I’m in Fiji at the Civicus World Assembly.
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Innovation and financial creativity
I read in the newspapers, with unbelief, a comment by Afra Raymond et al about Lawrence Duprey and his colleagues, and I quote:
“I do not believe the people who caused this disaster and who are in a position of responsibility could just be handed back this company after the money is repaid and so on… I do not think that it should be returned to those people who are not fit and proper to have ownership, directorship or hold positions as officers or controlling shareholders of a financial institution in this country.”
Let me repeat some of the comments that I made before, that we should take a wider and more informed view of what the Duprey group did.
I listened with sadness as the then Governor of the Central Bank presided over the dismantling of CL Financial—over the sale of its assets; one of the more innovative examples of financial creativity in this plantation of ours.
I was encouraged by similar comments from David Abdulah who also saw the importance of non-petroleum wealth generating assets to our country’s economy.
However, many seem very happy. The local and regional investors will get their money back, other creditors will get their money back, the government will get some of its money back and part of the remaining assets will be subsequently sold including: an international methanol holding and, eventually, the iconic insurance company, Clico.
As the Governor noted, then the debacle that was CL Financial in 2008-2009 would have come to an end; one which will put cash back into the hands of the risk-averse population, which some see as simply increasing the liquidity in the country that, to date, has been unable to find any creative business investment outlet for the savings that are languishing in our finance houses.
Even in this current dismantling of an indigenous asset there is a bit of rancour that the architects of CL Financial may not lose their shirts. There was even a statement from the then government that it was seeking to ensure there was no return of assets to those who created the financial collapse.
In a recent statement by Colm Imbert Minister of Finance, he said that once all liabilities are paid the remaining assets—devoid of the choice companies that are sold—will be returned to the original shareholders. Oil is not the biggest curse in this country. This honour is reserved for those who hold and manage the rewards from the oil rents, the savings of this country, including successive governments.
Let us return to the ideas behind the creation of this conglomerate called CL Financial.
The nadir of the entity was Clico, an insurance company that understood the potential power of local and regional money assets; those in T&T backed by foreign exchange and assets.
Its architects also recognised our people were willing to buy insurance, a sure thing, but would not put a penny in a venture that was of higher risk. Hence an innovative mechanism had to be devised which would attract this low-risk money which CL Financial could use to invest in the individual and higher risk ventures.
In other words, CL Financial had to assure the investors of a sure return—somewhat higher than what others were offering—and assume the risk of the target ventures; much like the role I have repeatedly recommended for our governments in the diversification of the economy. Still these architects had to alleviate as much as possible the aggregated risk of the chosen ventures.
They did this the classic way.
They invested globally and diversified their targets both spatially and market wise.
The ventures spanned some 65 companies in 35 countries and the ventures ranged from spirits, construction and real estate to petrochemicals.
The idea here was that with such a distributed portfolio, business failure in any market or region would not bring down the entity. This was based on the concept that the probability of a global economic collapse was very low. The risk was worth taking even though the management and integration of such a portfolio would present a challenge to the most astute businessmen in the world.
But, indeed, some of our own were able to do it.
Then the perfect storm hit.
The global economy was red-hot and this drove the price of oil—the life blood of the global economy—up to US$147/bbl, which initiated an economic decline in the world’s markets. This cascaded into a global economic collapse as the parallel sub-prime mortgage fiasco unfolded.
As many other large organisations, CL Financial ran out of cash flow and, eventually, approached our Government for money to ride out the storm.
Hence, it is startling that the Minister of Finance and now Afra Raymond et al could refer to the people at CL Financial as those who may have created this debacle in the first place.
Did CL Financial also create the debacle that saw the collapse of AIG, of Lehman Brothers, of Bear Sterns and J P Morgan?
The impact on the low-risk side of the CL Financial commercial structure was disastrous in that the low-risk returns to the EFPAs could not be paid and the cry went up for the return of monies invested, which the statutory fund should have guaranteed.
CL Financial took advantage of the laxity of the Central Bank’s regulators and its statutory fund was under financed; though CL Financial before the crash could have allocated some of its less risky assets to the fund.
However, the perfect storm would have wiped out the value of these assets in the fund and to sell such assets in the midst of the global meltdown would have been madness.
But CL Financial’s calamity was not the only one in the world; only in other parts of the world the governments handled the requests for cash flow bailouts differently. The US bailed out AIG (US$85bilion), Bear Sterns and J P Morgan (US$29billion), Fannie May and Freddie Mac (US$25billion).
Today these companies have weathered the storm and have repaid these advances where necessary, the assets were preserved and they are now viable companies.
The US Government did the same thing in similar circumstances before; there was a run on Continental Illinois Bank in 1984 and it was given a bailout of US$4.5billion which was repaid by 1991 and the bank sold to another US bank as a going concern. The object of the bailout was to preserve the entity as a viable US company.
In our case with CL Financial, the hue and cry was to advance money to CL Financial’s benefit so that as many of their investors could be paid off, hoping that when the global economy picked up again, the assets would be sold to repay government and the rest of investors and creditors.
There was absolutely no thought or intention about funding CL Financial so that it would weather the storm and emerge as a viable operating asset that could repay its debts to government.
Today, as the global economy turns up, we are here selling what is left to pay debts, denigrating our financial innovators. Instead we could have been celebrating the survival of a conglomerate that was our own creation.
But this is the culture of the onshore plantation and its governments.
Mary K King