Tag: corruption

CL Financial bailout – Closing the circle

Inquiring What Went Wrong. Illustration by NiCam GraphicsAmidst the raging debate on the rights of the disappointed depositors versus those of the anxious taxpayer, I am continuing to examine some more of the fundamental issues. Yes, I accept that there are depositors amongst the taxpayers, but those interests are not in alignment, hence the discussion.

By making a legislative proposal to frustrate the CLICO Policyholders Group (CPG) litigation, the government seemed to have conceded the merit of the protestors’ case. Those proposals have now been withdrawn and on Friday 1st October, the Prime Minister gave an extensive reply to the CPG. The strategic decision seems to have been to retreat from the narrow corridors of legality and strive for the broad perspectives of the entire nation. The apparent decision is to favour an act of persuasion over one of sheer power. Given our norms of governance in these parts, that is no small shift and it is a welcome sign, quite apart from my agreeing with the stance taken.

Most importantly, the Prime Minister announced a Commission of Enquiry into the collapse of both CL Financial and Hindu Credit Union (HCU).

Once again, I am going to refrain from discussing the legal issues, despite the tempting developments in this aspect of the matter. I am going to keep deepening this discourse so that we can have a better quality of discussion

What was the EFPA?

Firstly, it is necessary to spend a little time on the true nature of the Executive Flexible Premium Annuity (EFPA), since that product is what the majority of this dispute is about. The product was approved for marketing by the Supervisor of Insurance in 1990.

An annuity is an investment product for an individual, to save for a specified future expense by means of periodic payments. CLICO had an approval for a Flexible Premium Annuities, which was attractive to those people who had fluctuating incomes, but soon led to the sale of Single Premium Annuities. Those are investments in which the investor pays a single premium and receives the benefits after CLICO had held the funds for a short term.

So the single premium can be viewed as a deposit, which is what many of the agents called it. While the annuity, traditionally a long-term investment product, then assumed a norm in which most EFPAs were held for 5 years or less.

In saying so, it is interesting to consider the question of just how an organisation can purchase an annuity, which is an investment product for an individual. The fact that so many organisations did so, does damage to the notion that this EFPA was sold in conformity with its true nature.

So, in summary we have an approved annuity, which is mainly sold as a single-premium, short-term, high-interest investment product to anyone who wants one, including Credit Unions, private companies – several CLICO agents tried, repeatedly, to get deposits from our firm – and State-owned corporations. At some point that annuity morphed, by this series of changes, which seem, to me at least, to have fundamentally altered the character of the approved instrument

All of which returns to the basic accounting principle that when one is trying to interpret a situation such as this, the correct procedure is to be guided by the substance rather than the form of the transaction. That is the background to my assertion that the correct interpretation of the EFPA is as a deposit.

When you consider the very high interest rates offered and the unique way that CLICO altered the EFPA, one has to wonder how the regulator viewed these activities. But more on the regulators later.

What did CLICO become?

Even beyond the changes which the EFPA underwent in the hands of CLICO, the reverse was also to take place. That happened because CLICO changed the EFPA to suit the strategy of its parent company, CL Financial, but the parent group (and ultimately CLICO) in the end were irreversibly changed and then destroyed by the EFPA’s success. Let me explain –

In our system, there are 3 species of financial institution –

  • Banks and other Financial Institutions (approved as Deposit-taking Institutions by the Deposit Insurance Corporation);
  • Insurance Companies and
  • Credit Unions.

CLICO’s liabilities, as stated by the Finance Minister, were $6Bn to traditional insurance policyholders and $12Bn to depositors. The question being, given that two-thirds of their liabilities are non-insurance, how could it be legitimate to consider CLICO an insurance company? More to the point and looking forward, where does a company like CLICO fit into our regulatory framework? That is an important aspect for us to consider for the future of our financial services market.

What were the Regulators doing?

The Regulators! Coulda, Woulda, Shoulda!That is the burning question at this time and a large part of the blame for the CL Financial collapse must lay with the regulators.  In this case it seems that the Governor of the Central Bank and Inspector of Financial Institutions both have serious questions to answer.  The situation is really too much to even imagine, but a few examples –

  • The Governor repeatedly stated his doubts on the stability of the CL Financial group, yet admitted later, in a written statement – see http://www.central-bank.org.tt/news/releases/2009/mr090204.pdf – that he had deposited money at CLICO Investment Bank (CIB).
  • The Governor stating his strong disapproval the conduct of the CL Financial chiefs – The Governor spoke on 23rd April 2009 – “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 .  Yet he has not invoked ‘fit and proper’ regulations to disqualify those offending people from holding office in any financial institution, which is within his ambit.
  • Carl Hiralal, Inspector of Financial Institutions, swears an affidavit in the CIB winding-up action in which, at para 23, he confirms that CIB had filed no Corporation Tax Returns in 2007, 2008 or 2009.  The plain meaning of which is that they did not pay their taxes, yet  were able to keep their banking licence and when it all went wrong, were also able to get a bailout.
  • The Statutory Fund – We have heard many statements since this collapse that the CLICO Statutory Fund was not paid-up in full and yet they too were able to retain their licences.
  • When, if ever, did the CLICO sales force stop selling?   Answer is they never did, and have continued to remain open for business despite their self-confessed insolvency.  Is it true that CIB was seeking deposits up to the last?
  • Mismatch of funding tenor and risk – It was clear that CL Financial, in addition to morphing an approved product beyond recognition, then ballooning those receipts up to over-balance the entire company, operated with a fundamental ill at the heart of the thing.  Having coaxed many investors to place their eggs in one basket, the very company they had trusted with their savings turned around and broke yet another fundamental financing rule.  CL Financial used short-term/high-interest funds to finance long-term investments, which was evident from its accounts.  Did the regulators have a risk ranking or some other tool to allow closer monitoring of these activities?
  • The Nature of the thing – Finally, we have the issue raised above – i.e. the EFPA that became something else and the insurance company that also became something else. Like some bizarre horror or science fiction movie, but is our country.  My question being that there must be some point at which an approved product stops resembling the original one, to the extent that the regulator needs to have the clarity and integrity to stop those sales.  In consequence of the prior failure, CLICO stop resembling CLICO and also became something else.

What is to become of these self-confessed, slack regulators?  The state has already saddled a considerable burden in assisting these depositors, but are we to have a continuation of this disastrous performance?

I ask the question because the CLICO pattern is not over, not at all.  There are still other doubtful financial institutions offering incredible rates of interest, with special incentives for the vulnerable.  Yes, it is still going on – see the sidebar.  Do we have the will to do differently?  Can we do better?

As a matter of urgency, we need to have published the full details of those who gained from the $7.3Bn already spent in this scandalous bailout.  We need names, addresses, amounts of capital and interest and date of payments as a minimum.  Those monies are public monies and if it was correct to insist on disclosure in the shocking case of the ‘Secret Scholarship Scandal‘ last year, it is equally right in this disgusting case.

‘What is good for the Goose is Good for the Gander’.

Expenditure of Public Money – Accountability and Transparency = CORRUPTION

We also need to have published the full details of the $1.0Bn of ‘non-performing’ loans on CIB’s books.

The Impossible Claim – denied?

The size of the outstanding claims is a total of about $18Bn, which is colossal when compared to the largest pool of money available to the state – i.e. the Heritage and Stabilisation Fund, which itself holds about $18Bn.  The state cannot bankrupt itself

SIDEBAR: The case of AIC Finance

AIC Finance is owned and run by the Jamaican billionaire, Michael Lee-Chin, who came in for mention in this debate in Anthony Wilson’s 15th October 2009 BG View ‘Will Lee-Chin avoid Duprey’s fate?’ – see http://guardian.co.tt/business/business-guardian/2009/10/15/will-lee-chin-avoid-duprey-s-fate.  I commented on that in Trinidad & Tobago Review of 2nd November 2009 in ‘Duprey’s fate’ – see http://wp.me/pBrZN-43 or http://www.tntreview.com/?p=887 and the point is again pertinent.

