?

The more one considers the CL Financial bailout, the less comfortable one feels.  It was no surprise to see the main points of last week’s column publicly confirmed by the key participants.

What can one possibly say to the confirmation that the assets pledged in the MoU were pledged elsewhere? That was confirmed by both the Governor of the Central Bank and Michael Carballo, CL Financial’s Group Financial Director.

These are some of the puzzling aspects of this complex situation-

  • Methanol Holdings Trinidad Limited (MHTL) – There appear to be stark contradictions between the 6th April statements of the Governor of the Central Bank and the recent MHTL press release (available at http://www.ttmethanol.com/web/assure.html).  The signatory on the MHTL press release is their CEO, Rampersad Motilal, who is also listed as a CLF Director in their 2007 Annual Report.  There have been recent press reports that Mr. Motilal recently resigned as a Director of CL Financial.  The Governor stated that methanol prices are so low that to try to sell those shares now would be to limit the returns on the sales.  MHTL states that  its operations continued to be strong with all their plants having excellent first quarter performance, with its low cost profile allowing it to maintain overall profitable operations for 2009 even if the softened methanol prices continue.  The press release went on to state that the company’s financial position, especially its liquidity position is very strong.  Which one of these accounts should we trust?  What are the MHTL shares worth?
  • Republic Bank Limited (RBL) – These shares were pledged as part of CLF’s collateral in the 30th January MoU, but we have only silence on the agreed disposal.  Indeed, the RBL share price is stable at $86 per share since November 2008 and one has to wonder why the delay in the agreed disposal.
  • CLICO – As stated in last week’s column, the newly-appointed CEO of CLICO, Claude Musaib-Ali, revealed on Ash Wednesday that over $5.0Bn is missing from CLICO’s Statutory Fund and that those monies cannot be located.  A week ago, the Governor stated that the size of the CLICO bailout is now estimated to be $5.0Bn.  I am assuming that these taxpayers’ funds are being used to fill the gap left by the missing Statutory Fund monies.
  • CL Financial’s stance – At the beginning of this process we were led to believe that CL Financial was being pro-active and cooperative in their dealings with the State.  Indeed the Governor even made this point directly in his prepared remarks at the 30th January press conference “…I would like to acknowledge the high level of cooperation that we have received from Mr. Duprey…”  Since then CLF has now been exposed as paying dividends after requesting the State bailout, challenging the injunction obtained by the State over their assets with a powerful legal team and, to top it all, pledging the same assets twice.  The Governor spoke on 23rd April – “If you ask me whether CL Financial did everything that was honourable and beyond reproach, the answer is no! The answer is no!”  [See – http://guardian.co.tt/business/business/2009/04/24/cl-financial-bailout-cost-5-billion-over-two-years ]My word.  But there is yet another account coming from Michael Carballo, expressing surprise at the Governor’s statements – “We have a good relationship…and we have always sought to operate in good faith.  All information presented has been authentic and above board…”  In that case we may not need a Bob Lindquist to find out ’Where is the missing $5.0Bn the Treasury is now replacing?’  One can only wonder – What next?
  • A matter of interest – It seems clear that some consensus has now been formed to defer the sale of CLF assets so as to transfer the burden to the Treasury.  The MoU, which we were led to believe is the main document, now appears to have become secondary, despite the existence of no new facts.  What could possibly be the rationale for such an iniquitous decision?  If we proceed from where we are, it is clear that CL Financial has negotiated for itself an unsecured, massive line of credit from our Treasury.  Any one who has had to borrow money without security knows how difficult it is to get such a loan.  Even if you are lucky and someone big in the bank favours you, the interest rate is going to be extremely high.  Given the background to this fiasco, the lack of security and the reported conduct of the chiefs at CLF, what is the rate of interest being paid by this high-risk borrower?  We need to know that interest rate and now, please.

