CLICO MOU: Why Did We Have To Wait So Long?

For the life of me, I have never understood why the Government did not make public the Memorandum of Understand (MOU) with CLICO that has supposedly existed for about a year. But, I see that it has now been tabled by the Finance Minister (see Barbados Today and image alongside for extracts). I presume that this was in response to the question from the Leader of the Oppostion that was on yesterday's Order Paper, see below:

*8. Miss Mia A. Mottley (St. Michael North East): To ask the Minister of Finance:

1. Will the Minister of Finance urgently provide to this Honourable Chamber the terms of the Memorandum of Understanding announced in his 2009 Budgetary and Financial Statement signed between the Government of Barbados and Clico Holdings Barbados or any other subsidiary of Clico Holdings Barbados? Will the Honourable Minister also state whether it is his intention to lay this Memorandum in this Honourable House? If so, will the Minister state when he intends to lay the said Memorandum. Will the Minister of Finance further provide the terms of reference of the Government Control Oversight Committee that has been established to have oversight over the sale of financial subsidiaries of Clico Holdings Barbados and their expenditure? Further, will the Minister of Finance indicate if the oversight committee is still operational; and did the mandate extend beyond the six (6) months given at the time of its establishment?

Transparency and accountability in government affairs should have argued for this being presented to the House much sooner, not least so that any matters contained could be discussed fully. We will now listen to the explanation why despite repeated previous requests that this be done that it took so long.

An Extraordinary Week: Let's Play Pass The Parcel

It has been an extraordinary week in Barbados, culminating with a press conference held by PM David Thompson yesterday afternoon (see Advocate report). He gave what seems like the final word on whether a proposed concert and 'youth forum' featuring Jamaican dance hall artistes, Vybz Karkel (Adijah Palmer) and Mavado (David Brooks) would take place. It's now officially cancelled, after he met with the event promoters, just as the artistes were putting their toiletries together for the flight. Much public concern here had been raging about the spreading of the clear and sometimes violent rift between these two artistes and their fans, which has developed into what has been know as the 'Gaza' [Kartel] and 'Gully' [Mavado] feud. In Jamaica, it had several months ago gotten the attention of government, who wanted to see some easing in tensions between the factions with the government stating that it had reached a 'resolution' to the rift between the artistes (see link). Whatever merits the organizers claimed in their idea of bringing the artistes to Barbados for a show and to talk to young people about their new peace was lost on most people, who saw either another piece of public relations-turned marketing for the artistes. In addition, many saw it as another example of how a certain culture of disrespect and violence as portrayed and perpetuated through music was going to be allowed to spread and undermine values, especially amongst impressionable youths. The dispute here has done much for the recognition of the two artistes, whose music is no less accessible now than before and did not need an actual show to spread. But they now have a new, albeit varied and older audience as parents (perhaps for the first time) decided to listen to a kind of music many do not like or understand. The arguments were sometimes clear but also confused, but raised again many issues about freedom of movement, who could and should determine standards, parenting, youth development, decision making, role models, copying trends from abroad, and much more.

But the subplot to whether the show would go on was a show itself, with decisions changing as often as babies need diapers. We had the head of the police force, Commissioner Dottin, standing up and saying he did not approve of the show/concert only for his Deputy Commission Bertie Hinds to give approval for the show, just as Mr. Dottin was on his way to the airport. The Commissioner was not a happy camper and so he told the Nation: "It sends a very bad image and message that the Commissioner of Police has been having discussions on these issues and nobody had the decency to consult him....It reflects very poorly on the administration of the force." It's been an open secret that communication at the top of the police tree had its own special branch that was virtually non-existent, so no wonder the Commissioner was out on a limb. The PM ducked the issue nicely in his press conference when he said that "I will say there have been press reports about less than acceptable communication." Roger that! But with a Commissioner named Darwin should we speculate about who will survive any fight of the fittest?