AIC Finance defaulted on a USD bond last year – in other words, they were unable to pay their debts – see http://guardian.co.tt/business/business/2009/06/06/lee-chin-late-us47m-bond-payment or http://www.jamaica-gleaner.com/gleaner/20100818/business/business1.html.

AIC advertIn the last fortnight or so, the same company has been advertising surprisingly high rates of interest in daily newspaper adverts which also offer ‘Preferential rates to Trinidad & Tobago Association of Responsible Persons (TTARP) members’.  Those interest rates range from three to four times the rates being offered by the commercial banks.  If CL Financial could not sustain this strategy, how can AIC continue to offer these rates in today’s market?

That is the question.

SIDEBAR: Two points in the PM’s speech need emphasizing

The First, is in the positive, democratic interpretation of the revised bailout being offered to the estimated 250,000 people affected as policyholders and depositors.  All 225,000 policyholders – those with life, pension and health insurance policies – will have their claims honoured by the State.  10,000 of the 25,000 depositors are owed amounts less than $75,000 and those claims can be settled now.  Which leaves 15,000 depositors to choose between litigation or accepting the present offer of a discount on their monies.

In summary, 235,000 of the 250,000 claimants are being fully settled and that is 94%.

The Second, is in relation to the erroneous portrayal of the impact of discounting on the claimants who accept the government’s offer.  There seems to be an error in the calculations upon which the PM relied in making her statement –

“…We are going to give some help.  These installment instruments I am saying can be cashed in early at financial institutions.  Yes, they will be cashed in at a discount. But I have been informed by the hon. Minister of Finance, Mr. Winston Dookeran, that based on discussions with local financial institutions, that if the first five years of installment notes were cashed in, the discount could be as high as or as low as—when we look at it the glass is half-full or half-empty, depending on how you look at it—5 to 10 per cent.  What this means is for every dollar, you could get between 90 to 95 cents per dollars if you decide to discount.  I am so advised…”

Apart from my not understanding the selection of the first five years of investment notes as a point for discussion, the calculations are misleading, since the actual discount at those rates (with which I concur) will have a far greater impact – see http://wp.me/pBrZN-qh for a detailed explanation.

CL Financial bailout: What is this campaign?

Clockwise from top right, Norris Gomez and Peter Permell; Ramesh Lawrence maharaj; CLICO Policyholders Group meet; a speaker at CLICO Policyholders meeting. Illustration by NiCam Graphics.We are witness to a second wave of assault on our Treasury.  Let us be sure, those of us who are not in line to benefit directly from the bailout, that the picture is complicated and it contains perils for the entire country.

The original bailout was an unjustifiable and colossal facility granted to the CL Financial Chiefs and the shareholders of that failed, privately-owned, group.  I say facility because the taxpayers’ money in our Treasury was pledged to repay the debts of the CL Financial group.  The deal was hatched in secret and fact is, upon reflection, its terms were never formally debated in our Parliament.  What was debated was a series of amendments to the laws governing distressed Banks and Insurance companies.  A lot was said about the issue and many notable contributions were made to the debate in Parliament, but the agenda item for debate was not the terms of the bailout.

The 30th January 2009 Memorandum of Understanding had already been signed and was on its way to implementation when our Parliament debated and agreed to amend the legislation.  The nation had witnessed a ‘Quiet Coup’ to draw from the title of Professor Simon Johnson’s seminal article (in the May 2009 edition of The Atlantic) on this process in the USA – see http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/7364/.

I have no intention of arguing the legal merits of the case being advanced by the CLICO Policyholders’ Group (CPG), leave that to the learned.  I just note that we are yet to hear the voice of the traditional policyholder in the declarations of this Policyholders’ Group.

The bare facts need to be laid out for consideration, it would be far better to conduct this discussion in a more informed manner, with some of the missing details requested at the close of last week’s column.  But is best to start from where we are.  So, the bare facts –

  • CIB’s insolvency is estimated, according to the winding-up petition being heard in the High Court, to be of the order of $4.7Bn
  • According to the Finance Minister in his budget speech, the combined insolvency of British American and CLICO is of the order of $7.2Bn.  It is not possible to tell from that speech if those estimated figures included the monies already drawn from the Treasury in pursuance of this bailout.
  • The amount said to be spent on the bailout, up to May 2010, was $7.3Bn.
  • The amount being owed to the 225,000 policyholders is estimated to be $6Bn.  That covers traditional insurance products such as pensions, health plans and life insurance – it works out at an average of $26,666 owed to each person.
  • The amount being owed to the 25,000 depositors is estimated to be $12Bn, which works out at an average of $480,000 owed to each person.  But there is another way to look at that information and that is in the sidebar.
  • The Governor of the Central Bank, the very official the CPG is seeking to have affirmed as the proper decision-maker in this matter, in April last year made public statements that all the assets of the group are encumbered.

In the absence of the accounts and operating with the available information, it seems reasonable to believe that the CL Financial group is insolvent and further that our Treasury has swallowed an impossible series of obligations.  Furthermore, there is no obligation on the borrowers – the CL Financial shareholders – to pay one cent of interest. Even worse, Para ‘A’ of the 12th June 2009 CL Financial Shareholders’ Agreement actually obliges the State to protect the interest of the shareholders – see http://wp.me/pBrZN-bP.

Of course this leads to yet another ‘$57,000 question’ – ‘If the CL Financial group is insolvent, then how are we paying for all this?’  Yes, that is the big one.

It seems that the CPG is intent on advancing its sectoral interest and while we know that is how things work, it is even more important to be watchful of our nation’s wealth.  We are actually being asked to put out an additional $12Bn to rescue the 15,000 CPG members, with no reasonable hope of recovering those monies.

For the record, no one from the previous government or the Central Bank, for that matter, has ever even attempted to justify the rotten terms of this bailout.  Not even an attempt to explain the interest-free, unlimited, unsecured loan to that lucky group of 325 CL Financial shareholders.

Even now, with the new terms being hotly debated, please note carefully that no new terms are being announced for the ultimate borrowers, the CL Financial shareholders.

Selwyn Ryan
Selwyn Ryan

Professor Selwyn Ryan of UWI, who was, last year, a strong critic of the bailout process and its glaring conflicts of interest, now appears to have become a leading party in the CPG, calling for that suspect deal to be honoured.  A deep contradiction in terms, I tell you.  How do you honour a rotten deal?  Politics does make strange bedfellows and yes, history is truly rich in irony.

Emmanuel "Manny" Lawrence
Emmanuel "Manny" Lawrence

Even stranger still, is the presence in the CPG of Emmanuel ‘Manny’ Lawrence, former Sales Director of CLICO and now head of one of its sales agencies.  In the three years before the CL Financial group collapsed, all the CLICO agents I knew made intense efforts to get deposits from me.  Not once did these agents even attempt to sell me a life insurance plan or health plan.  These agents consciously and deliberately coaxed many of those people who are now protesting to place all or most their investments in this one instrument.  That is the kind of irresponsible behaviour which led many people to be in breach of the basic investment guideline against over-concentration of risk – to avoid putting all ones eggs in one basket.  That is the kind of biased and unsound advice which no proper professional would render to a client.   It is a decisive factor in this entire scenario.

The ingredients included the requirement for cash by an expanding industrial/commercial group, the resulting lucrative commissions being paid, the trust of the investors and the poor level of general financial literacy.  Those factors all contributed to this appalling picture.  To be fair, despite the titles adopted by some of these salesmen, they were not true Investment Advisers, since they were selling CLICO products.

Also, as to the discussion about the sophistication of the investors, the fact is that even an organisation as large as the National Gas Company, could be seen to have placed undue reliance on the high-interest/high-risk products being offered by the CL Financial group.  At one point, according to its 4th February 2009 Press Release, over 45% of NGC’s funds were in CL Financial – see http://wp.me/pBrZN-ec .

SIDEBAR: The depositors re-examined

I just made the point that the 225,000 ‘traditional, long term policyholders’ are owed an average of $26,666 per policyholder.

