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Explaining Caribbean response to financial crisis

Published:Friday | March 16, 2012 | 12:00 AM

by Wilberne Persaud, Financial Gleaner Columnist

Last week's column looked at the differences in official response to financial crisis on Wall Street, in Jamaica, Trinidad and Tobago and Barbados - we might say Caribbean actually, for the CLICO enterprise spanned the whole region as we shall see.

But first I must ask my readers to forgive the unavoidable late arrival of the column for last Friday's Financial Gleaner deadline, hence its publication in the Sunday Business. Here's the URL for online only readers:

http://jamaica-gleaner.com/gleaner/20120311/business/business92.html

There seem to be two main differences in response. The first is timing, the second, what we might call depth of response. Wall Street really means the world. As a result, gumming up the plumbing of international finance never is an option - although one might be excused for not knowing this given intransigence of some of the world's finance ministers.

Yet, although Secretary Paulson had to go to Congress twice and transatlantic fiber-optic cables must have overheated, we got a fix in weeks rather than months.

The fix for Jamaica's indigenous financial-services sector crash occurred within a period of six months to one year, depending on how you do the calculation. Local financial-service providers, particularly insurers, approached Government indicating what they termed a liquidity problem in mid-1996. They sought government support — a bail out — to tide them over what would have been a period of intense stress. As it turned out, the malaise was not liquidity shortage.

Mismatch of assets

The firms claimed there was mismatch of assets and liabilities. Their deposits (liabilities) were short term but their investments (assets) - housing developments, shopping malls, land, etc - were long term.

Were people to come calling for their monthly or quarterly interest payments, the cupboard would be bare.

The resolution institution, the Financial Sector Adjustment Company Limited (FINSAC) was created in January 1997. It completed most of its rehabilitation work by 2003 - a period of six years thought incredible by the multilateral financial agencies.

As pointed out last week, both political parties agreed not to make this crisis part of political debate in an election year. The reason was to avoid further erosion of confidence.

The cynical amongst us argued that was because both sides had closets of skeletons to protect.

No one will forget the radio talk shows of the period, one of which became sensational as former Prime Minister Edward Seaga told the host he had forgotten a debt to Century National Bank of US$23 million.

Now move to CLICO and consider Trinidad and Tobago, Barbados and the OECS - or CARICOM, if you will.

The playbook in all the recent episodes of financial crisis in the Caribbean apart from Allen Stanford in Antigua is the same. Insurance companies begin to thrive, finding themselves sitting on mounds of money capital, investment and other funds held in the public's trust. They create shopping malls, purchase government paper, sponsor youth games and a host of other good thing — these activities enable them to achieve their true mission.

They find themselves well respected and trusted. Then a virus hits. At this point previously impeccable, prudential fiduciary behaviour changes to gambling with other people's money.

CL Financial in Trinidad and Tobago became the region's largest conglomerate with holdings in more than 65 companies in 32 countries spanning the Caribbean, Europe, the Middle East and Asia.

It employed in its heyday more than 20,000 persons and controlled assets in excess of TT$100 billion. The company and its leadership became the flagship not merely of Trinidad and Tobago but also the entire Caribbean. It included four of the largest financial institutions in Trinidad & Tobago managing assets in excess of TT$38 billion —more than a quarter of the twin-island republic's gross domestic product.

On January 30, 2009, the day its meltdown was publicly and officially recognised, Trinidad and Tobago's Central Bank intervened in the operations of the CL Financial Group. The entities included specifically CLICO, CLICO Investment Bank and British American Insurance Company.

These were the financial-services operations of the group.

Problem of solvency

Government was approached with a claim by CL Financial's CEO, Lawrence Duprey, of significant liquidity problems derived from unusually high levels of withdrawal requests and acute shortfalls in the liquid assets of its banking and insurance operations. Subsequent review would, however, quickly reveal a problem of solvency rather than liquidity.The financial-services operations of the group had been soliciting deposit funds, undertaking interest payments significantly higher than its competitors throughout the region.

Simultaneously, the Barbados sister operations of CLICO came under scrutiny and questioning. Official response, clearly meant to avoid panic, was one of optimism: the two sets of operations were not identical, the Barbados government said. CLICO International Life (CIL) Barbados and CLICO Holdings Barbados were separate, and sound.

As with Wall Street, the government of Trinidad and Tobago had to act, otherwise the financial sector would crash and chaos reign. They did, creating new entities controlled by government whose mandate it was to sort out the mess. They also created the ongoing commission of enquiry.

In Barbados over the past few weeks comment has built up to a crescendo, as an as-yet-to-be publicly released interim forensic audit of CIL by the Canadian auditing firm Deloitte, becomes the basis for unending questions.

Late former Prime Minister David Thompson's firm, Thompson and Associates, represented CLICO Barbados and at least one of its principals, CEO Leroy Parris.

CIL is said to have contributed to both political parties in the last elections. Questions of corporate governance, morality and equity abound as thousands stand to lose their life's savings.

Former leader of the opposition, Mia Mottley's, early call for a judicial manager to take over CIL's operations is recounted and questions asked about transparency and impropriety in government.

This is an awful state of affairs. It is, to put it mildly, insufficient to pay lip service to the idea of a strong vibrant and well-regulated financial-services sector in the Caribbean in the midst of these happenings that appear too widespread for comfort. It is to the depth of the fix that we turn in the next column.

NB: your columnist served on the board of FINSAC, the resolution institution created to address the Jamaican indigenous financial services crisis.

Wilberne Persaud is author of 'Jamaica Meltdown: Indigenous Financial Sector Crash 1996'. Email wilbe65@yahoo.com.