The weakening of moral authority

Finally, we come to an inevitability we all have to face, even if there is seldom any appetite to discuss it.  Yes, I am talking about the future and our aspirations.  There is a real danger that we – and I am deliberately using the collective ‘we’ – could allow our ‘Fit and Proper’ guidelines to remain yet another law which is ‘on the books’ but ‘nobody ever get charge’.  Here we have Directors and Officers of a finance company who –

  • have paid dividends after appealing for a massive State bailout;
  • pledged assets twice, which is something no ordinary person would ever be allowed to get away with;
  • claim to be cooperating with the State yet there is still $5.0Bn missing and silence on the refund of those odious dividends.

This country has intentions or stated ambitions to become an International Financial Centre.  This sorry episode is a litmus test as to our seriousness.

SIDEBAR: 22 Days of Decision

  • Tuesday 13th January 2009 – CLF writes to Central Bank requesting urgent financial assistance.
  • Friday 16th January 2009 – CLF issues dividend cheques to its shareholders.
  • Friday 23rd January 2009 – CLF holds its AGM at Trinidad Hilton.
  • Friday 30th January 2009 – MoU announced at Central Bank.  This is available at http://www.finance.gov.tt/documents/news/mr03183E.pdf
  • Sunday 1st February 2009 – Press reports that an agreement has been made to allow CLF to re-purchase MHTL shares at an agreed price in 2 years’ time.
  • Thursday 5th February 2009 – Press reports that an agreement has been made to allow Lawrence Duprey to remain as CLF Executive Chairman.  Further press reports that CLF has been advised by its British legal advisers that they must abide by the terms of the MoU.

If it was not so serious, this would be real jokey.

Rapid De-Rail

The Governor of the Central Bank is reported to have advised, at his address to the South Trinidad Chamber of Industry & Commerce on 7th April, that the assets of CL Financial (CLF) were fully pledged. <http://guardian.co.tt/business/business/2009/04/08/govt-left-empty-handed-cl-financial-bailout>. This is an outrageous development.

We are told that CLICO, CMMB, CIB and British-American Insurance Company Limited are the 4 CLF companies which were in financial trouble.  Those troubles prompted the request for urgent financial assistance made on 13th January.

That letter remains hidden from our view.  What sound reasons could possibly exist for its concealment?  Lawrence Duprey was interviewed on 12th March by this newspaper and it was reported that “…Speaking about the bailout, Duprey said he could not discuss the proposals that the CL Financial group made to the Government in January…”  Why the secrecy?  http://guardian.co.tt/news/general/2009/03/12/conflict-interest-no-way-says-duprey

This is not, repeat not, private business.  This is an enormous claim, estimated to exceed $10Bn, on our Treasury at a time of ‘belt-tightening’.  The continued secrecy on this matter is inimical to the very investment trust which the bailout is meant to preserve.  The CLF letter of 13th January must be published without further delay.

We are witnessing one of the greatest outrages in the history of our young Republic.  You see, the CLF officials who negotiated with the State must have known that the assets being pledged under the terms of the Memorandum of Understanding (MoU) were already pledged elsewhere.  You cannot sell something twice.  Everybody knows that.  Unless, that is, you trade in lies and fraud.

One of the basic principles of the insurance contract is Uberrima Fides – meaning that the person seeking the cover of an insurance policy must act with utmost good faith.  Failure to disclose important facts to your insurer could have the effect of making your policy in-valid.  It seems that CLF has acted with utmost bad faith in this matter.

CLF does not have, or cannot borrow, enough money to meet its financial obligations.  The plain meaning of the Governor’s statement is that CLF’s liabilities exceed its assets, which means that CLF is insolvent.

On Ash Wednesday, 25th February, the newly-appointed CEO/Managing Director of CLICO, Claude Musaib-Ali, reportedly told employees that the sum of $5.0Bn was missing from the company’s Statutory Fund.  “The people who were here before took the money and put it somewhere. We don’t know where. “We are perplexed…” he told workers, “we don’t know where it has gone.”<http://guardian.co.tt/news/general/2009/03/01/where-money-gone>

I could scarcely believe what I was reading.  If ever there were a case for the expensive expertise of the renowned forensic accountant, Bob Lindquist, this is it.  Mr. Lindquist is now investigating an alleged discrepancy of $20M at the Housing Development Corporation.