Also, that the 25,000 depositors are owed an average of $480,000 per depositor. It is interesting that if you subtract the maximum of $75,000 which would be due to each of the 10,000 ‘small-scale’ depositors, the total owed to the remaining 15,000 depositors is reduced to $11,250,000,000.  That adjustment carries the average amount due to the real protestors in this CPG to no less than $750,000 per depositor.  Yes, that is twenty-eight times the amount due to the traditional policyholders.

Ironically enough, the voice of the traditional policyholders, who outnumber the depositors nine-to-one, is virtually silent in all this.  I am yet to hear anything from the CPG on behalf of those traditional policyholders.  But then again, it is clear that by far the larger amount is owed to the depositors and further, that they appear, on average at least, to be owed about 18 times more than the typical policyholder. Yes, as Growling Tiger did sing “Yuh know very well that Money is King’’.

CL Financial bailout: Disturbing Arrangements in the 2011 Budget

A Bailout Cheque payed by taxpayers to CLICO was stoppedWinston Dookeran’s budget proposals to re-order the ongoing CL Financial bailout have sparked considerable controversy. Dookeran stated his first priority to be “…Stop the drift and indecision…” – ironically enough, it appears that the sentiments of the public are moving in another direction entirely. A new mood of protest and threats of impending lawsuits have emerged. This is a live example of the law of unintended consequences.

The budget’s revised proposals are –

  • Immediate stop on all interest payments;
  • $75,000 claims from depositors to be settled immediately;
  • Balances exceeding that threshold to be repaid over 20 years, with no interest payable. For an example, click here;
  • The group to be re-structured, with CLICO and British-American Insurance Company (BAICO) to be merged and prepared for divestment;
  • “…Those responsible for this crisis must be held accountable.…”

Clearly, Dookeran took the decision to review the MoU of 30th January and the Shareholders’ Agreement of 12th June 2009. He reduced the burden on the State by increasing the sacrifice of those who were anticipating the return of all their funds under the terms of the original agreements. The latter aspect is arousing serious protest, but there are other areas which also deserve attention.

The entire picture is very confused, which seems to be deliberate.  There were two main types of investments made in this situation – firstly, the basic and traditional insurance products such as pensions; life, health and general insurance and secondly, the depositor who was seeking high returns.  It is true that the pension products offered an optimistic 12% rate of return, but the short-term depositors were different.

Much of the current discussion and argument is actually about the repayment of the depositors, not the traditional insurance policyholders.  The fate of the policyholders is often invoked by people who are actually arguing for the return of their own deposits and that is why the separation between the two, which Dookeran makes, is so important.

To quote  – “…The number of traditional, long term policyholders affected by this crisis, covering pensions, life and health insurance, is around 225,000 persons and accounts for $6 billion in liabilities…”  That is an average of $26,666 per policyholder.

Again – “…There are approximately 25,000 customers holding these short term contracts, and the liability to this group is in the region of $12 billion…”  That is an average of $480,000 per depositor.

Ironically enough, the voice of the traditional policyholders, who outnumber the depositors nine-to-one, is virtually silent in all this.  But then again, it is clear that by far the greater liability lies with the depositors and further, that they appear, on average at least, to be owed about 18 times more than the typical policyholder.  Yes, I am aware that there are depositors who are also policyholders and so on.

For those of us who did not invest with CLICO, the mere idea of our taxpayers’ funds being used to rescue those who placed high-return deposits is deeply offensive. Both the CL Financial chiefs and the depositors who took the chance at investing at those incredible rates of return are being spared the consequences of their decisions by the bailout process. But those groups are being differently treated from each other and that is the point in this commentary.

On the principle, the absence of consequence is inimical to any development, personal or national.

When I consider the appeals from Credit Union and Trade Union leaders, as well as individual investors, it makes me wonder if there is a live concept of responsibility in this place. All those people withdrew money from the slow-but-steady accounts of the traditional banks and put it into the high-interest accounts at CL Financial and HCU were indulging in riskier choices. How can they be so bold-faced as to tax the rest of us for their adventure?

Some members of the CLICO EFPA group including (l-r) William Aguiton, Selwyn Ryan, Norris Gomez and Peter Permell
CLICO EFPA Policyholders group at press conference on Sept. 21

There are now two groups organized to lobby for the interest of the disappointed depositors – the ‘CLICO EFPA Policyholders’ and the ‘CLICO Depositors Interest Group.’ Some of the leading members are themselves leading CLICO sales agents, so the decline continues. They are asking for an urgent meeting with the Minister of Finance and litigation is threatened, so this will form part of this ongoing series.

‘Credit Unions fear collapse’ was the headline of a story in this newspaper on 17th September – at http://guardian.co.tt/news/general/2010/09/17/credit-unions-fear-collapse – reporting on the concerns of the Credit Union League (CUL), given the scale of their investments in the CL Financial group. Figures were presented for four large credit Unions and those have an average of less than 4% of their assets in CLICO. See the table here:

CREDIT UNIONS’ reported CLICO Holdings
Credit Union CLICO Deposits Total Assets Proportion
Eastern CU $17,000,000 $1,234,000,000 1.37%
Teachers’ CU $24,000,000 $503,000,000 4.77%
Rhand CU $28,100,000 $395,000,000 7.11%
Venture CU $21,000,000 $333,000,000 6.29%
Summary $90,100,000 $2,474,700,000 3.64%

Note – The data in this table is taken from the Guardian article cited, except for the Eastern Credit Union Asset Value which is from its 2009 Annual Report.

The CUL has not made any convincing case for a possible collapse and it seems reckless to even suggest further collapses on the basis of these figures.

But the confusion is continuing, with contradictory positions being taken on this issue. The idea that the Credit Union movement is under threat is a very serious one, which would be of great public concern, so we need to examine these statements carefully.

At page 10 of the Express of 22nd September ‘Credit Unions seek help from Rowley’ – see http://www.trinidadexpress.com/business/Credit_unions_seek_help_from_Rowley-103498744.html?corder=reverse – the Credit Union League met with the Opposition Leader, Dr. Keith Rowley. Once again, the idea that Credit Unions are in serious trouble was advanced – “…They said they would not be able to sustain daily operations. …” That is a very startling statement, this time given without any attempt to provide evidence.

To add to the confusion, the Guardian of that same day (22nd September) reported, at page 13 “CFF welcomes move to meet with CU on Clico” – see http://guardian.co.tt/news/general/2010/09/22/cff-welcomes-move-meet-cu-clico – on statements by Esme Raphael, President of the credit union’s Central Finance Facility (CFF) on this situation – “…Raphael said while the credit union movement was under no threat of collapse, the 20-year repayment plan would make it less competitive in delivering credit union services…”.

These contradictory messages will detract from the credibility of the Credit Union movement and must be clarified.

The idea that there is any such thing as a ‘guaranteed investment’ is preposterous. An absolute oxymoron is generating all this argument.

Yes, the last government made certain pledges and I have been critical of those, but here we are entering an even more turbid situation.

As outlined above, the PP government has decided to alter the terms of the existing bailout agreement as to refunds to depositors, so it is clear that it regards the terms of those agreements to be negotiable.

In my view, the most odious aspect of the entire bailout is that the wealthiest individual in the Caribbean was able to negotiate the largest-ever loan from our Treasury at zero interest on the basis of a letter. If the terms of the bailout agreement are negotiable, why are we not insisting on charging a proper rate of interest to compensate the State for these massive loans? Who is protecting our country’s wealth? In view of the fact that they are essentially unsecured loans, the only proper interest rate would be a punitive one.

There are live, cogent notions of financial equity and economic justice which are being abused in this entire scenario, but that is for a separate series.

The amounts involved are massive – “…The total funding provided as at May 2010 by the Government and the Central Bank, excluding indemnities and guarantees to First Citizens Bank amounted to approximately $7.3 billion…” Emphasis in the original. That equates to over $456M a month to rescue Mr. Duprey. I wonder how much is the total of the indemnities and guarantees?

The bailout terms were revised to reduce the amount of the State payout to the depositors, but no additional pressure is being put on the CL Financial group in terms of interest payments. It is resembling a comfortable arrangement for Duprey.