The other bizarre event (or incident) involves an altercation in Parliament, which reportedly occurred last Friday during and after the Estimates Debate. The Worm cartoon in Monday's Nation was again really on target, with its depiction of an 'alleged incident' in the precincts of Parliament between Cabinet Minister, David Estwick, and Deputy Leader of the Opposition, Dale Marshall. Allegations include the brandishing of a firearm. The PM has decided that a bipartisan committee should look into matters of parliamentary procedures and privileges, and include not just politicians but media, clergy and others who could offer insight and input. But the current matter is for the Speaker of the House of Assembly to deal with. The matter was aired publicly by Mr. Owen and Miss Mottley at a BLP branch meeting at St. Leonard's School last Sunday. Reports suggest that Mr. Marshall has filed a formal complaint with the Speaker about the incident. This whole matter puts the government in a pickle as it deals with certain kinds of threats to society and less than stellar public behaviour and morals on one hand and has to deal with other similar threats in its midst.

There's also the uncomfortable situation brewing over the sentencing of the man responsible for the death of a Canadian tourist at Long Beach, after he hit her over the head with a piece of wood in an attempted robbery. The judge gave a sentence of 10 years to Curtis Joel Foster on a charge of manslaughter, well towards the lower end of possible sentences even though mitigating circumstances were slight. A lot of public surprise was expressed at what some would call 'insufficient punishment'. In keeping with that view, the Director of Public Prosecution is referring the matter to the Court of Appeal (see Nation report), arguing that the sentence does not reflect the gravity of the offence. As reported in the paper, citing the document on which the appeal is based:

"It is contended...that the sentence of ten years imprisonment imposed on [Foster] for the offence of manslaughter is unduly lenient in the circumstances.

"It is also contended that the sentence does not reflect the gravity of the offence.

"It is also contended that the sentence does not reflect the public's concern about offences of this nature.

"Moreover, there is an error of principle in the sentencing in the circumstances".

A space to be watched with much interest.

Then there is CLICO, which some say has become a political football. Stung by comments about the size of its statutory deficit, the company took out paid adverts in the papers 'categorically' deny that it was B$300 million. It did accept that the deficit was about this figure in 2008 and is now about B$100 million, but there is an accounting exercise for 2009 to be done by end April, which may move that figure around. Then in today's Advocate (page 7), CLICO's Executive Chairman, Leroy Parris, makes a statement taking to task the former PM, Owen Arthur, and 'responding to scurrilous attacks on my integrity by certain Barbados Labour Party (BLP) member, especially former Prime Minister Owen Arthur'. If it was a political football before, I dread to think what it has become now. A medicine ball?

It would be unoriginal to say that we live in interesting times, but I have to say we live in interesting times.

Fool Me Once, Shame On You. Fool Me Twice, Shame On Me

Several months ago, I wrote about some issues to do with the credibility of government and governing (search 'credit ratings', for example, and see Do Good Things Come To Those Who Wait? Economists Talk About Issues?). Much of that concern comes right back and hits me in the eye when I listen to what government spokespersons, mainly the Finance Minister/PM have been saying recently about things economic. I wont spend many words on them, because it appears to reflect much indecision, which has been costly, but just note the to-ing and fro-ing in four particular areas There's a reason to not spend too much time on the details of the Estimates that are now being thrashed over in Parliament, not least because they are estimates (and I know how to do that and it's more art at best than science), but also if the overall picture is a mess and unclear then what clarity can one get from the details that make that up? But looking at the problem areas where clear paths seem to have come and go like day and night.

Asset sales: First it was the plan to sell shares in BNB and ICBL to fund rebuilding/renovation of the QEH. Then it was talking about raising the governemtn ownership of BNB so that it could again become a 'national' bank. Then back we come to planning sell BNB and ICBL shares to fund QEH improvements. Is your head spinning yet. The Exorcist was a horrible movie.

Ratings downgrades and warnings and international borrowing: When Standard and Poor's made its downgrade of Barbados last November, one of the comments from the central bank governor was that Barbados was 'not going the route of borrowing on the international market, choosing to use less expensive sources of funding', and therefore concern about a worsening view from credit ratings agencies could be lessened. But here we are hearing from the Finance Minister yesterday that Barbados will go to the market to raise US$ 200 million at the maturity in June of a US$100 million bond. So, what was not a concern in the mind of the central bank governor may now be a concern as Barbados tests the international borrowing waters. But guess what? Several months ago concerns about high budget deficits and possible sovereign defaults was very muted, Since then, we have had the debacle of Dubai and very recently the greasy pole of Greece's financial and fiscal problems, and renewed talk that so-called solid sovereign borrowers like the UK and USA may see the loss of their AAA rating. Let's see what a welcome there is at the doorway for Barbados. If you want to think about happy ever after in the market place, remember The Beatles song, Oh-bla-di, Oh-bla-da, with 'Life goes on, bra. Lala, how the life goes on'.