The Liquidation process

We also need to consider the liquidation process – what gets sold; to whom; when and at which price.  According to the 30th January MoU, CLF agreed to sell its shareholdings in Republic Bank, Methanol Holdings and CMMB to meet the cost of the bailout.  If the money raised from the sale of those shares was insufficient, CLF also agreed to the sale of “…all or any of their other assets as may be required to achieve the said correction…”.  Yet the Governor was reported to have also said on 7th April – “…because of a slump in real estate and methanol prices the Government would not be able to sell the conglomerate’s vast real estate holdings at present to recover the funds provided to CL Financial to relieve a liquidity problem.”

It seems that the decision has been taken to defer the sale of these assets because of the poor returns which would be made at this time.  Why the shift in strategy since 30th January?  The plain meaning of the Governor’s words is that to sell the CLF assets as agreed in the MoU would not yield the required monies.  That, in turn, would lead to a call on ‘all or any’ of the other CLF assets until the State injection of funds were matched.  The likely effect would be to close down CLF.  We are now being given a stupefying rationale for the fact that the implementation of the MoU is being delayed.  I say stupefying because the slump in real estate and methanol prices were already realities on 30th January.  The deferral of the liquidation of these CLF assets has two important consequences –

Firstly, taxpayers would be funding the bailout while waiting for asset prices to recover.

Secondly, CLF, having negotiated in bad faith, are being given a second lease on life, since, when asset prices recover they would be able to settle their indebtedness to the State and continue trading.  The obvious CLF insolvency issue is being forgotten.  Is any interest being charged on the huge sums of money being advanced to fund this business rescue?  Is it proper use of taxpayers’ money to rescue a privately-owned conglomerate?

In my view, the main effect of deferring the liquidation of CLF’s assets would be to transfer the growing costs of the bailout from the CLF balance sheet to the Treasury.  Thus allowing CLF’s shareholders to retain value.

The Minister of Finance and her defenders would have us believe that the MoU does not benefit CLF shareholders.  That would be so if it were being faithfully implemented.  But, as is so often the case, the devil is in the details.

Finally, we come to the burning issue which has occupied so much of the debate taking place overseas.  CLF paid a dividend to its shareholders on 16th January, 3 days after writing to the Central Bank for urgent financial assistance.  What moves are being made to recover those dividends?

SIDEBAR: CLF’s Directors and their responsibility

CLF’s Directors, as listed in their 2007 annual report, were –

Lawrence A. Duprey, CMT (Group Executive Chairman / Executive Director)

Sylvia Baldini-Duprey (Deputy Chairman)

Michael E. Carballo (Group Financial Director)

Roger R. Duprey (Executive Director)

M. Anthony Fifi (Director)

Dr. Bhoendradatt Tewarie (Director)

Dr. Rampersad Motilal (Director)

Clinton Ramberansingh (Director)

Leroy Parris (Director)

Bosworth Monck (Director)

Evan McCordick (Alternate Director)

Director’s liability – In May 2005, the Central Bank published its ‘Fit and Proper’ Guideline (sic) and that document can be found at http://www.central-bank.org.tt/news/releases/2005/mr050510.pdf.  It is a critical part of this discourse since it 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.

In light of the startling information disclosed in the Governor’s recent speech, how can we regard the CLF officers who conducted the MoU negotiations as ‘fit and proper’?  What action is being proposed to deal with them?

On 12th March Mr. Duprey was interviewed on the conflict of interest issue – here are some interesting quotes from that interview –

  • “What conflict of interest? Let’s grow up.”
  • “…Government came to protect the policyholders. They are not protecting us because I could walk away from Trinidad tomorrow and make a better living…”
  • “…It does not matter what I am left with. That is irrelevant. What is most important is that the policyholders are protected. I’m not important because I could pick up tomorrow and make a living in Greenland or Alaska or Saudi Arabia…”

The Meaning of Things

Many friends tried to correct me on the title of this article by saying that CLICO was being bailed out, along with British-American Insurance, CLICO Investment Bank (CIB) and Caribbean Money Market Brokers (CMMB).  They went on to assure me that CL Financial (CLF) is fine now that the bailout of those four subsidiaries has taken place.