Another aspect of the budget which was difficult to follow was the shifting focus between CLICO and CL Financial.

The proposal to merge and prepare CLICO and BAICO for divestment needs a fuller explanation. That is because the leading insurance ratings agency, AM Best, just de-listed CLICO, due to its failure to provide financial data – see http://insurance-technology.tmcnet.com/news/2010/09/14/5004871.htm. In addition, BAICO was declared insolvent in November 2009 – see https://afraraymond.net/wp-content/uploads/2009/11/baico_resolution_strategy.pdf – and filed for bankruptcy in the Florida courts in March – see http://www.thevoiceslu.com/local_news/2010/march/02_03_10/British_American_Files_for_Bankruptcy.htm. To quote Dookeran – “…As of June 2010, CLICO and British American combined total liabilities were approximately $23.8 billion but total assets were $16.6 billion…” Emphasis his. That is an insolvency of the order of $7.2Bn and it is not at all clear how, if at all, that can be divested.

We need a better quality of information to move ahead with this, so it was encouraging to hear Dookeran’s clear post-budget statement “…No more shall we have secret government,…” – see http://www.newsday.co.tt/news/0,127330.html.

Minister, these facts need to be made public if we are to eliminate secret government :

  • The original Duprey letter of 13th January 2009 – I have applied twice under the Freedom of Information Act for this and the second application has been in your Ministry since 28th June, unacknowledged.
  • The audited accounts of the CL Financial group for the year ending 31st December 2008 – Have PwC completed that? When are they to be published?
  • The Lindquist Report – Bob Lindquist was reportedly appointed to examine CLICO. Has he submitted a report? Are we to be told of any of his findings?
  • The Mottley Report – There was a team of three advisers – Wendell Mottley, Colin Soo Ping Chow and Steve Bideshi – appointed to examine the CL Financial group and we need to know what were the findings of this group.
  • The Central Bank’s winding-up petition for CIB in the High Court has given us a disturbing insight into the operations of ‘The House on the Corner’. When are we going to get reports into the collapses at CMMB, British-American or CLICO?
  • Given that we are being asked to bailout and clean-up Mr. Duprey’s crisis, I feel we need to be told who are the borrowers of the $1.0Bn of ‘non-performing loans’ in CIB’s portfolio. The fact is that these are some of the delinquents we are being asked to bailout and the names would surprise the public. Local banks customarily publish the names etc of people who have non-performing loans, so why can you not do the same thing in this case?
  • To quote the budget statement – “…This crisis was caused by…wrong financial reporting…” False Accounting is a criminal offence under our laws – When are criminal charges to be laid? Those people – the accountants who were accused of that grave offence – belong to professional bodies, both here and overseas. Is there any intention to make formal reports to these professional bodies?
  • Quoting again – “…This fiasco was caused by reckless corporate governance and the glaring failure of our financial regulatory institutions…” What action is to be taken against these slack regulators?
  • Is there any intention to invoke the ‘Fit and Proper’ provisions against any of the CL Financial Directors or Officers?
  • Finally, do you intend to insert an interest clause into the ‘sweetheart bailout agreement’?

Mr. Dookeran, you have the opportunity to inject notions of solid responsibility and proper conduct into this sorry situation.

Next, I am going to delve into the promise to ensure accountability of the responsible persons.

SIDEBAR: The Hindu Credit Union peril

Amidst all this and completely to be expected, the PP government is bailing-out HCU depositors on identical terms to those now being offered to CL Financial depositors. For the record, the Finance Minister’s statement was as plain as it was unsettling –

“…Although the failure of HCU did not carry a systemic risk to the financial system since it represents less than one percent of the total assets of the financial sector, this Government is of the view that these funds of these small investors must be protected…”

We were told directly that this HCU collapse is not a risk at all to the system, but these disappointed savers are still to be rescued by the Treasury.

This is a poor precedent, since when the next Financial Institution collapses, the then Minister of Finance would have to deal with those unrealistic expectations.

CL Financial bailout – The House on the Corner 2

Winston Dookeran sounds off on CLICO

—* Finance Minister Winston Dookeran, speaking on the CL Financial bailout, during his inaugural Budget Speech on 8th September 2010

More insights into CIB

The examination of CLICO Investment Bank (CIB) continues, based on the affidavits in the Central Bank’s winding-up action.

Firstly, as an overview, I consider the various versions of the accounts and their implications –

  • CIB’s 2007 audit – Was performed by PricewaterhouseCoopers (PwC) as at 31 December 2007, with the Balance Sheet showing Total Assets of $12.587Bn and Total Liabilities of $11.699Bn. Please note that those accounts were unqualified – PwC gave a ‘clean’ audit to CIB at the end of 2007. (See – https://afraraymond.net/wp-content/uploads/2010/09/cib_2007_accounts.pdf)
  • CIB’s Management Accounts – As at 31st January 2009, showed Total Assets of $12.264Bn and Total Liabilities of $10.692Bn. Those figures are broadly in line with the audit figures 13 months earlier, at the end of 2007. (See – https://afraraymond.net/wp-content/uploads/2010/09/cib_mngt_acc.pdf)
  • Ernst & Young’s Statement of Affairs – As at 31 January 2009, that showed Total Assets of $6.387Bn and Total Liabilities of $11.080Bn. Virtually $5.9Bn of assets seem to have vanished in a mere 13 months – a weekly rate of ‘withdrawal’ close to $105M – leading inevitably to the estimated insolvency of $4.693Bn. (See – https://afraraymond.net/wp-content/uploads/2010/09/cib_stmnt-of-aff.pdf)
  • The size of the CIB insolvency – Apart from its size as a proportion of the entire CIB Balance Sheet, this gap can give one an idea of the composition of the missing $76.1Bn from the CL Financial Balance Sheet – see ‘Finding the Assets‘ published in the Business Guardian on 19th November 2009.
  • The Return on Assets – This is a benchmark of company performance, being the net income as a proportion of the total assets. In the case of CIB, according to the PwC 2007 audit, the RoA is less than 1%.  That is an exceedingly poor rate of return which would normally denote weak management, but it seems that CIB functioned well as an operation to raise cheap finance for the CL Financial group.
  • Statutory Deposit – Note 4, at page 45, of CIB’s 2007 financials states a legal requirement for CIB to maintain a non-interest bearing Reserve Account with the Central Bank equivalent to 9% of its deposits and other specified liabilities. Given that the 2007 Balance Sheet discloses Customer Deposits and accrued interest of $5.509Bn, the Reserve Account ought to have been holding about $495M, as a buffer against just this sort of situation. Was that Reserve Account credited in accordance with the stated requirements? Were those funds expended first in the crisis, or has the Treasury taken the full cost of CIB’s failure?

That is an overview of the CIB position, which leaves the burning question – ‘Where did all this money go?‘  For $5.9Bn in assets to vanish in 13 months is an incredible failure of corporate governance and state oversight.  Given paras 5 and 6 of Hiralal’s affidavits – which effectively seek to claim that the events of the 15 January 2009 were unexpected – it seems that neither the auditors nor the regulators performed properly in this case.  But more on that later…

Devilish Details

Here are some details of where the money went and how it was handled.  This is taken from para 7 of the affidavit of Ernst & Young Director, Maria Daniel –

  • Financial Records –

    …The financial record keeping in CIB was weak.  The financial accounting system was not appropriately designed and implemented…

  • Bank Records –

    …Bank reconciliations were not properly prepared.  CIB’s reconciliations contained numerous errors that were not corrected on a timely basis …

  • Loan Portfolio –

    …In general the loan portfolio comprised a significant percentage of high risk real estate projects…and the rest of the portfolio was of poor credit quality.  Additionally, there was a lack of supporting documentation and/or appropriate security for many of the files inspected.  There was little evidence to suggest that the loan portfolio was being properly administered by management, and generally, recovery efforts on delinquent loans were inadequate…

  • Loan Arrears –

    …The arrears report as prepared and presented by CIB’s management as at 31 January 2009 showed only $111M in arrears, which is approximately 5% of the loan portfolio…

    That 5% bad-loan proportion would be considered acceptable by banking norms and would raise few alarms.  Given that CIB was in crisis, it seems unbelievable that this crucial indicator was at 5%, but the very next sentence reads –

    …However, upon further examination Ernst & Young identified at least $1Bn in loans that should have been classified as non-performing or on a watch-list…

    From those figures it seems that the true level of delinquency in the loan portfolio was of the order of 45% and one can only wonder what CIB’s management were trying with the 5% arrears story.