CLICO/CL Financial: This is really something that may become a horror movie before our eyes. An unbelievable amount of time has been lost or wasted dealing badly with the affairs of this entity, and with about as much transparency as you get by looking through a wool blanket. During the Estimates debate the FM/PM told Parliament that the proposed sale of CLICO International Life has proven to be very difficult (see Advocate, March 16, page 3). I'm not really going to who has seen the Memorandum of Understanding between CLICO Holdings (Barbados) and the Ministry of Finance. If Parliament has not seen it then we have serious governance issues.

Supervision of nonbank financial institutions: The icing on the cake comes with the belated announcement/decision by the Supervisor of Insurance that CLICO and British American Insurance must now cease and desist from writing new policies and both be put under judicial management (see Nation report). Should have been done a year or so ago. You have a hole and don't know how deep it is and where it will hit water and you keep digging?

Buying BNB is not the solution to CLICO Barbados situation

My friend, Avi, a pretty good economist and Bajan of long heritage, has been following and analysing financial markets for some time, and has a well-earned reputation. He has put his mind to the matters facing the Barbadian financial sector, in particular, ways through the problems that may face a major player in the investment sector. His points were published as a letter yesterday (see Advocate, March 20, 2009), and he allowed me to reissue it here.

An important aspect he highlights is the higher risks that would be entailed if an insurance company's assets were sold to a bank.
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Buying BNB is not the solution to CLICO Barbados situation
3/20/2009

I HAVE found the attention placed on repurchasing BNB at this time a little odd. I have been involved in a few financial rescues and in my experience it is always best to start with what is the problem we are trying to solve.

What is the problem that would be solved by a repurchase of BNB or an encouragement of local interests to buy BNB? The whole issue of “local interests” is a hornets’ nest. Is Sagicor local?

It has a large degree of foreign owners of its shares. It is headquartered in Barbados, but then again so is BS&T. Is that local? Moreover, it seems to me that if the private sector has cash burning a hole in its pockets it should put it aside to stop job losses. Let’s not see a return to the early 1990s. The critical test that any repurchase needs to pass is can we do something better with the money. Today, saving jobs seems a better use of the money to me.

In terms of Clico, the problem the Government has to solve is well summarised by the Governor of Trinidad & Tobago’s description of the company as exhibiting a high degree of transactions between companies in the group, a risky investment strategy and a high-debt strategy – three things that insurance companies should not do. This means in the Barbados case that the asset values of the insurance company have fallen below prudential levels in circumstances, different than before, where the Barbados subsidiary can no longer rely on support from the Trinidadian parent or from quick sales of local real-estate assets.

What is the solution to this problem? Below are a list of solutions to this problem with the least cost to tax payers at the top and the highest cost at the bottom:

1. The Government can request that the central bank accept as collateral for liquidity loans, a wider class of assets, including prime real-estate from a wider class of institutions such as insurance companies. (The central bank would have to quickly acquire some expertise in real-estate assets, which it may second from the private sector.) Lending money without security would be irresponsible.

2. The Government could take “conservatorship” of the company over the short-term to guarantee policy holders and make those adjustments required to ready the company for a future private sale or initial public offering. This is a form of “Chapter 11”. I suspect those adjustments would include a more conservative investment and management style.

3. The Government could take control of the insurance company to guarantee all policy holders and to run-off the insurance company. Tax payers would take a hit were the assets to prove insufficient as they are likely to.

4. The Government could cajole the private sector to purchase assets, at a high-price on the basis that there will be a government guarantee if the assets were subsequently sold below this price after, say, five years. In essence the buyer would be paying for the government guarantee and the company would receive the proceeds from that guarantee. How do you ensure that those proceeds go to back Barbadian claims?

