Ian Nar­ine

The com­mis­sion of in­quiry in­to the col­lapse of CL Fi­nan­cial is back on and based on all that has been said at the in­quiry, to date, two points seem very clear. The first is that "it wasn't me" and the sec­ond is that "no­body knew." "I was not re­spon­si­ble, it was not me it was some­one else at fault". That has been a con­stant bat­tle cry from share­hold­er, in­vestor, man­age­ment, board mem­ber, min­is­ter of gov­ern­ment, au­di­tor and reg­u­la­tor. The list goes on. Al­so, "every­thing was fine un­til it was no longer fine, so it was im­pos­si­ble to fore­see what was go­ing to hap­pen." It was all down to cir­cum­stance, no one was re­al­ly to blame. The sad re­al­i­ty is that so­ci­ety has tac­it­ly and im­plic­it­ly ac­cept­ed these per­spec­tives in part be­cause many peo­ple find them­selves ei­ther di­rect­ly or in­di­rect­ly af­fect­ed. Fur­ther it amounts to be a case of "just pay out the mon­ey and move on." Let me sug­gest that the ex­pe­di­ent so­lu­tion is hard­ly a so­lu­tion.

Of course, lessons from this de­ba­cle are be­ing learned but it is hard­ly the kind of far reach­ing in­tro­spec­tion that can move our econ­o­my and so­ci­ety for­ward in a sus­tain­able man­ner. The fo­cus seems to be on per­son­al­i­ties such as: who did what, said what and got how much. Our col­lec­tive fail­ure to in­tro­spect and to act on such in­tro­spec­tion rep­re­sents a colos­sal fail­ure of gov­er­nance that spans the po­lit­i­cal di­vide.

While it may not be con­sid­ered po­lite to knock some­one when they are down, it is im­por­tant in the con­text of the CL Fi­nan­cial and Hin­du Cred­it Union (HCU) de­ba­cles to dis­pel the no­tion in sug­gest­ing that all one need to be a min­is­ter was "a lev­el head and com­mon sense." It is a view that pre­vailed in the for­mer ad­min­is­tra­tion and judg­ing from some of the ap­pointees to state boards and the en­su­ing con­tro­ver­sies, still re­mains present at some lev­el.

Ex­per­tise

Con­trary to the view­point at the na­tion­al lev­el the lead­ers in the pri­vate sec­tor are os­ten­si­bly cho­sen be­cause of in­dus­try knowl­edge and skill. Even when a per­son is cho­sen from out­side a sec­tor to lead a com­pa­ny in an­oth­er sec­tor, it is be­cause of some tan­gi­ble qual­i­ty, such as be­ing a turn­around ex­pert, ex­pe­ri­ence in merg­ers and ac­qui­si­tions or some oth­er qual­i­ty that suits the job at hand. It is re­al­ly no dif­fer­ent to why you would send out a bats­man to bat, a bowler to bowl and a goal­keep­er to goal keep. In the mo­ment of split sec­ond or cri­sis de­ci­sion-mak­ing, it is the in­dus­try ex­pe­ri­ence and ex­per­tise that comes to the fore in mak­ing the tough de­ci­sions. Ex­pe­ri­ence means that you in­tu­itive­ly know what to do or at least know where to look for a so­lu­tion. The great­est cost sav­ings or rev­enue ben­e­fit oc­curs when an ex­ec­u­tive gets it right in a time of cri­sis. The op­po­site is true as well where the biggest cost or lost op­por­tu­ni­ty oc­curs when the ex­ec­u­tive gets it wrong. The idea that we could se­lect lead­ers with­out rel­e­vant tech­ni­cal ex­pe­ri­ence was ex­posed at the on­set of this cri­sis. The un­der­stand­ing of the sys­temic risk and how it could have been re­solved are com­plex mat­ters, but these is­sues have been faced many times be­fore all over the world.

Sys­temic risk

It has of­ten been said that Cli­co and, by ex­ten­sion, CL Fi­nan­cial posed a sys­temic risk. In fact, the mem­o­ran­dum of un­der­stand­ing be­tween the Gov­ern­ment and CL Fi­nan­cial signed on Jan­u­ary 30, 2009, states as much. The is­sue then be­comes how is this sys­temic risk ad­dressed. While every cri­sis is dif­fer­ent, we should have by now en­gaged in a pub­lic dis­cus­sion on how our cri­sis was ad­dressed and what we may want to do dif­fer­ent­ly the next time. Like I in­di­cat­ed ear­li­er, we are not the first coun­try to ex­pe­ri­ence this type of melt­down and the pre­vi­ous re­spons­es are well doc­u­ment­ed. Right through the last quar­ter of 2008, we wit­nessed trou­bled fi­nan­cial in­sti­tu­tions in the Unit­ed States go­ing to the reg­u­la­tor on a Fri­day and the is­sues be­ing ad­dressed over the week­end and a res­o­lu­tion in place by Mon­day. In my view, the most ap­pro­pri­ate mod­el for ad­dress­ing the cri­sis came from the Nordic coun­tries dur­ing their bank­ing cri­sis of the 1990s, in par­tic­u­lar, that of Swe­den. The first is­sue in deal­ing with any sys­temic fi­nan­cial cri­sis is to ad­dress the loss of liq­uid­i­ty.