  • Investment Portfolio –

    …The profile of the investment portfolio was not commensurate with the liquidity requirements on the funding side of CIB’s balance sheet, with less than 1% of the portfolio invested in government securities and money market instruments…In addition, 88% of their investment portfolio, including the investment in Republic Bank shares, represented investments into other CLF Group companies…

I said ‘some details’ and the full affidavit can be viewed at https://afraraymond.net/wp-content/uploads/2010/09/cibey1.pdf.

Well, William?

Well, William?William Lucie-Smith, the erstwhile Managing Partner of PwC until his retirement in June 2004, commenting on the CL Financial bailout, recently stated “…Indeed I dont (sic) know why anyone assumes the books were wer (sic) wrong at any time and did not reflect accurately what was happening…”

Mr. Lucie-Smith, the people questioning the accuracy of those CL Financial books now includes Ernst & Young and our Finance Minister, not just this Chartered Surveyor.  Given the quantity and quality of the information presented here, I am wondering if you are going to stick with that opinion.  Will Lucie-Smith resile from those views?  That kind of reversal would require real character and integrity.
** See http://www.trinidadexpress.com/commentaries/CL_Financial_A_new_strategy_required_.html.

Where does the Truth Lie?

If PwC’s audits were properly done, based on true accounts received from CIB and the relevant accounting standards, then the Inspector of Financial Institutions has been at fault to allow this failed institution to retain its licence.  If, as an alternative, the Inspector relied on misleading accounts, then one could hardly lay the full blame onto them.  In the latter case, either CIB’s in-house accountants, or the auditing firm PwC bears a heavy responsibility for this entire crisis.  EYvsPwCCompare and contrast the different results of the PwC 31 December 2007 audited Balance Sheet and the E&Y 31st January 2009 Statement of Affairs.  The discrepancies between the CIB Management Accounts and E&Y’s Statement of Affairs of 31 January 2009 are astonishing.

One can be escapist and say ‘on the one hand this, but on the other hand that‘ for only so long before reality sets in.  The fact is the group collapsed because it ran out of money.  Exactly how it ran out of money is a huge story of our age, supposedly an enlightened and more educated one.  That is the $57,000 question.

But the allocation of responsibility would also have to go beyond the role of the auditors to include the failure of the Inspector to detect the fact that CIB had filed no Corporation Tax returns for 2007.  Or was it that the Inspector’s office did note that and simply took no action?

Auditing the Accountants

What is the role of ICATT in all this confusion?  I tried with an open letter on 19th October 2009 and several dialogues with various of their Board of Directors.  Is ICATT investigating any aspect of this fiasco?  Does ICATT have any concerns over the MoU/Shareholders’ Agreement and its terms?  Does ICATT exist solely to advance and protect the professional interests of its membership?  Is it unreasonable for the general public to expect ICATT to have spoken out on these burning issues?  With all respect to the people concerned, ICATT’s silence is resembling a cover-up.

What is the meaning of ‘Fit and Proper’?

Our laws sets the penalty for murder as hanging, so, even if one does not agree, it is clear that the penalty is final to both indicate society’s intolerance of taking another human life and to prevent a recurrence.

The ‘Fit and Proper’ regulations are meant to regulate the behaviour of the Directors and Officers of Financial Institutions, since they are the people to whom we entrust our monies.  Any recklessness or dishonesty on their part can lead to severe loss of capital and ‘Fit and Proper’ ensures that those acts are punishable by loss of your privilege to serve in those high-powered positions.  The Companies Act even makes it illegal for Company Directors to ‘mismanage’ the affairs of a company.

Look at the case of the failed insurer, Goodwill Insurance, the Central Bank took a winding-up action which ended in two of its Directors – Johann Lambkin and Lennard Woodley – being fined $20M and banned from serving as Directors or Managers in any company incorporated in here for 5 years – see http://webopac.ttlawcourts.org/LibraryJud/Judgments/HC/rajkumar/2009/CV_06_02529DD30July2009.pdf.

Why is the Central Bank not proceeding against the CL Financial Directors?

The Timing Thing

So far I have been writing about this CL Financial collapse as if it took place in January 2009 and that is a position in need of a re-think.

When a marriage ends, the first ‘official notice’ of that is when one of the parties files for divorce, but there is often a stage before that when one of them moves out or moves on, and a stage before that one at which they stop having sweet times together.

I think the CL Financial ‘official notice’ was when they wrote for help on 13th January 2009, at some point before that, key people moved out or moved on and at some point before that, the group was failing.

When did the CLF group actually collapse?

CL Financial bailout – The House on the Corner

Some insights into CIB

CIB head office - The House on the Corner
CIB head office - The House on the Corner

I am starting to look at the CLICO Investment Bank (CIB) and its operations, as revealed by the ongoing bailout.

CIB is a very interesting part of the saga, because even prior to the collapse of the CL Financial group there was a widely-held view that CLICO and CIB were parts of the group which were responsible for raising finance for their ambitious plans.  Even though the interest rates offered by CLICO and CIB were incredibly high – about twice the average offered by others – it would have been much more expensive for the CLF group to borrow those funds via loans.  The view was that the CLF group had a legitimate method of harvesting funds on terms advantageous to them.

In April this year the Central Bank applied to the High Court to have CIB ‘wound-up’, due to its insolvency, estimated in that submission to be of the order of $4.7Bn.  (See https://afraraymond.net/wp-content/uploads/2010/09/cibcbtt2.pdf) That application to wind-up is being opposed by the NGC and the National Insurance Board (NIB).  Those matters are still before the Courts, which I only mention because the documents filed there give a disturbing insight into the CIB mystery.

We were also being fed some lyrics that the CL Financial group in general and CIB in particular were all healthy/strong companies with good assets, fallen victim of the global financial crisis.  Despite the natural doubts on that one, I had some trust in those people who were speaking to me.  The mystery remained – Was CL Financial and CIB an audacious, well-run operation which had become a victim of a declining market or, even worse, a sinister conspiracy?  Or was it a much less glamorous story of the Caribbean’s largest-ever business conglomerate actually being some kind of Naipaullian ‘Thing without a name‘?

I have read some of the affidavits in this case and the contents will be severely disturbing to any right-thinking reader, even you are not a financial expert.  This week I am looking at two affidavits of the Inspector of Financial Institutions, Carl Hiralal. The affidavits are available to read at https://afraraymond.net/wp-content/uploads/2010/09/cibey1.pdf and https://afraraymond.net/wp-content/uploads/2010/09/cibcbtt1.pdf.

Carl Hiralal
Carl Hiralal, Inspector of Financial Institutions

There is a way that the entire reading is surreal, since the very person who was supposed to safeguard us from extensive wrongdoing and risk-taking, now has to swear to the Court that the institution has failed so badly it needs to be wound-up.

The main points were –

  • The initial meeting – At para 5 he states “…On January 15th 2009 as part of its normal regulatory process, the Central Bank held a meeting with officials from the Petitioner…” (CIB).  Now that is literally an unbelievable sentence.  Hiralal is swearing that this was a routine meeting.  We are being asked to forget that the then Minister of Finance told the Parliament on 4th February 2009 that

    “…I would like to read into the record of Hansard, a letter from Clico Investment Bank addressed to the Central Bank. That letter is dated January 13, 2009. It is on the letterhead of CL Financial, addressed to Mr. Ewart Williams, the Governor and signed by Lawrence A. Duprey, Group Executive Chairman…”

    see page 628 of http://www.ttparliament.org/hansards/hh20090204.pdf.  I am forming the impression that Hiralal does not want to have the ‘bailout letter’ cited in this Court matter at all, for whatever reason.  You see, if it were cited, the Central Bank would have been forced to file a true copy, which anyone would have been able to access.  Neither of my Freedom of Information applications for that ‘bailout letter’ – to Nunez-Tesheira or Dookeran – have been fruitful.  So we have this incredible statement for starters.  We are being asked to believe that Lawrence Duprey’s letter requesting urgent, massive financial assistance and the meeting two days later were unconnected.