5. The Government could offer to buy some of the prime real-estate assets at a long-term price, with the proceeds ear-marked to the satisfaction of Barbadian policy-holders. This price would have to be estimated using a long-term economic valuation and not an historic accounting valuation. This would gift the company cash but again, you would have to ensure that this cash was only available to back Barbadian claims or it would be used indirectly to fund Trinidad’s $10bn statutory deficit.

Ideally these steps should have been done quickly. Following the recent injunction in Trinidad, all of these steps now require some international negotiation.

Repurchasing BNB by national interests is only a solution to the problem if we want BNB to buy Clico assets at a price BNB could not recover themselves and so would not do otherwise and therefore, it would mean a transfer of losses from an insurance company to a bank. That would be highly dangerous as banks are systemically more exposed than insurance companies.

Professor Avinash D. Persaud,
Emeritus Professor of Gresham College and Member of the UN High Level Task Force on International Financial Reform.

Financial Issues And News Management

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.

Cadogan, You're At It Again. Want To Buy A Bank?*

Every body's doing it. Governments around the world are getting their hands on banks. But why? Most of them are doing it because the banks, big and small, are going belly up after another wave of selective memory: excessive risk-taking, bad lending, poor oversight, related lending, conflicts of interest, overpaying people for what they do, etc. If governments are looking to take control of banks then they go for the major ones and let the minnows flounder and fail, believing that the system can lose the small and weak but not the big and weak. Governments are not looking to put their fingers in the pie of banks that are doing well. Why should they? Look at Citigroup, where the US government raised its common equity stake in a third bail out attempt (see Bloomberg report). Banks should really be private institutions and people in capitalist economies get nervous when they see government wanting to raise its stake. If the government wants control of things in the financial sphere they should rely on the central bank and finance ministry to set the right policies. So, why the rush in Barbados for the government to get its hands dirty again by repurchasing a majority stake in Barbados National Bank (BNB), which was sold off in 2003?

It's all in the name? So, the bank that was sold has 'Barbados' and 'National' in its title and these represent legal property. Of course, those words have value not least because everyone in Barbados knows them, loves them, and maybe trusts them with a lot of money. The bank carries the colour of the national flag--blue, yellow and green--in its logo. When Trinidad's Republic Bank bought BNB, a change of name would have raised more hackles than were necessary. The bank did not get an image make over to look like its Trinidadian parent. If it had been Citibank as the buyer, then they would have come with a bigger name and with a splash that many would regard as "Yes, we reach, now, Iyah!" Well, that would have been true up until a few months ago, now Citibank's name stinks.

Not a Bajan bank? Well, I don't know what a Bajan bank is. BNB has the colours of Barbados, is located in Barbados, has mainly Bajan customers, and more.Yes, it is run by Trinis. But so what? When it was run by Bajans it went into emergency care. When BNB was put up for sale, it was taken up by a foreign entity because the infamous risk aversion of Bajans meant that not enough of them wanted to stump up and take pieces of the bank that were on offer. So, one could say "You had your chance, and you decided that you had better use for your money."

The bank is not serving the people's needs? Seems that the bank has been ripping ahead as far as shareholders are concerned and they probably give wider service than their local competitors. When the original pieces of the bank were established they were there to meet certain needs, namely, Barbados Savings Bank – 1852; Sugar Industry Agricultural Bank – 1907; National Housing Corporation (Public Officers Housing Loan Fund) – 1958. As the bank developed from the mid-1970s, it continued to meet these needs. Into the early 1990s, the fact that the bank was failing became apparent and then over the next decade its balance sheet was cleaned up, and provisions and write offs were made, the bank moved from losses to profits and the bank improved its capital base. Like it or not, an 'unholy alliance' of the Government of Barbados, the Central Bank of Barbados, the Inter-American Development Bank, and the IMF was instrumental in showing the bank's bad loanss problems and setting out a way to get over them. All of this was happening at a time when Barbados' economy was at a modern nadir.

Balls of confusion and political football? When PM David Thompson made his Budget speech in July year, this is what he had to say about BNB (see Budget text):

• The Barbados Government owns a substantial number of shares in both the Barbados National Bank and the Insurance Corporation of Barbados, but in both companies, the Government is a minority shareholder, and so is in no real position to direct the strategy of either company.

