Mission Accomplished?

Summary: Regional mega-financial group, CLICO, has run into a cash shortage in Trinidad, needed to be bailed out by the central bank, and the government has now nationalised it. CLICO's assets will go to the government-owned bank, cementing its position at the top of the banking sector. Concern in Barbados is about whether CLICO's Bajan operations will be adversely affected soon or in the near future. The government here sought to calm fears. But the headlines seen this week urging calm may not remove fears? We could see today if that is the case. However, these are early days, but this development will be a big test for the regional and local financial sector .

This week will be very interesting in the area of regional and local financial activities. Last Friday, there was a press conference in Trinidad, where the central bank governor announced that the Trinidad government had been asked to provide financial support to a major local institution, the Colonial Life Insurance Company (CLICO) financial group, and had decided to take control of CLICO, Clico Investment Bank (CIB) and Caribbean Money Market Brokers (CMMB). The basic problem has been reported as follows:

CIB has had ‘liquidity challenges’ (running out of cash) in recent weeks, and these came to a head in the last few days when the bank began to face an unusually high level of withdrawal requests which put a strain on their available liquid resources. CLICO has also been facing liquidity problems, though less than the levels of CIB. The close integration of these two financial institutions within the CL Financial Group meant that only time would control when CLICO also started to come under severe liquidity pressures. Official contact between the group and the regulators in Trinidad were reported to have started in mid-January.

The immediate public feeling is that the increase in CIB withdrawals and the nervousness seen at CLICO related to depositors' concerns about the impact of the sharp decline in methanol and real estate prices on CL Financial's overall financial situation. However, the central bank said that the problems have more to do with the following:

* 'Excessive related-party transactions which carry significant contagion risks' (but note that the high level of concentration is not specifically prohibited by the present legislation). In other words, they churned a lot of money around within their group, sort of like Daddy taking cash from his son Peter and giving to the other brother Paul, and the small pox virus on the bank notes putting the whole family at risk of getting sick.
* An 'aggressive high interest rate' resource mobilization strategy' to finance an 'equally high risk investments strategy', much of which are in illiquid assets (including real estate both in Trinidad and Tobago and abroad). In other words, the borrowed dear money and put into risky projects, many of which could not be quickly turned into cash.
* A 'very high leveraging of the Group's assets', which constrains the potential amount of cash that could be raised from the asset sales. In other words, the borrowed money could be multiplied many times over in paper terms, but the gains could not quickly be turned into the same amount of real cash.


In the regular monitoring of CIB and CLICO since 2004 (when insurance supervision was transferred from the Ministry of Finance), the central bank consistently focused on these weaknesses but were ‘stymied by the inevitable challenge of change and by inadequacies in the legislative framework which do not give the [central bank] the authority to demand these changes’. In other words (and I do not know if this is local politics at play or something else), the official institutions had to tolerate a bad situation and hope that the **** did not hit the fan. So look for a mad scramble now to get laws changed--yes, the horse has bolted.


What financial people call 'contagion risks'--i.e., the spread of the problems--are of course feared, knowing that financial difficulties in an institution as big as the CL Financial Group could have on the entire financial system of Trinidad and Tobago and indeed in the entire Caribbean region. The central bank spelt out that:

* The Group controls over (TT$100/US$16) billion of assets in at least 28 companies located throughout the region and the world.
* The Group's financial interests cover several industry sectors including banking and financial services, energy, real estate and manufacturing and distribution. The four largest financial institutions in the Group manage assets of over TT$38/US$6 billion, over 25 percent of the country's GDP.
* In addition to CLICO, among the Group's holdings is the British American Insurance Company Limited, one of the main insurance companies in the Eastern Caribbean.