  • Reasons for winding-up – At paras 9 c. and 10 g. he states “…the Petitioner (CIB) was not maintaining high standards of financial probity and sound business practices…”  Stunning, and in a sworn affidavit from the chief regulator.  This is the high official responsible for maintaining good order of the players in the financial system.  Those Directors, Auditors and Officers of CIB, the ones who presided over this situation, do you still consider them to be ‘fit and proper’, Mr. Hiralal?  Yes or no?  If Yes’, how come?  If ‘No’, what are you going to do about it?  And when?  But there is more.
  • Board of Inland Revenue – At para 23 he states “…With respect to the Creditors of the Petitioner, the Petitioner has met the statutory obligations for the Board of Inland Revenue (except for Corporation Tax Returns for 2007, 2008 and 2009 which are being prepared and remain outstanding)…”  I spoke with a very experienced accountant and a corporate attorney before writing this and the common view is that the meaning of that statement is that the Corporation Tax owed by CIB is unpaid for 2007-2009.  If they owe those taxes we dealing with people who do not pay their taxes, yet expect the taxpayer to assist them in times of need.  Even if the taxes are paid-up in full, there is still the elementary and inescapable governance question of how and why CIB failed to file a tax return?  Did PwC report on this in either their audit or management letter?  Was Hiralal aware of CIB’s failure to file before he was forced by the procedural requirements of the winding-up petition to declare his hand?  Did the Board of Directors know?  Have penalties been applied?
  • Statement of Affairs – This is at para 12 and appears to contradict the prior statement in that it does not show any amount for either ‘Taxation Recoverable’ or ‘Taxation Payable’.  There needs to be an explanation on this.
  • Auditors – CIB’s auditors were PricewaterhouseCoopers (PwC), who were featured last week.
  • Lucie-Smith’s view – William Lucie-Smith, former Managing Partner of PwC, responding to bloggers on his Express article ‘CL Financial: A new strategy required’ – see http://www.trinidadexpress.com/commentaries/CL_Financial_A_new_strategy_required_.html – replied on Friday 20th August, like this “…Indeed I dont (sic) know why anyone assumes the books were wer (sic) wrong at any time and did not reflect accurately what was happening…”  Just my first read of those affidavits made me question the reliability of the accounts.

Next, I will be going into some more detail on how CIB actually worked, based on sworn affidavits.

The Concentric Circles

Concentric circlesFor the purposes of this article, CIB is at the centre of the page, with its Directors and Officers being in charge of its strategy and management.  They bear primary responsibility for the company’s affairs on behalf of the shareholders and other stakeholders.

The second ring is the auditors, usually a leading firm of Chartered Accountants, who examine the accounts prepared by the company to report whether those accounts offer a true and correct picture of the company’s financial health.  The auditors use international accounting standards as a benchmark for quality and comparability of figures, if there are material divergences from those standards, the auditor’s opinion can be qualified, which is when the divergences are specified.

The third, outer ring is the financial sector regulators, whose job is to ensure that the companies within the industries comply with the law and other guidelines created by the regulators.  The regulators examine the audited accounts and other information from the companies in order to determine the extent to which the rules are being followed.

We, the saving and investing public, are outside of that series of concentric circles and once there are no alarm bells, we will place our savings with these approved financial institutions.

The reason for all that is to preserve the most fragile and vital ingredient of the capitalist system.  Yes, I am speaking about trust, which is also an important aspect of the wider society.

The society relies on the people in these three concentric circles to act in a ‘fit and proper’ fashion in the execution of their duties, with proper penalties in place for improper or illegal behaviour.  The idea being that there is a minimum standard of conduct and risk-taking which avoids nasty surprises in the course of normal savings and investment.

There are real questions as to what levels of risk-taking and innovation are healthy or desirable to maintain some balance between profit-levels and stability.  That is a fascinating aspect of the financial industry to be expanded on.

The Regulator

The chief Regulator at the Central Bank, with responsibility for both Banks and Insurance companies, is the Inspector of Financial Institutions.  That office is held by Carl Hiralal, who was appointed on 1st January 2007.  Hiralal is a well-qualified, highly-experienced professional and that only makes the contents of his affidavits all the more disturbing.

For more details, see – http://www.ttaifa.com/downloads/2009CarlHiralalBio.pdf

The CIB Directors

At the time of the collapse, the Board of Directors of CLICO Investment Bank comprised –

Mervyn Assam (Chairman)
Amjad Ali
Anthony Rahael
Maria Thorne
Michael Callender
Faris Al Rawi

CL Financial bailout – Examining the Horns

Once again, I am returning to the need for us to grow a culture of responsible behaviour as a vital part of national development.

Responsible Reasoning

William Lucie-Smith
William Lucie-Smith

The idea that the CL Financial bailout is just like the one in the USA is a durable one, which has been very useful to those people who are seeking satisfaction.  Nothing could be further from the truth.  That is a false view and what is more, extremely misleading to the public, who rely on informed members of society to share that information conscientiously.  Rightfully or wrongfully, many people here look upon the USA and the doings of its government with a sense of approval, to the point that if Uncle Sam does it that way, there must be some good sense in that.  That idea that our bailout is ‘just like the one in America‘ must be challenged, defeated and put out of its misery.

On Wednesday August 18th, William Lucie-Smith, the Express columnist wrote on this very topic, his sub-title being ‘A new strategy required’.  That column can be found at http://www.trinidadexpress.com/commentaries/CL_Financial_A_new_strategy_required_.html
Lucie-Smith is a chartered accountant, former Managing Partner of PricewaterhouseCoopers and currently is a Director of both Republic Bank and Sagicor – he is described in his byline as ‘specialising in corporate finance’.

That article started with the claim that the CL Financial bailout was in some way similar to the US government’s bailout of its financial sector.

…The original plan was to guarantee policyholder funds and make loans available to Clico, so that confidence would be restored and the group businesses turned around. This is what happened in the United States with the vast majority of TARP funds being repaid in full with interest…

Given the huge stakes in this matter, the promotion of such misleading views is nothing less than public mischief.

Here are some of the main points of the CL Financial bailout which are, in every respect, completely different from the USA situation –

  • No Public Explanation – Apart from Duprey’s single, brief speech at the press conference to announce the bailout on 30th January 2009, there has been no proper forum at which the CL Financial chiefs have been made to give an account of this catastrophic collapse.  Neither has there been an attempt to set one up.  That is in direct contrast to the highly-publicised and televised Congressional hearings at which the chiefs of these failed financial institutions have been questioned as to their actions and the serious consequences.  We have all seen those TV shows.  Even the new CL Financial management is little better, compared with the USA where the Treasury must make a monthly report to Congress on the bailout.
  • No limit on quantum – No limits have ever been set on the CL Financial bailout.  Every firm in the USA bailout had its borrowing limits specified at the outset.  As an example, see Citigroup’s terms at http://www.financialstability.gov/latest/hp1287.html.  Or the wider bailout, at http://www.financialstability.gov/latest/tg13.html.
  • No interest – Neither of the Agreements specifying the terms of the CL Financial bailout even mention interest.  As Lucie-Smith himself stated, the recipients of the US bailout had to repay taxpayers’ monies with interest.
  • No pre-payment of creditors – An interesting feature of the US bailout was that the failing financial institutions were made to stand the first tranche of losses before any taxpayers’ monies were injected.  In other words, they had to sell some of their assets first before tapping into Uncle Sam’s Treasury.  In contrast, CL Financial has been able to tap right into Treasury funds without any significant asset disposals – yet another point that Lucie-Smith himself makes.
  • No time-limit for repayment – Neither of the Agreements specifying the terms of the CL Financial bailout give any stated payback period.  The US bailout set out repayment periods for all recipients of taxpayers’ funds.
  • No security taken – No significant CL Financial assets have been disposed of, as per the agreements – yet another point that Lucie-Smith himself makes.  In addition, the Governor of the Central Bank has himself confirmed that all of the CL Financial group assets are encumbered – see http://guardian.co.tt/business/business/2009/04/08/govt-left-empty-handed-cl-financial-bailout.
  • No dilution of equity position of CL Financial shareholders – Despite the massive extent of the CL Financial bailout – it is effectively an open-ended commitment – there is no dilution of the shareholders’ equity.  In the US bailout, the troubled  companies were forced to give equity to the Federal Government.  In order to receive taxpayers’ money in the USA, Fannie Mae (the huge mortgage company) gave 79.9% of its equity; while AIG (at that time the world’s largest insurer) gave over 85% of its equity; 36% of Citibank belonged to the US government in February 2009 – pages 229, 401-2 and 530 of Andrew Ross Sorkin’s ‘Too big to Fail’ refer.  CL Financial shareholders have not been made to dilute their equity.  If I, writing as an interested citizen, could know this, it seems that any specialist in corporate finance would also know these details.