• At the same time, Government has been advised that the value of its shareholding in those two companies is approximately $200 million and that the rate of the cash dividend that Government receives on an annual basis on these shares is less than the rate of interest thatGovernment pays on its borrowing. Since these shares are no longer useful in determining the strategic direction of either of these companies, Government has taken the decision to offer these shares firstly to Barbadian individuals, theNational Insurance Board and local companies and then, if necessary, to the current majority shareholders of the two companies, if Barbadians do not take up all of the shares.

• The proceeds of these sales will be used to fund part of the upgrading and expansion of the QEH.
  

So, less than a year ago, the government felt no need to want to be the majority owner of BNB. What has changed to make for a reversal of a clearly stated policy? In current circumstances, some would speculate that the government smells trouble for the bank and cannot feel comfortable that the ultimate parent and its national government will stand up and assist if needed. So, it may be a pre-emptive strike.

Governments have a bad track record in running businesses? If governments go into owning a bank, many would suspect that its performance would deteriorate. A government can step in to stop a certain rot setting in or going too far, but that should be a temporary state. When government-owned banks exist they often end up being an extension of government policy. Loans get directed to individcuals, companies and projects the government prefers (see research report). Business decisions are always tinged with political consideration, as shown by some empirical research, which summarized that:

• State-owned banks charge lower interest rates than do privately owned banks to similar or identical firms, even if the company is able to borrow more from privately owned banks. State-owned banks mostly favor firms located in depressed areas and large firms. The lending behavior of state-owned banks is affected by the electoral results of the party affiliated with the bank: the stronger the political party in the area where the firm is borrowing, the lower the interest rates charged.

Fear of CL Financial/CLICO fall out? This is the one thing that may make some sense. CL Financial Group is due to sell its holdings of Republic Bank. That puts a cloud over BNB. However, that has to be resolved. Republic Bank, meanwhile, says it has no intention of selling BNB. So, this will be an interesting wrestling match. Think of it. Bajans did not want BNB. The Barbados governments it wants to buy bank controlling shares in BNB. The onwer of the majority of BNB says it has no interest in selling them. Hee-hee!

Undermining the Central Bank of Barbados? One big concern is that the Governor has been saying repeatedly, even yesterday, that the banking sector is secure. The system is 'sound'; banking system liquidity has not been a problem; the banking sector has performed well. If all of that is correct, why does the government feel the need to be involved with the major bank? It is curious and even a bit baffling.

Who will pay for it? If the bank is to be bought there needs to be financing. The government said it needed money from selling the bank to implement a certain health policy. If it does not sell the bank it will need to fill that financing need--philanthropic capital has been mentioned. If funds are to be found to buy BNB, where will that come from? Barbados can borrow, but would borrowing to buy a healthy and profitable bank be the best use of such funds? What of other needs on the government's agenda--stressing again that there is already a set of policies laid out in the 2008 Budget. That higher borrowing will need repaying and I cannot see how owning the bank is going to address that future need. How will the new fiscal situation fit with other economic policy objectives?

The government's flip has come as a surprise and many will see nationalism or patriotism in this somersault. But those are not good reasons for making financial policy.

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*To understand the role of Cadogan see previous post, Follow Fashion Kill Cadogan.

Who's Fooling Who?

What is really going on?

Today's Advocate does something extraordinary. It draws a number of red herrings out across the path and plays at what could be mistaken for some partisan propaganda, throwing out a good dose of brickbats against any comment or criticism of a major financial company.

• It warns that 'Barbadians must guard against indulging in rumours and baseless allegations...'
• It talks about 'against background of ongoing hysteria over circumstances involving a prominent Trinidad-based financial institution, which has a subsidiary in Barbados, there has been a noticeable fall off in shares in the local Stock Exchange'.
• It calls on 'everyone to recognise that if mischievous rumours and wild speculation continue, not only would harm be done to the image of the investors' chosen institution, but other companies could suffer as members of this island's small corporate community'.
  

I am not easily scared by events in financial markets and I like to check statements.

Who is being hysterical? What is the evidence for this? I do not see lines at any bank offices. I do not see people trying to put their hands of foreign currency and shed the local currency. I do not see or hear of other signs of financial panic, such as people hoarding goods. I do hear questions about the actions and statements of public officials, and that should not be discouraged, because lack of credibility is a major reason for failed measures.