Bear Sterns, Lehman Broth­ers failed be­cause they ran out of cash. It is now well doc­u­ment­ed that CL Fi­nan­cial and Cli­co faced the same cash short­fall. The sys­temic risk was ap­par­ent when de­pos­i­tors sought to pull mon­ey out of the bank­ing sys­tem be­cause of fear. That would have cre­at­ed a liq­uid­i­ty crunch across the sys­tem lead­ing to cas­cad­ing fail­ures. This is what is meant by sys­temic risk. In Swe­den, the gov­ern­ment in con­junc­tion with the op­po­si­tion agreed to guar­an­tee de­posits in the en­tire bank­ing sys­tem. By sup­port­ing the sys­tem as op­posed to one en­ti­ty, it meant that the good was not pun­ished with the bad.

Com­pare that to the agree­ment in the T&T con­text to guar­an­tee­ing the in­vestors in Cli­co prod­ucts.

Lucky share­hold­ers

A ques­tion that has nev­er been raised is why was Cli­co and the CL Group not na­tion­alised? The mer­its, or lack there­of, of this ap­proach has not been dis­cussed in the pub­lic do­main as far as I am aware. What tran­spired in the ini­tial stages was the na­tion­al­i­sa­tion of the li­a­bil­i­ties in the form of a blan­ket and un­con­di­tion­al con­tin­u­a­tion of in­ter­est pay­ments and a guar­an­tee of prin­ci­pal to ex­ec­u­tive flex­i­ble pre­mi­um an­nu­ity (EF­PA) pol­i­cy­hold­ers while any as­sets were left with­in the frame­work of the ex­ist­ing cor­po­rate struc­ture where the pre-bailout share­hold­ers re­mained with a 51 per cent in­ter­est. Last week the ed­i­tor of the Busi­ness Guardian of­fered a lay­man's opin­ion that the pre-bailout share­hold­ers of CL Fi­nan­cial can re­turn to con­trol the fi­nan­cial con­glom­er­ate re­gard­less of the amounts ex­pend­ed by the State in the pe­ri­od June 2009 to June 2012. This is a con­cern that I had from the day I man­aged to see a copy of the agree­ment.

In fact, if one were to read the MoU of Jan­u­ary 2009 and the sec­ond agree­ment of June 2009, there is a very sub­tle change in the ini­tial word­ing. In the first doc­u­ment, it states that the fi­nan­cial con­di­tion of CIB, Cli­co and British Amer­i­can "threat­en the in­ter­est of de­pos­i­tors, pol­i­cy­hold­ers and cred­i­tors." On June 12, it was fur­ther agreed that cer­tain steps be tak­en to cor­rect the fi­nan­cial con­di­tion of CIB, Cli­co and British Amer­i­can "in or­der to pro­tect the in­ter­ests of de­pos­i­tors, pol­i­cy­hold­ers, cred­i­tors and share­hold­ers of these in­sti­tu­tions." No­tice the in­tro­duc­tion of the share­hold­er in­to the equa­tion. Note that in every in­stance of a failed fi­nan­cial in­sti­tu­tion dur­ing the re­cent fi­nan­cial cri­sis, whether it was in the Unit­ed King­dom or in the US, the share­hold­ers of the failed en­ti­ty were made to suf­fer the max­i­mum loss. The share­hold­ers of Bear Sterns, Lehman Broth­ers, Wash­ing­ton Mu­tu­al, just to name a few, were wiped out. These were share­hold­ers of pub­lic com­pa­nies and it was con­sid­ered that in­sol­ven­cy was a risk of share own­er­ship.

Here we have pri­vate share­hold­ers where the ma­jor­i­ty share­hold­ers were ac­tive­ly in­volved in man­ag­ing the com­pa­nies in ques­tion and the com­pa­ny is seek­ing a bailout us­ing tax­pay­ers funds, but there is an agree­ment to not on­ly pre­serve a sig­nif­i­cant in­ter­est, but al­so to re­turn full con­trol in three years' time.

All the while, the con­sid­er­a­tion that would be pro­vid­ed for tax­pay­er sup­port re­mains un­clear. What was the log­ic of an agree­ment that seeks to pro­tect the in­ter­est of the said share­hold­er and places that in­ter­est in the same line as de­pos­i­tors, pol­i­cy­hold­ers and cred­i­tors? To date, there is no re­al de­bate as to why this was done and what, if any, were the al­ter­na­tives. As at the 2007 au­dit­ed fi­nan­cial state­ments the share cap­i­tal, re­serves and re­tained earn­ings of CL Fi­nan­cial amount­ed to less than $1 bil­lion.

For Cli­co, the amount was $6.3 bil­lion, of which $5.8 bil­lion were the re­sult of reval­u­a­tion re­serves which most like­ly would have been erod­ed by the time the Gov­ern­ment was ap­proached. The State has so far ex­pend­ed be­tween $5 bil­lion and $10 bil­lion. One of the gen­er­al prin­ci­ples Iin a bailout sce­nario is that loss­es must first be cov­ered with the cap­i­tal of share­hold­ers. It is a key el­e­ment in re­duc­ing moral haz­ard. This was not done here. Does any­one know why? All of this is rel­e­vant be­cause every­one seems to have jumped on the band­wag­on of cor­po­rate gov­er­nance at CL Fi­nan­cial. Be­fore we reach there, the over­ar­ch­ing is­sue of na­tion­al gov­er­nance has to be ad­dressed.

Ian Nar­ine is a bro­ker reg­is­tered with the Se­cu­ri­ties and Ex­change Com­mis­sion.