The only resemblance to the US bailout is in name only.  Real Trini-ting.    Duprey and his cohorts negotiated a Blank-Cheque Bailout at zero interest, without losing any of their assets.  That deal is absolutely unique.

Our taxpayers have effectively made a huge single loan (probably the largest in the Region’s history) to the wealthiest individual in the Region at Zero interest.  Virtually every relevant professional body and Civic Society organisation has remained silent on this bold-faced attack on our Treasury.  Nothing from the Accountants, Lawyers, Bankers, Economists, Trade Unionists or Religious bodies.  The one recent exception to this has been the call by the Trinidad & Tobago Transparency Institute (TTTI) for investigations into the Angostura disaster.

The CL Financial bailout has been cloaked in the robes of benevolence and stability, resulting in a situation which has minimised the floods of lawsuits which would have been confronting some of those responsible parties – Auditors, Attorneys, Company Directors and Officers.  In reality, the common-wealth of our entire society has been pledged to rescue a fortunate few.

The CL Financial bailout is in urgent need of re-negotiation, to say the least.  “It wrong like a biscuit.”

In the same way it was wrong for the last administration to use taxpayers‘ money to rescue the CL Financial chiefs from the real consequences of their decisions, it would be equally wrong for this newly-elected government to also bailout those affected by HCU’s demise.  Two wrongs could never make a right.

Cocktail of Consequences

Angostura Rums

Angostura is the Caribbean’s flagship rum and bitters company.  It was a Caribbean icon, manufacturer of Angostura Bitters, as well as classic rums like 1919, Royal Oak, 1824, VAT 19 and Old Oak – Angostura was acquired by CL Financial in 1998.

The 2008 audited accounts were finally published at the end of July 2010 and the extent of their losses are cause for grave concern, seemingly a harbinger of the state of the entire group, 18 months into the bailout.

Coming after an extended wait for the 2008 audited accounts, the Guardian headline on 4th August 2010 was stunning: ‘Angostura declares $1.28Bn loss’ – see   http://guardian.co.tt/business/business/2010/08/04/angostura-declares-128-billion-loss.

The Express headline, on the same date and story, made me smile – ‘Angostura sales rise’ – see http://www.trinidadexpress.com/business/99917894.html.

It was said to be the largest loss in the history of our stock market and it represents colossal destruction of investors’ capital and national wealth.  It seems that the source of the losses was a receivable due from its parent company, CL Financial – according to the Deputy Chairman’s report – see http://www.angostura.com/LinkClick.aspx?fileticket=JSMxolh%2bmC8%3d&tabid=144 –

…[the] precarious financial position of our parent company…impaired the collectability of circa $1,185M in receivables from the CL Financial group…

The Notice to Shareholders of 26th June 2009 – see https://afraraymond.net/wp-content/uploads/2009/11/26jun2009_angostura_notice_to_shareholders.pdf – stated that the receivable from the parent company was $633M.  So you have to wonder what is the reason for that receivable almost doubling.

The interests of the minority shareholders have been subordinated to those of the majority shareholder, CL Financial, which was able to acquire the leading Jamaican distiller, Lascelles Mercado, by deploying the Angostura assets.  This episode is one which raises issues of minority shareholder rights which are unlikely to disperse.  As Justice Carlton Best is reported to have said, in relation to his lawsuit against CLICO for a $57,000 fixed deposit they failed to honour upon maturity – ‘It feels like robbery without a firearm’.

Who advised the Angostura Board on this transaction?  How can we accept the declaration that those funds are now irrecoverable?  How could a parent company, said by its auditors to have assets worth in excess of $100Bn at the very same accounting date (31st December 2008) be unable to repay a mere $1.185Bn.

Yes, it is true, the same accountants – the esteemed international firm, PriceWaterhouseCoopers – are auditors for both CL Financial and Angostura.  But more on that in the sidebar.

It is almost a metaphysical query – can a responsible class always escape judgement?

SIDEBAR: Auditing the Auditors

PricewaterhouseCoopers (PwC) is the world’s largest professional services firm in the accounting and finance industry.  PwC audits the accounts for UDeCOTT, CL Financial, Angostura and at one point I can even recall the Hindu Credit Union announcing that that firm was to be their internal auditors.  Clearly, PwC is a main player in the big leagues here in Trinidad & Tobago.  Let me declare here that they are also my [Afra Raymond, not Raymond & Pierre] accountants.

On 30th June that firm issued a letter, under the hand of Colin Wharfe, its new Senior Partner, to announce four new appointments.  The letter also explained that four of the most senior Partners had all retired on 30th June, those were –

  • Graham Mitchell, former Senior Partner, after 28 years’ service;
  • Jewan Ramcharitar, after 34 years’ service;
  • Peter Inglefield, after 34 years’ service;
  • Gerald Olliverre, after 32 years’ service.

The new appointments were announced in full-page press adverts, which omitted the retirements. See letter here – https://afraraymond.net/wp-content/uploads/2010/08/pwc_resignations.pdf

•
A version of this commentary appeared in print on August 26, 2010, on page 17 of the Business Guardian.

Housing Policy Imperatives – part 5

This week the examination shifts to the scale of the failure of our national housing policy – see <http://www.vision2020.info.tt/pdf/Policies and Procedures/Strategic_Corporate Plans/Housing Plan.pdf>.  Three main points for consideration are –

  1. Meeting the targets
    The original target was for the HDC to construct 100,000 new homes in a decade, which figure was generated from the 1994 ‘PADCO reports’—The Review of Shelter and Land Development Policy Study (PADCO reports): The PADCO reports is a series generated by The Planning and Development Collaborative International, Inc. and Laughlin and Associates Limited (who were contracted by the Government of Trinidad and Tobago in 1993)—that study is available at the Ministry of Housing & Environment’s library.  The annual target was reduced to 8,000.  As noted in the previous article, the reduced targets should have yielded 60,000 new homes by now, but the HDC has built only 15,394 new homes.The HDC made a recent statement that the number of empty new homes was approximately 10,000.  So just about 5,000 new homes have been built and distributed since the inception of this ‘accelerated housing programme’ in September 2002.  Even if we omit 2002, that is an annual average of 667 new homes being built and distributed. Even with the most optimistic assumptions, one is looking at considerable challenges in achieving these demanding targets.  At the current rate of performance it would take over 140 years to satisfy the original target.  That is how far off-track this accelerated housing programme has gone.  Deep into the long grass.
  2. The Cost-based Pricing model
    In previous articles in this series, I have been critical of the HDC’s cost-based approach to pricing its units.  In terms of the central mission of the Ministry of Housing  – i.e. creation and distribution of housing to the needy – that pricing model is inappropriate.  That is because it does not identify either the housing subsidy allocated to successful applicants or the opportunity cost of the HDC’s policies. The value-based approach is the more appropriate model to satisfy those basic requirements.  That is because it offers greater clarity to policymakers, since it is based on the market value of the completed homes, with the housing subsidy and the opportunity cost being the difference between the value and the actual HDC selling price. On 21st March 2008, this newspaper carried a report headlined “PM’s son in line for apartment” – see http://legacy.guardian.co.tt/archives/2008-03-21/news8.html – on allegations that Brian Manning, son of the then-PM was in line to receive one of the HDC apartments at Fidelis Heights in St. Augustine.  Noel Garcia, the then-MD of the HDC, was reported to have said –

    …the Government had taken a decision not to subsidise this  particular development. It is being sold at market rates in HDC’s thrust to expand and attract an open market clientele.

