Consultant at Clico/HCU Enquiry: Restructuring conglomerate was a most complex project

Management consultant Osborne Nurse rated the restructuring of the CL Financial (CLF) conglomerate at ten on a scale of one to ten, with ten being the most complex. Appearing yesterday before the enquiry into the collapse of Clico, Clico Investment Bank (CIB) and British American and the Hindu Credit Union, Nurse said the Government had determined that Clico should be injected with $5 billion in capital, which included equity capital.

“Given the nature of the problem, certainly with Clico, which is what I have focused on, the company was not in a financial position to borrow, because borrowing is an increase in liability, so borrowing would not have helped the problem,” he said.

Nurse, former chairman of the Securities and Exchange Commission, was the managing director of Workers’ Bank after it was restructured and returned it to profitability. He was also the first general manager at First Citizens Bank, into which the restructured  Workers Bank, Co-operative Bank and National Commercial Bank were entrusted.

At the time of CLF’s approach to the Government in January 2009 for an injection of funds, Nurse said he was working as an adviser to the Central Bank from February to June 2009 and then to the Ministry of Finance, so he was familiar with the bailout of Clico and CIB.

Nurse outlined to the enquiry how the bailout was handled. He said CLF initially asked for $1.4 billion, which would have satisfied its liquidity needs for about three weeks.

“Bearing in mind the extent of the interconnection between the financial institutions and the entire (CLF) Group, it was considered important that some form of support or assistance be made available, certainly in respect of financial institutions,” said Nurse, whose evidence was supported by a PowerPoint presentation.

Nurse said Section 44 (d) of the Central Bank Act gave it the power to exercise a necessary level of control over CIB, but the Central Bank had no such emergency provision regarding insurance companies or what he described as “lender of last resort for securities companies.”

“It was also determined that the public was best served if shareholders of financial institutions led by CLF were made to be financially accountable for the demise of problems facing CIB and British American, but no compulsory means by which shareholders could be held accountable,” he said.

Nurse, a trained economist, said there were legal, economic and financial justifications for the intervention in CLF’s financial entities. He said in the case of Clico and British American, they were to be recapitalised, restructured and returned to financial solvency and run as going concerns, with a new board, new management and the Government’s support.

Nurse said it needed to be borne in mind that the Central Bank had the capacity to lend support to financial institutions, but not insurance companies. Lone commissioner Sir Anthony Colman said, “CIB seemed to be a completely lost cause,” to which Nurse agreed.

Nurse said Section 44 (d) of the Central Bank Act did not make provision for the restructuring of securities company, Caribbean Money Market Brokers, the CLF subsidiary. He said it was determined that no form of financial assistance be given to the parent and other entities other than financial institutions.

“The regulators had no authority to intervene in the parent. It was a concern that the parent not dismantle or sell off assets at fire-sale rates. That was the general principle of funding,” Nurse said. He said those deemed responsible for the crisis were not considered eligible for any government support, including repayment of any policy, receipt of dividends for the intervened entities.

Third-party deposits in CIB
Nurse said third-party deposits from CIB were transferred to First Citizens Bank for payout. “That means that third-party deposits had to be backed by an equivalent value of assets, which would either come from CIB assets or would have to come from the Central Bank.

“The CIB assets were considered to be, by and large, not in good quality condition. In any event, the liquidation of CIB would raise issues about how those assets were being disposed of, and therefore it was done with the advance by the Central Bank of an instrument adequate to cover the value of the deposits.”

CMMB
Nurse said CMMB had assets under management of $6.2 billion in the repo market. “They were the leading institution in the sale and repurchase of financial assets.” Related party assets in it were about $1.7 billion. And third-party assets for the rest of the market was about $4.5 billion. He said the $6.2 billion represented about 75 per cent of the then ongoing trade in repurchase agreements in T&T.

Nurse said it was felt if CMMB collapsed into liquidation, the investment community and not just the banking sector would be affected.

“In the absence of any safety-net provision, it was felt if we could get First Citizens Bank, or somebody else, to purchase the shares of CMMB, Government was prepared to put in capital, and First Citizens was an ideal instrument, because that is a government-owned institution, to put in the capital necessary to support that particular transaction,” he said. The tenth hearing into the collapse of Clico will resume on December 3 and run for two weeks.