At the post-Cabinet press briefing on Thursday 12th, PNM Chairman and Minister of Energy, Conrad Enill called for a focus on the ‘Bigger Picture’ and a reduced emphasis on the Minister of Finance.  I could not agree more.  As shocking as the story of the Minister’s shareholding etc. might be, it is easily outweighed by ‘The Bigger Picture’.

CLF wrote to the Central Bank on 13th January to seek urgent financial support from the State and we need to ask why.  In the absence of the CLF letter, the stage is set for speculation.  Given that we are contemplating a bail-out in excess of $10Bn, according to the last statement from the Central Bank Governor, the publication of that letter should not be delayed.

CLF’s 2007 Annual report is available online at http://www.clico.com/pdf/AR07/CL%20Financial%20Annual%20Report%202009.pdf and it tells of a group comprising over 65 companies in 40 countries worldwide.  Even after a decline, profit (after tax) for the year ending 31st December 2007 was stated at $1.74Billion.  Why would a healthy and thriving group like CLF need to seek State intervention to provide urgent financial support for 4 of its subsidiaries?  Was it a case of the looming liabilities being of a scale to eclipse the entire group’s assets?  If there was still equity available within the group’s portfolio, why could they not cover the liabilities by borrowing in the private market?  Was it merely a case of temporary illiquidity – a sort of technical insolvency – needing to be relieved by State intervention?  Even if the answer to this last is positive, we still do not know why they could not borrow on the open market.  It cannot have been easy to decide to go to seek State support and my interpretation is that the group had no other choice.

When we consider the recent revelations that the Minister of Finance holds substantial shares in CLF, which paid its shareholders dividends in January 2009, things become turbid.  Bear with me here, but we are looking at the period between CLF’s auditors publishing their 2007 accounts –18th November 2008 – and CLF’s Executive Chairman writing to the Central Bank on 13th January 2009.  By my count, that is only 55 days.

In that period the CLF Board of Directors did 2 critical and fundamentally opposed things-

  1. Declaring and paying a Dividend – At page 20 of CLF’s Annual Report 2007, we are told, in respect of Dividends, that “…In 2008, a dividend of $3.00 was declared by the Board in respect of the Financial year ended 31 December 2007…”.  The CLF Board could only have declared a dividend when the accounts were completed.  This newspaper published an uncontested report on Tuesday 10th March that those CLF dividend cheques were mailed out on 16th January, in advance of the AGM at Trinidad Hilton on 23rd January.
  2. Writing to the Central Bank to seek urgent financial support – CLF wrote on 13th January and that letter must have been the subject of some serious and prolonged board discussion.  Please consider that the same Directors who declared a dividend in the last forty-three days of 2008 also decided to write to the Central Bank in the first twelve days of 2009.  Imagine that.

Can we ever reconcile those two acts?  How does one write to say that one does not have enough money, then, only three days later, prepare dividend cheques which would have totaled over $20M?  What manner of man behaves in this fashion?  Was the Central Bank ever told that the declared dividend had been paid on January 16th?  We all know that the Minister of Finance knew.  Her statements to the Parliament to ‘clear the air’ were anything but.  Mamaguy for so.  Thursday’s headline in this paper made me smile ‘Duprey backs Karen’.  One can only wonder how long would a trusted executive at CLF last if that level of divided loyalties had been unearthed.  Mr. Duprey, for one, would know how expensive divided loyalties can be.

Is it legal to write cheques for dividends from a group which is unable to meet its liabilities?  Are these CLF Directors fit and proper people to sit as company Directors in our Republic?  Is theirs prudent and responsible behaviour?  Do we as taxpayers want to fund and endorse that kind of double-standard?  I, for one, do not.

