Tag: corruption

Moral Hazard, Part I

The key issue being exposed in the entire CL Financial bailout is that of Moral Hazard.  What is moral hazard and how does it have a bearing on this bailout?

A society in which people operate without standing the consequences of their actions is on a downward spiral to social breakdown or worse.  We have all discussed the social breakdown of our country with our friends and families.  Ours is a nation which has not suffered natural disaster, epidemics or invasion from our enemies, so the source of the breakdown is the absence of consequence.  The concept and reality of consequence is the essence of responsible, mature behaviour.

Moral hazard describes a situation in which, as a matter of policy, people escape the adverse consequences of their actions.  The idea that responsible people can, as a matter of custom and practice, escape the consequences of their actions is of course immoral to most right-minded people.  If there are no consequences, there is no motivation to do the right thing, other than an individual’s own private morals.  We all know how weak a safeguard those can be.  The hazard comes from the fact that the absence of consequence can encourage irresponsible and anti-social behaviour.  Hence the term moral hazard.

A society’s morality is the foundation upon which its legal system is built.  Morals come first and legalities are secondary.  An important point to note, for those who seem fixed upon which laws may, or may not, have been broken in this episode.  The point here is that it is possible to cause a great deal of harm by irresponsible behaviour, without necessarily breaking the law.

The Central Bank’s Governor has spoken directly on these points –

  • 30th January, in describing the causes of the CLF problems – “excessive related-party transactions which carry significant contagion risks. I should note that the high level of concentration is not specifically prohibited by the present legislation. An aggressive high interest rate resource mobilization strategy to finance equally high risk investments, much of which are in illiquid assets (including real estate both in Trinidad and Tobago and abroad).”
  • 13th February – “Clico/CIB were isolated cases of an overly-aggressive and risky business model.”
  • 11th March, speaking on that occasion on the limits of our financial regulations – “Even with all these pieces in place, any licensee who is committed to exploiting loopholes, to taking excessive risks with policyholders’ and depositors’ funds, and to bending the system could go undetected for a while and in so doing could do a lot of damage.”

The State is funding the bailout of the CL Financial Group and CLF’s operating methods were extremely risky ones.

There is no doubt in my mind that the bailout was necessary to prevent a huge financial disaster.  It was a necessary evil that we use taxpayers’ funds to preserve investor confidence.  The question is whether we are capable of learning from these experiences.  The litmus test is to ask – ‘What is to be the fate of those directors, officers, auditors, actuaries and attorneys who presided over the entire house of cards?’

We the taxpayers are now committed to finding the money to fix this colossal fiasco, and that is despite the fact that we did not cause it.  That is moral hazard for you.  This fiasco is due to CLF’s adventurous directors and officers.  What is to be their contribution to cleaning up this disaster?  Are these directors and officers going to be allowed to continue as if nothing happened?   I am asking whether CLF’s directors and officers are going to be let off the hook completely.

We continue to hold aspirations for Caribbean leadership and our response at this time of crisis is instructive as to challenges facing our region.

SIDEBAR: The CL Financial dividend

I have not spent any time on the many calls for the Minister of Finance to resign, be prosecuted, be fired and so on.  To me, the issue is simply too obvious for words and that is all.  I agree with Minister Enill that our time is better spent on the ‘bigger picture’.

The timeline set out in last week’s column allows an insight into the conduct of CL Financial over the last few crucial months.

CL Financial was unable to pay the interest or capital due to its depositors.  CL Financial was also unable to pay the benefits to which its policyholders were entitled.  We are told that that was the background to their letter of 13th January requesting urgent financial assistance.  We have no reason to doubt that account of events.

We have also read that dividends were paid to CL Financial shareholders on 16th January.  As a shareholder, the Minister of Finance knew that those dividends were paid after CLF requested State assistance.  The MoU, which is the ‘rescue plan’ for this fiasco, was signed on 30th January.  Why was that document silent on the refund of those dividends?

This cannot be allowed to stand.  It goes to the heart of the major issue of the negative long-term impact of a lack of consequence.  This is really the bigger picture.

Did the Central Bank know that a dividend had been paid to CL Financial shareholders after the written request for assistance and before the signing of the MoU?  If the Central Bank knew, why were CLF shareholders allowed to keep hold of those dividends?  If the Central Bank did not know, why not?  Was the Central Bank operating with an incomplete and misleading set of instructions?  Or are we contemplating something far, far, worse?

Methanol Holdings Trinidad Limited

Last weeks’ column sought to say that 2 statements on this aspect of the bailout – one from the Governor of the Central Bank and the other from MHTL – were contradictory.  It has been pointed out to me that those statements are not necessarily contradictory and I now accept that as being correct.

Equity in the Bailout process

Apart from the directors and officers of CL Financial and members of the government, there are other aspects of moral hazard at the level of the private citizen.

It is already a matter of concern that profits and benefits have been privatized, while the costs and losses have been nationalised.  That is a shame.  But there is more, since CLICO and CIB always offered the best interest rates and everyone knows what that means.

More reward is only available to those who have an appetite for more risk.  Those people who invested in CLICO knew that a greater rate of return was being offered.  Why then are we bailing out adventurous investors on these terms?

There is an apparent discrepancy in the terms of the bailout and that variance is interesting, to say the least.  CLICO Investment Bank has been absorbed by FCB and depositors there have been offered a choice of reduced interest at FCB rates, or the $75,000 entitlement under the Deposit Insurance scheme.  In contrast, CLICO’s depositors and policyholders have had their position fully guaranteed.  CIB, being a bank, was better capitalised, better regulated and its depositors were insured.  In terms of those benchmarks, CLICO was an inferior investment vehicle, yet the State has offered full protection to CLICO investors and only partial satisfaction to those who invested in CIB, the stronger company.  In my view the playing field should be leveled so that both sets of investors are offered the more modest package of benefits.

To continue with this lop-sided bailout only adds to the moral hazard of this messy situation.

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.