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FINSAC INQUIRY - Things we need to know

Published:Thursday | April 1, 2010 | 12:00 AM
A side view of the Ministry of Finance, in Kingston, home of the Treasury and the place where the financial rescue plan of the 1990s was crafted. - File

Chapter Four of former chairman of the Eagle Group of Companies Dr Paul Chen-Young's written testimony to the FINSAC enquiry.

This section suggests a number of issues that the Commission might consider under its terms of reference.

First, in 1994 there were signs that there was a problem in the financial sector when Blaise Trust and Merchant Bank ran into trouble and the Government decided to take it over. Then, in 1996, the Century financial entities experienced difficulties, which some have argued were contributed to by Government action, and were taken over by the Government.

By 1997 there was a real crisis when every major domestic owned financial entity effectively collapsed.

Second, given the escalating problems from 1994, a legitimate question that should be addressed was whether the Bank of Jamaica (BOJ) and the Superintendent of Insurance sounded any alarm to the Minister of Finance before the collapse of the domestic financial sector.

If so, when? And was there any specific course of action proposed to avert the crisis?

It is not enough to say that there was inadequate supervision of the banking and life insurance companies that helped to cause the problem.

Equally important was whether these regulatory institutions did anything to avert the crisis - assuming that they knew that there was one imminent. Should the supervisory entities not share some of the blame for the collapse of the sector?

Decision to sell

Third, as the crisis unfolded, and the troubled entities were requested to submit proposals to the Ministry of Finance indicating the type of assistance needed to survive, on what basis were such plans rejected when a decision was taken to sell off all of the troubled entities and to discard top management and the principal players?

What attempts were made to restructure entities with Government support through joint venture or whatever means?

In the case of Eagle, joint venture discussions were quite advanced. Were there any other such initiatives and what happened? Was there any policy paper on a strategic plan on how to deal with the sector? Or were decisions to sell made on an ad hoc basis to investors with "deep pockets" according to an announcements made by Dr Omar Davies?

Fourth, even without a strategic plan, was there any concern expressed by any of the key Government players about the serious and long term adverse balance of payments effect from sale of the financial institutions and bank debt to overseas interests?

Was there any objection by any key Government official, especially the Governor of the BOJ and the director general of the Planning Institute of Jamaica (PIOJ)?

Did the PIOJ or BOJ prepare any estimates on the potential annual outflows of investment income and how they would affect the balance of payments, the exchange rate and economic growth, resulting from the sale of these entities to overseas interests?

Fifth, did FINSAC consider other models and intervention initiatives used in other countries that experienced a similar financial crisis?

For example, in Mexico, the Government did not take over banks but supported the troubled entities by buying bad loans in return for bonds to help re-capitalise the banks.

The United States experience is described in an article in the New Yorker magazine, July 28, 2008.

Reference is made to the role of the resolution Trust Corporation in dealing with the insolvent saving and loans form 1989 through the nineties where the Government re-capitalised many of the stricken institutions.

The Swedish approach has already been suggested as one of the more pragmatic and sensible approach to address the financial crisis problem.

These models are successful examples showing where active Government intervention saved the banking system without report to any wholesaling off of banks as strategy to address the problem. In these models of intervention, Governments not only took equity position for better capitalisation but, as a deliberate strategy, participated in any upside gain as the entities became more profitable, thereby reducing taxpayer's burden.

Sixth, how much has been paid for the services of forensic auditors, especially the firm of Kroll Lindquist Avey? From a cost benefit point of view, did such expenditures make sense?

Seventh were there cases where the Minister of Finance intervened directly in the sale of assets, including companies taken over by FINSAC? And specifically, what was the nature of his intervention, including whether any specific instruction were given on how to deal with any particular financial enterprise or debtors?

Details of all assets sold outside of the auction system should also be disclosed to the Commission. For example, I recall Holiday Inn being valued at about US$40 million but it was reportedly sold for close to US$20 million.

Was this so? And to what extent were FINSAC assets sold below fair market value? Transparency requires that there be full disclosure of basis of which these assets were sold.

Eighth, given the disparate treatment of the various financial entities and their shareholders, what were the criteria used in deciding which shareholders should maintain their holdings and which should not.

For example, why were the shareholders of National Commercial Bank and Life of Jamaica allowed to maintain their interests, even though diluted? And what was the situation with other companies like Island Victoria Bank, Eagle Commercial Bank and other Eagle entities, Workers Bank and others? Why the discriminatory treatment?

Analysis needed

Ninth, now that it is over 12 years since the take-over of the domestic financial institutions, should not an analysis be done summarising the terms of the sale of each entity and how they have since performed on a profitability basis?

The profitability of companies bought on terms should also be analysed to see whether balances of the purchase price were paid off from profits. Analyses should also cover the negative balance of payments effect from profits earned by the sale of the financial entities of overseas interests.

Tenth, the Commission should examine the basis on which FINSAC decided to selectively bring lawsuits against only a few persons who were substantial owners of failed financial institutions (for example, Panton, Crawford, Fullerton and Chen-Young).

Why, for example was the publicly announced case against some dropped while others were aggressively pursued?

As previously expressed, this issue is not about those individuals who were not prosecuted - it is about the arbitrary use of power and whether there was selective victimisation.

Finally, given the take-over and sell-off of financial institutions by FINSAC, did it fail in its mandate to assist financial institutions as per its terms of reference, especially to "assist institutions in developing workout plans?"

Part 5 next week