On Carnival Tuesday, I saw in a notice that the High Court had granted an injunction to prevent CLF from diluting or disposing of its assets and also an order that they should produce a sworn affidavit detailing their assets.  That injunction has since been challenged by CLF’s attorneys and we recently learned that the parties are now discussing the matter privately before returning to Court.  Cool so.  On one side we have CLF and its advisers, who would obviously be trying to minimize the impact these events would have on their group.  On the other side we have the Central Bank, which is an organ of the Ministry of Finance, seeking compliance with the Court Orders they obtained on Carnival Sunday (February 22nd).  It seems that CLF has moved, rapidly, from seeking urgent financial assistance to being coy over the details of its assets.  It is almost beyond belief, but beat that.

It also seems that no lenders were willing to advance funds to CLF, since the State is the lender of last resort.  Given that CLF controls Republic Bank, CLICO Investment Bank and Barbados National Bank, this is a sobering insight into just how serious the cash flow crunch must have been.

To summarise – keeping our focus on the Big Picture – is CLF just suffering from a momentary bout of illiquidity or is the group actually insolvent?  If the former, why not just borrow the required monies from a private source?  If the latter, then just who is the State conducting private negotiations with?  Why?  Who are we, the taxpayers, bailing out?

The more I think about it, the more it seems that this title is just right.  The CL Financial bailout.

Sagacity and Veracity

The sheer rash of recent events, many of them contradictory, make it necessary to draw the connections between the emerging fiascos at both CL Financial and UDeCOTT.

The CL Financial crisis concerns every citizen, whether or not you had any funds invested there.  Indeed, given the scale of the fall-out, it seems that every Caribbean citizen ought to be concerned as well.  CL Financial was a trail-blazer in too many ways for this column to encompass and their problems are, in every way, also ours.  Just to show two ways, think firstly of the thousands of employees and other stakeholders who are affected by the unfolding crisis, then think of the way this episode is affecting the already poor levels of investor confidence.

The challenge at these times is to see what lessons we can usefully draw from the revelations thus far.  Yes, I am going to make a link between CL Financial and UDeCOTT and no, I am not going to make any comment on HCU.

About half of the nation’s insurances reside with the CLICO group.  CLICO’s agents were all trained to speak about the range of impressive assets which were owned by the CL Financial group – the Methanol plant, US and local real estate, Republic Bank Limited, the Home Mortgage Bank, lucrative Liquor brands and so on.  We all knew CLICO agents and have heard the lyrics.  But, as we have now found out, the decisive thing was the extent to which those various impressive assets were used for collateral and the way in which the parts worked together.  It seems that the actual returns on these investments were less than those originally anticipated.  So much so, that the liabilities eventually eclipsed the assets.

Point being that ownership of assets is necessary, but not sufficient, to add value to a portfolio.  The decisive aspect is the way in which those assets and liabilities are matched.  The related question being how much latitude to manoeuvre would the group have if times changed.

It seems to me that there are 3 aspects of the CL Financial fiasco to be highlighted in order to see the picture.

  1. The large-scale ‘Act of God’ events such as the fall in methanol prices, the stock/finance collapse and the declines in the real estate markets which no one corporate group could avoid.
  2. The viability of the business model and the emerging issues on the Statutory Fund.
  3. The struggle to retain selected assets for the CL Financial group by the corporate leadership.

UDeCOTT is the subject of the Uff Commission and we have learned that they have carried out a feasibility study on only one of the many office buildings they are responsible for erecting.  That feasibility study is itself discredited by the fact that the land was omitted.  It is true that our capital city is being greatly altered by the many commercial projects done by UDeCOTT, but the fact is that none of the projects are feasible and all of them are financed by US$ borrowings.  There is no doubt that this represents a great tranche of investment, but what is the rate of return?  Can anyone say?  Is the interest rate greater than the rate of return?