The bail-out strategy now involves:

* The transfer of all the third-party assets and liabilities on the books of CIB and CMMB to First Citizens Bank. These liabilities will be matched by resources from the sale of CIB's holdings of certain high quality assets. The central bank will provide short term liquidity as needed to ensure that these liabilities are serviced. following the execution of these transactions, CIB's banking license will be revoked.
* CLICO has a sizable Statutory Fund deficit. CL Financial has agreed to divest additional assets to help fund this deficit. The Trinidad and Togabo government has committed to provide any additional funding that is needed by CLICO.
* Government funding will be provided in exchange for collateral and an equity interest in CLICO. It will also act as a catalyst for implementing a change in the current business model and corporate governance structure of CLICO. The intention will be to return CLICO to its original moorings.

Getting through the financial inside language, a big financial group in Trinidad looks like it ran out of cash and needed to be bailed out. The central bank and government have agreed to do that, and give money as needed; in return the government has essentially nationalised CLICO's operations in Trinidad. They have also boosted the position of the largest bank in the country, which is also government-owned.

The first concern in Barbados went toward whether CLICO's operations in Barbados would be adversely affected and if so, how and when. The initial words from local financial officials were that people should 'stay calm', but as Barbados' PM said:

"Barbadians would be extremely concerned as it would be difficult to conceive that CLICO Barbados and CLICO Trinidad are not inextricably bound. Those with investments in CLICO's financial institutions are therefore justifiably concerned."

His real fears were clear:

"It is not in the interest of depositors or our country for there to be panic. Such panic would reverberate through our financial system and compromise our ability to ride out this situation and the global economic challenges. It is in the interest of all Barbadians for calm thinking and normalcy in our financial sector."

It's really hard to convince skeptics, by definition. The key to convincing people is credibility, not content. People ask immediately, "Does this make sense? What are we not being told? How many times have we heard this? All we have had in the past is lies."

As a former central banker and economist in an international organization, I know that a major problem faced by those responsible for policies is credibility. In the face of skepticism, well-founded or not, how believable you are is often more important than what you really say or do.

There is no knowing how convincing the statements and proposed actions are until they get tested. This Monday morning, for example, will there be long lines at the local banks with people seeking to withdraw their money? Someone said to me yesterday afternoon that they believe this would happen because, when asked on a radio call-in program if there were enough cash reserves to cover deposits, the answer given by an official (correctly) was 'no'. Most people do not understand the differences between commercial banks, investment banks, and insurance companies, for example. CLICO is involved in all of these activities. People have bank deposits and want to feel that they are safe. That 'no' may be wrongly interpreted as meaning that the deposits cannot be covered, and people run to be the first to withdraw. The attempts to explain that no bank in the world usually carries enough cash to cover all deposits, or that investment banks do not usually get their resources from deposits but from lenders, or that insurance companies have different obligations in terms of what liabilities they have to cover and how, will all fall on partially deaf ears and minds that do not understand. Gut instinct may take over, and fleeing is easy.

As reported in the Bajan papers today, chartered accountant and financial analyst, Douglas Skeete, suggested yesterday that a help desk be set up and meetings called with interested parties to give them information:

"You get the rumour-mongering and fear that will take hold of some members of the community and as a result of that we have individuals who may want to visit the company's premises."

CLICO Holdings Barbados Limited's chairman, Leroy Parris, said on Friday:

"I think it is a matter of confidence in the organization, confidence in the economy, confidence in the management structure of the company...If people believe you are doing a good job [or] if they believe you are not doing a good job..."

He will soon know what people believe.

The front page headlines in the Bajan papers in the last few days have included 'Stay Calm', 'Money Secured!' and 'Don't Panic!'. The words were meant to reassure, but there is no guarantee that they will not do the exact opposite. While initial indications are that CLICO's Trinidadian problems are the result of a series of local incidents, people will want to be convinced that this is not part of the wider and more troubling international financial crisis.

While the local population has no immediate experience of what is feared and have not seen in the streets here lines of people demanding their deposits, they do have fresh memories of such lines in the UK (Norhtern Rock) or Iceland (all banks). So, they may say to themselves "If it can happen in a big place like England, it can happen in little England."

We will be watching very carefully.