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Finsac commission of enquiry - Taxpayers bear cost of rescue, no share of benefits

Published:Friday | April 23, 2010 | 12:00 AM

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

The macroeconomic indicators of the Jamaican economy in the 1990s showed the result of an unstable and hostile climate for any business to succeed, including the domestic financial institutions.

The period was marked by sustained high inflation, high interest rates, devaluations, increasing trade deficits, worsening fiscal deficits and declining employment in the productive sector.

Those conditions were a consequence of failed economic and financial policies that had a direct adverse effect on management decisions at the enterprise level during a turbulent investment environment that contributed to the failure of many financial institutions and businesses.

In the life insurance industry, premium income fell sharply from cancellation of policies and slower sales as the public shifted more towards high interest rate financial products. Management in these institutions had to rely more on high-cost short-term commercial paper to fund their operations and investments.

Most entities invested heavily in long-term assets - real estate and hotels - that created a mismatch of funds and could not generate adequate income to cover their high interest-paying notes.

They then ran into trouble.

Banks were lending at high interest rates to businesses that were using inflated assets values as collateral and could not service loans.

Banks had higher levels of bad debts, which had to be written off. In the midst of these difficulties, banking regulations changed that forced banks to make higher provision for loan losses.

Then there were the frequent changes in reserve requirements for a higher portion of deposits to be sterilised at the Bank of Jamaica.

Management of the financial institutions must accept blame for strategic policy investment mistakes.

But the reality is that the hostile environment in which these institutions and businesses operated impacted on how decisions were made in the effort to survive.

In the volatile and hostile business climate, like the 1990s, business policymakers had to be second-guessing possible economic outcomes, and mistakes were made in doing so.

FINSAC failed to take into account that the failure was not solely the fault of management.

By abrogating its responsibility to resuscitate the troubled domestic financial sector and taking over all of the domestic financial institutions, it played no constructive role in saving the troubled financial institutions and other businesses.

It failed to arrive at any agreement with principals of the troubled financial entities to 'assist institutions in developing workout plans' as per its mandate.

Instead, its actions can be described as anti-ownership by taking over all of the domestic financial institutions and selling them to overseas interests on terms that are proving costly to Jamaican taxpayers.

Furthermore, in its dealing with the failed institutions, it displayed arbitrariness and discrimination that borders on victimisation.

The wholesale transfer of the country's domestic financial institutions was unnecessary and could have been addressed more efficiently by constructive negotiations with the principals of the troubled financial entities to provide support, such as by joint ventures, and by giving those institutions the benefit of a five-year window to restructure and emerge from their problems.

The ill-conceived sell-off of the financial institutions and bank debts has created unnecessary fiscal burden.

It will also have far-reaching adverse consequences on entrepreneurship and on the country's balance of payments.

From a strictly financial cost-benefit point of view, the terms of sale of failed institutions did not protect the Jamaican taxpayer.

Bad debts and investments were cleared off the books of the troubled entities, which were disposed of in what can be described as a 'fire sale' of the assets of financial institutions.

There was no provision to participate in any upside gains from the future profitability of those entities.

Thus, taxpayers are now forced to bear the burden of the FINSAC intervention but will receive nothing lasting from the sale of the financial institutions and businesses.

The manner in which the developed countries have tackled the current international economic crisis, especially in the financial sector, makes the approach used by FINSAC in Jamaica nothing short of lamentable - and a tragedy in national mismanagement for which those responsible must be held accountable.

Initiatives taken at the international level, like the Troubled Asset Relief Program (TARP) in the United States, along with transparent tests, etc., to try to keep banks, financial institutions and insurance companies afloat with stock ownership and warrants, gave the financial institutions time to recover.

Alas, FINSAC took over ownership not with the intent to preserve long-standing, fundamentally strong institutions that, but for unexplained reasons to which the Commission should seek to find answers.

Some of the troubled entities could have been saved, especially if given time to restructure, which was well within its terms of reference.

Given the collapse of the bauxite/alumina industry, the reduction in remittances, the struggles in the tourist industry, the growing trade deficit, the outflow of investment income overseas from the sale of the domestic financial entities will be a continuing drag on the country's balance of payments with adverse effects on the exchange rate.

By failing to rehabilitate financial institutions and businesses, is handling of the crisis must be described as anti-entrepreneurial and lacking any long-term vision about the financial and business sector in the economic development of the country.

As a result of FINSAC's action, there will be less risk-taking in long-term investments in the productive sector.

The mishandling of the financial crisis is a sad chapter in Jamaica's history from which it will take many generations to recover.