CL Financial called a scandal of monumental proportions
Linda Hutchinson-Jafar, Business Writer
Trinidad and Tobago's Prime Minister Kamla Persad-Bissessar has ordered a commission of enquiry into the root causes that led to the financial collapse of several CL Financial companies which she described as a "scandal of monumental proportions" and one of the largest financial failures in the country.
"The root causes of this financial collapse must be fully ventilated. The persons deemed responsible must be held accountable," said Persad-Bissessar, while ordering investigations into the files of CLICO Investment Bank, CLICO, and British American Trinidad and Tobago Limited and parent CL Financial.
Her administration is taking over the rescue efforts for the diversified group, over which Trinidad first assumed control close to two years ago, in January 2009, under the former Manning administration.
Persad-Bissessar's comprehensive statement to Trinidadian lawmakers and the setting up of the commission of enquiry followed protests, mainly by depositors in the high-interest bearing Executive Flexible Premium Annuities (EFPAs), against the government's plan to deal with policyholders, which includes an initial partial payment of a maximum of US$12,000 to depositors in the short-term investment and mutual funds.
Short-term investment and mutual fund depositors whose principal balances exceed US$12,000 will be paid through a government IOU, amortised over 20 years at zero interest.
250,000 citizens affected
Last month, Finance Minister Winston Dookeran said the US$1.2 billion pumped into CL Financial up to May 2010, by the previous administration, involved more than 10 per cent of the country's GDP and affected 250,000 citizens.
As of June, the combined total liabilities of CLICO and British American were US$4 billion, but total assets were US$3 billion.
The number of traditional, long-term policyholders affected by this crisis, covering pensions, life and health insurance is 225,000 persons and accounts for US$953 million in liabilities.
CLICO also sold short-term investments or deposit accounts with three- to five-year durations which earned interest rates significantly above market rates.
Some 25,000 customers were left holding the short-term contracts, and the liability to them is US$1.9 billion.
Knocking the previous government's handling of CL Financial, Persad-Bissessar said given the extent of the significant debts owed by the CL group, the problem was not a temporary one but was a much deeper and wider problem of solvency in the group's financial institutions.
"It is our view that the former administration grossly and completely mismanaged the CLICO matter, making it into the crisis it is today. They lacked the capacity to properly diagnose the crux of the problem facing CLICO to this country," she said, adding that recent disclosures in a private matter before a High Court revealed evidence of concern raised six years ago about the stability of CIB.
"More than that, they pumped billions of dollars, in what appears to be in a blind manner, into a situation in which they had not the slightest clue of how to handle it. What the results show is that they were acting out of their league. They wasted TT$7 billion in CLICO which passed through CLICO in the proverbial "dose of salts" manner. Their actions signified nothing and, clearly, did not accomplish anything for our citizens in spite of that seven billion of taxpayers' dollars being wasted there," said the prime minister.
Focusing on the insurance entities of CLICO and British American, Persad-Bissessar said it was clear that these companies shifted their marketing focus away from the traditional long-term insurance business, and began to sell EFPAs which offered and paid interest rates ranging from eight to nine per cent on average; and for very large sums which were invested, the rates went as high as 13 per cent.
By comparison, information published by the central bank revealed that the weighted average interest rate on deposits invested with commercial banks range from 2.88 per cent to 3.14 per cent between 2006 and 2008.
Persad-Bissessar said a significant amount of the cash raised from the sale of these products was "lent" or transferred to CL Financial, the parent company of CLICO and British American, and other CL Financial entities, to fund investments and acquisitions - some extremely risky - within Trinidad and Tobago, the Caribbean and across the globe.
The inability, then, of parent CL Financial to repay CLICO and British American the billions that was "borrowed" was exacerbated by the global financial crisis and compounded by the fact that CL secured some of the assets of CLICO and British American for other third-party borrowings, she said.
"So, it is really, you know, in the sense of a scheme. Other people would have called it a kind of scheme that was going on. I know that when we were younger we heard something about the pyramid. Now we are hearing about Ponzi schemes, and so on. This, here, was the CL scheme ... to take people's money in non-traditional investments, push it out there in very risky investments to try to get a very high rate of return, and, of course, like a pack of cards, it collapsed," she said.
No consideration was provided
"These companies, insurance companies, gave assets to CL Financial for which no consideration was provided in return. That is to say, they took the cash from the sale of the products in CLICO and British American - they took that money out - and invested in the other non-traditional businesses. But they gave no consideration, that is to say, nothing in return, for using and leveraging people's money in that regard," she told the Parliament.
She also said the intervention by the authorities in January 2009 was too late.
"There was oversight and governance failure across the board, and questions must be asked of the regulators, auditors, executives and, of course, the previous administration under whom this all unravelled," she said.
To those protesting her government's offer, Persad-Bissessar said they can accept or decline, but the government could not afford to pay off all investors in CLICO and British American over a shorter period.