Recent events affecting financial institutions in the Caribbean region have highlighted a major problem in the management of financial policy. How should news about financial problems be handled and what effect does the flow of news have?
Financial institutions depend heavily on public confidence. When that confidence slips even a healthy institution can face problems as people ‘sell the rumour’ and perhaps look to flee a bank or other financial institution by withdrawing their funds. Those who make policy and those who report news have important roles in maintaining confidence.
Governments and public officials naturally try to create a climate of calm and give assurance when problems arise, and that is no different if the problem concerns a financial institution. But, their efforts to maintain calm depends greatly on how credible are their claims. The political opposition naturally wants to exploit any signs of weakness or failure that can be pinned on the government—whether or not this is really ‘the fault’ of the government of the day. This political competition between the forces of calm and those of exploiting the government’s vulnerable position can take many forms and can go on for a long period. As it rages, there will inevitably be a build up of partisan positions as supporters of each side try to show their strength. In the meantime, the real financial problem remains to be addressed, but may become more difficult to deal with because it has become intertwined with politics.
Those who report current events also play their role. They should aim for truthful and accurate accounts of events, and may add their analyses. The accounts and analyses may differ because of some inherent bias, whether purely political or based on different beliefs about how economic policy should be conducted. The media may reinforce the sense of calm that government seeks to ensure or they may start to undermine it.
The general public has the unenviable task of trying to make sense of all of this as well as manage its own emotions. That public response may maintain calm and confidence, or may do the opposite. If people rush to take out their deposits then the calls for calm are for naught (and we saw this in the UK recently with the failure of Northern Rock).
The public often views events in the order in which they hear about them, so the flow of news is critical. Mismanaging this flow can have some awkward consequences. If we look at the recent discussions concerning CLICO and CL Financial Group, we can have some idea of this. We do not know what information was available to the Prime Minister of Barbados when the authorities in Trinidad made their public declaration on January 30 about the institutions’ financial problems and its need to make a financial rescue of CL Financial Group. But almost immediately, the calls for calm came from the Barbados government (and several other local entities) with assurances that the local subsidiaries were not in danger. For good measure, the Central Bank of Barbados made available a sizable deposit (B$10 million) and line of credit for CLICO Mortgage Finance Company as a ‘sign of confidence’. The opposition then ‘revealed’ soon after a damaging piece of information that CLICO Barbados’ statutory fund was in deficit by B$93 million in 2007—the most recent data available—suggesting that all was not well and that calls for calm and words of assurance were inappropriate. That ‘revelation’ might have been known to the PM and he had perhaps chosen to not disclose it yet. If so, why was he being ‘economical with the truth’? If he did not know it, then what did this say about the information available to him to make policy decisions? Whatever the real situation, his hand was now forced. If he had imagined that he could manage the problems and the flow of news, he had lost that initiative. He sought to regain that when he acknowledged the deficit, but pointed out that it had existed under the watch of the now opposition. Furthermore, there had been several years of deficit when they were in government and it appeared that they had not seen this as a problem and had taken no action to correct it. So, which pot is calling which kettle black?
Politics were now clearly in play. That was made easier by the awkward personal and professional closeness between Barbados’ PM/Finance Minister and the Chairman/CEO of CLICO Barbados—that Mr. Thompson and his law firm had represented CLICO for many years is a known fact, but that raised questions about what the PM/Finance Minister really knew and if any claims of ignorance were really credible. That awkwardness could easily cause concerns in the minds of many about mixing of political and personal motivations.
Add some background flavour with the revelation that an American financial magnate based in a neighbouring island was alleged to have perpetrated an US$ 8 billion fraud, with that news leading to a run on banks associated with him. The seeds of panic were now being sown in parts of the region. Not that panic was widespread, but Caribbean people’s sense of unease had risen.
While the international dimension of financial problems should not have been news to those in the region, they had been comfortable believing that these were being contained mainly to the US, UK and the rest of Europe. Now, the problems seemed much closer to home. Were local financial institutions now headed down a similar slippery slope?
For many people, it was the ‘revelation’ by the opposition party leader about CLICO’s statutory fund deficit that forced the PM to say more and to give a fuller, though less rosy, picture. The opposition turned the screw tighter by putting the government’s feet to the fire by tabling in Parliament a vote of no confidence in the Minister of Finance (who is the PM). Some argued that this was pure political theatre and that the government would be undermined by it. Some argued that it would be good because the debate would allow for more disclosures, which the government should make but were reluctant to make. There is no way to determine which of the competing views was really correct. The debate passed, and the opposition lost its motion. Those on both sides will argue about whether they had a victory or not. It is not really clear how the public viewed this, but no apparent signs of panic have been visible.
However, the real financial difficulties of CLICO need to be addressed. The discussions around this focused rightly on the absence of good supervision and adequate regulation. They also focused on problems with the way that the institution did business—a ‘risky business model’, to use the words of Trinidad’s central bank governor. Trinidad also had to deal with learning that the problems of its local element were worse than initially perceived. All national policy makers in the region have to deal with the absence of a regional perspective to how the problem could be solved, because at least there is no regional (Caribbean-level) mechanism for supervision and regulation or for new funding, if that were needed. So, we have seen individual national responses: the governments in Guyana, The Bahamas, Belize, and The Cayman Islands, have so far each done what they individually thought was best for the parts of CLICO for which they are responsible. We are not sure if that will be good for the whole, or how these actions may ultimately affect what Barbados can do. The Barbados government, in the meantime, is discussing with another local insurance company possible purchase of parts of CLICO.
I suspect that many people are confused by what they have read and heard about CLICO/CL Financial Group over the past few weeks, whether from politicians, public officials, or the media. As far as visible signs go, financial panic is not present in Barbados—one has not seen lines forming outside CLICO’s offices or heard stories of accelerated requests to cash in policies. Other financial institutions do not appear to have been affected by lower confidence, in the sense that banks and credit unions do not appear to be facing accelerated deposit withdrawals.
We can only speculate whether solving the problems is easier or harder now because of what has been disclosed and the manner in which disclosure has occurred. But we need to be keenly aware of how the flow of information can make a situation more or less fragile.
"Cyborg Finance" paper - Little pre-abstract primer for this paper: *Detective Del Spooner*: Human beings have dreams. Even dogs have dreams, but not you, you are just a machine. A...
2 weeks ago