    Noel Garcia, former MD of HDC. Photo courtesy Trinidad Guardian
    Noel Garcia, former MD of HDC. Photo courtesy Trinidad Guardian

    Given that the units were reportedly being sold for a maximum of $875,000 and that they were worth a minimum of $1.7M, it is clear that each new home there is sold with at least $800,000 in housing subsidy.  The only way Garcia’s incredible statements could be correct is if one were using the misleading cost-based approach.

    I entirely agree with his statement that the Fidelis Heights development “…is therefore not part of HDC’s provision of subsidised housing for low-income earners.”  It is really subsidised housing for the middle-income groups, but that could never be right when the waiting list is bulging with needy people who cannot even get an HDC unit to rent.

    Fidelis Heights was, even by its name, a monument to misleading and wrong-headed thinking.  The HDC project with probably the highest level of housing subsidy per unit was built for the least needy on their waiting list.  Only if the underlying philosophies and resulting models are appropriate, can we avoid a repetition of this blatant waste of public funds in the face of real, human need.

    Given that the HDC is unable to satisfy the needs of the people it was intended to serve – the poorest citizens who cannot afford a proper home – it is scandalous that its scarce resources should have been diverted to Fidelis Heights, or the one at Federation Park in Port-of-Spain.

    The selection of this pricing model is proof of misguided policy at the most elementary level.  The basic concept of opportunity cost appears to have eluded the responsible officials and, what is more, that misguided policy appears to have been approved at the very highest level.

    Wrong-headed thinking can only encourage corrupt behaviour.

  3. Costs
    What has the national housing programme cost this country?  That is no rhetorical question, since this fact sits at the heart of the analysis.  The Housing Development Corporation (HDC) is the State’s implementing agency for production of new housing, it was formed in 2005 by an Act of Parliament and replaced the National Housing Authority (NHA).  The HDC’s funding comes from four sources –

    1. Treasury allocations – Those are announced in the budget and can be established from the Estimates of Expenditure as Capital Allocations to the Ministry of Housing.
    2. Sale of new homes – When the HDC sells a new home, that money is also available to them.
    3. Bond Issues – The HDC has also raised money by occasional bond issues; those funds can be used to either build more homes or ‘pay down’ on more expensive loans.  The bonds issued are government-guaranteed, so they are considered as virtually risk-free ‘sovereign debt’.  Given that the government itself issues bonds at lower rates of interest, it begs the question as to why these SPE’s are allowed to borrow on these terms.  That issue was raised by in the BG View of 20th August 2009 – see http://guardian.co.tt/business/business-guardian/2009/08/20/debt-depreciation-or-discipline.
    4. Bank Financing – The HDC also borrows money from commercial banks or the IADB to fund their construction programme.

    Try as I might, it has proven impossible to determine just how much the HDC has spent on building new homes in any given year.  That is because there are no accounts at all which are available to the public.

    The HDC Act, at section 18 and 19, mandates that the Board shall keep and properly audit accounts.  Section 20 requires the Board to submit its annual report to the line Minister within 3 months of the end of the financial year.  The line Minister is in turn obliged, by section 20 (2), to lay that report in Parliament within 3 months of receipt.  See – http://mphe.gov.tt/home/images/stories/pdfs/tthdc%20act%2024%20of%202005.pdf.

    The HDC has never laid either its annual report or audited accounts into Parliament for the public.  The failure to publish accounts is one of the most serious warning-signs of companies in financial trouble.

    That failure to publish HDC or NHA accounts over such a long period (since 2002 at least) spanning several administrations, is a serious indictment of the main participants – the politicians, the Board Directors and of course, the professionals involved in the entire huge operation.

    I have been reliably informed that the HDC’s new management is attempting to rectify this situation and that must be a priority if we are to properly assess the performance of this vital social programme.

The overall picture is stark –

  • Gross under-performance in terms of the output of new homes, only about one-quarter of the reduced target has been achieved:
  • Poor financial and project controls – as revealed in the Uff Report (at para 25:30 – see http://www.raymondandpierre.com/articles/article84.htm), not one HDC project has a signed contract:
  • No accounts or annual reports, given the preceding point, that is not surprising:
  • An inequitable allocations policy, with lower priority given to those who cannot afford to buy.
  • Approximately 10,000 new homes remain empty and that is the one which tops them all.  The ongoing adverse consequences include – vandalism, the greater rate of general deterioration afflicting empty homes, the high cost of security and of course, the continued pressure on those people on the waiting list ‘holding strain’.

Given the combined effect of all this, which is probably hidden to most of today’s readers, one can only wonder at the patience of our needy citizens.

The entire situation also raises potent questions about the purpose and performance of the SPEs.

SIDEBAR: The concept and importance of opportunity cost and housing subsidy

Let’s use a typical home at Fidelis Heights as an example.

  • Unit Cost – $825,000 (and it is not clear if land and professional fees were included)
  • Selling Price – $825,000
  • Market Value – $1.7M

    • In the prevailing cost-based pricing model, this is considered a satisfactory, ‘zero-subsidy’ result, since the State has recovered all of its costs. Another phrase in the lexicon is the ‘cost-recovery’ model of pricing.

    The danger, as shown in the example in this article, is that the ‘cost-based’/’cost-recovery’ model ignores opportunity cost.

    The opportunity cost is the difference between the actual selling price of the unit and the market value. The HDC could sell each Fidelis Heights home for $1.7M, but has made the decision to sell at a reduced price of $825,000, which means that each sale is at the loss of those possible earnings. That amount of the loss incurred by the decision to sell at a lower price is called the opportunity cost. It is important that opportunity cost be identified and quantified as an element in all decision-making, both private and public sector. A decision-making process which ignores or obscures opportunity cost is negligent at the very least and can encourage corrupt practices and the dilution of capital.

    In this example, the opportunity cost is $1,700,000 – $825,000 = $875,000.
    Opportunity cost

    $875,000 is enough money to build at least three modest homes, yet this system has allocated that much money to each Fidelis Heights purchaser, each of whom qualified for a mortgage at that level.

    As a result of this questionable choice and the resultant shaky pricing model, there is an enormous ‘leakage’ of housing subsidy and opportunity cost.

    The opportunity cost can also be described as the housing subsidy since that is the difference between what a Fidelis Heights unit actually sold for and what a purchaser in the open market would have to pay for a similar unit.
    The two terms are therefore synonymous – Opportunity Cost is exactly equal to Housing Subsidy.

    http://guardian.co.tt/news/general/2009/03/25/quality-performance-must

    •
    A version of this commentary appeared in print on August 5, 2010, on page 13 of the Business Guardian.

    Related reading:

    VIDEO: Morning Edition Interviews

    VIDEO: Morning Edition Interviews – March 2010

    AfraRaymond.com, at this time chooses to re-issues these interviews on Morning edition on TV6 CCN, Trinidad and Tobago, to keep readers up-to-date on issues surrounding Uff Report and UDeCOTT Affair respectively.

    1. Afra Raymond sits with senior journalist Andy Johnson to discuss the “UDeCOTT/Calder Hart Affair” on Morning Edition television show on TV6.
      • Programme Date: 10 March 2010
      • Programme Length: 0:28:16

    2. Afra Raymond sits with guest host, William Lucie-Smith on the Morning Edition television show as part of a panel with senior counsel Israel Khan, to discuss the leaked Uff Report.
      • Programme Date: 31 March 2010
      • Programme Length: 0:26:52