These are object lessons in hubris and the social costs of empire-building.  There are benefits to be sure, but we are witness in both cases to agendas to privatize the benefits and nationalize the losses.  It is particularly important at this point to guard against attempts to confuse us by blaming the respective fiascos on the large-scale events mentioned above.  In both cases we need to separate the ‘Acts of God’ from the imprudent and improper acts for which the public now has to pay.  Those events did indeed take place but it does seem that their impact would have been reduced, had proper prudent procedure been followed.

Commission of Enquiry

There have been calls for a Commission of Enquiry from Mary King, Dennis Pantin and Ramesh Lawrence Maharaj.  I support those calls.

It is not ‘every Monday morning’ that one can have a Commission of Enquiry, but we need to know what happened if we are to prevent a repetition of this fiasco.  This is a ‘bail-out’ in excess of $10Bn, which is a colossal sum at any time.  This is historic and we need to enquire vigorously into the causes of the collapse.  We constantly hear of our aspirations towards regional leadership, particularly in the finance arena.  We cannot learn from this fiasco unless we know what went wrong.

Just two questions could illustrate the issues –

  1. In light of the obvious insolvency, when exactly did CIB and CLICO stop soliciting investments?  This one is almost personal because I spoke, along with two other panelists, at CIB’s inaugural Investment Seminar at the CL Duprey Box at the Oval on Thursday January 22nd.  Yes, that’s right, the official version is that  “…on January 13 2009, Clico’s Chairman formally raised the issue of possible financial assistance from the Central Bank…”
  2. Did CL Financial pay dividends to its shareholders in January 2009?  CIB is wholly-owned by CL Financial (CLF) and CLICO is about 98% owned by CLF.  If CLF had to write on 13th January seeking urgent assistance from the State it is obvious that the parent company was unable to meet the looming obligations.  That is a situation tantamount to insolvency and one can only wonder if it is true that a dividend was paid in these circumstances.  As is my practice, I am sticking to the facts and not indulging in innuendo or ole talk.  I have myself seen the Minister of Finance’s name on the register of shareholders for CL Financial Limited as filed on 17th February 2009.  What a thing.

The CL Financial Fiasco contains lessons at all levels and these would include –

  • the type of regulatory framework
  • the independence, degree of discretion and diligence of the regulators
  • the culpability of Directors and Executives.

There are many solid and troubling accounts of the last days which would emerge during a Commission of Enquiry.

SIDEBAR: An easy guide to the CL Financial and UDeCOTT Fiascos

Six quick pointers for our readers –

  1. Ambitious Empire-building – Huge and dazzling development is envisaged and implemented.
  2. Other peoples’ money – Use of either taxpayers’ or investors’ monies as ‘seed capital’.
  3. Excessive borrowings – Make sure to borrow for the majority of the costs.  As we are discovering in the CL Financial case, assets have been heavily pledged – i.e. borrowed against.  In the case of UDeCOTT, most of the massive borrowings are in $USD with the situation tantamount to the taxpayer having given a blanket guarantee.
  4. No cogent planning or feasibility checks – Independent professionals of integrity are marginalized or erased from the script.  Witness the long-overdue audits of both CLICO and UDeCOTT, usually a sign of some adverse news.  CLICO’s 2007 audited accounts were only issued in November 2008.  On 28th January 2009, UDeCOTT’s Executive Chairman told the Uff Commission under oath that “…my understanding is that probably before the end of next week we shall have our 2007 accounts…”.  The plain meaning of that statement is that those accounts would have been ready a month ago.  No accounts yet.  The silence and its implications are equally concerning.
  5. Real Profits? – Is it possible for CL Financial to pay dividends at the same time as writing to seek the State’s urgent financial assistance?  How could UDeCOTT be employing commercial strategies and declaring improving profits as a property-development company, if every one of their projects is not feasible?  As usual, the figures will reveal a lot to careful readers.
  6. Strategic Agenda – The common agenda is to privatize the benefits and profits while being careful to nationalize the losses.  We reject that agenda.  Moral hazard has to be upheld as a reality if we are to develop a progressive nation.