What are the rumours and baseless speculation? Just last Friday, the Governor of the Central Bank of Trinidad and Tobago, Ewart Williams, was describing CLICO's financial position [CLICO's shortfall of TT$10 billion] as "much worse than we envisaged", essentially echoing the words of regulators in developed countries several months earlier (see Trinidad Guardian report). Essentially, he also flagged the last solid data (audited accounts) for the company are for 2007--well over a year old--and that its surpluses for three years appear to have turned into substantial deficits in 2007 and 2008. So, is sharing the concern of a central bank governor working with rumours and baseless speculation? Moreover, there is evidence that the Trinidad authorities dropped the ball in terms of their oversight of the financial group, and are now hastily trying to fill gaps in legislation to allow for better oversight, so expecting the public to have faith and patience is a big ask.

Since the news broke of financial trouble with the Trinidad arm of CL Financial, the central bank in Barbados has placed a B$10 million deposit with it and made available a line of credit: these actions suggest some possible serious financial problem, so local concern has a base and is not fed solely by rumours.

The matter of inter-linkages in CLICO is important and not well understood or well explained, but it has been said by local public officials that the group had a 'risky business model' involving global deals that moved money out of CLICO.

What has been the fall off in the Stock Exchange? In the same issue, in Business Monday, I look at the 'Stock Market Report' dated February 13, 2009. Of 24 shares quoted, only 12 have had transactions in 2009, and 8 of these since end-January (when the CLICO problems surfaced)! There appeared to be only trading going on in Goddard Enterprises last Friday. (If one looks at the 'odd lot' market, it is similar story, with 18 companies showing transactions in 2009, and fifteen of these since end January, only Goddard trading last Friday.) Tell us what the fall off has been, in market that is essentially moribund.

So, if Bajans are worried it is not due to hysteria or baseless allegations and rumours. If one works just with the 'well-informed' statements of local and regional government and public finance officials, there are causes for concern.

Telling people 'Hands off CLICO' is a statement that really requires some in-depth assessment. It is especially troubling as the CLICO group is a multi-national, private enterprise that is now getting substantial financial support from regional governments and central banks. Therefore, a major private business has now become very public. Warning the general public to 'keep off', so to speak is a very odd position for a newspaper to take. Very odd indeed. To not treat CLICO (whichever part we mean) as a political football, means not kicking things related to it around as if they are tin cans on the street and can be ignored.

Another Fine Mess

I am not going to spend a lot of time on the issue, but will raise it as a matter of political judgement. What possesses the leader of a political party to appoint someone who is viewed as the patron of his political party, who is the chairman of a major regional financial entity (CLICO Barbados), as the chairman of government-controlled/national broadcasting company? I asked myself that question at the time of the appointment. I was not convinced by any argument about dearth of talent or abundance of talent in the person of one person. Why ask someone to hold these two positions at the same time? This just seemed to be leading down the road of conflict of interest or just awkward situation sometime soon. If the person really is the BEST for the public sector job then let him/her take a leave of absence from the private sector post. If the private sector post is really THE job, then stick with it, and let someone else perform a worthy public service. Even if the person is Superman or Superwoman and has hi/her cape, last time I looked, Barbados has no phone booths.

Then, a major event occurs; it is by its nature very newsworthy. The Trinidad arm of the chairman's company hits the financial skids and needs government help. The opposition party leader in Barbados wants to make comments about the issue and is 'denied' airtime. Guess what? It does not smell right and only a dodo would not have seen the possibility of this doo-doo (see Nation report February 14, 2009). I have a feeling that despite the PM's entrance into the discussion there will not be any Valentine Day's kissing and making up.

Why would you as head of government and Minister of Information to boot, put your government and yourself up for this awkward situation waiting to happen, even if you were not looking to push a platform of transparency and good governance? Is it part of the arrogance of power? Is it a blind spot for a friend and associate? Clear thinking? Good decisions?

Good dancers do not need to hear the music to choose the right steps. Jumping up for the tango when the band is blaring in your ear is not how the 'first legend' of tango would do it. Funnily enough, I thought of this metaphor at random, then found that that legend was Carlos Estevez, who had the nickname "Petroleo" (that means petroleum in English), because he was as smooth as oil.

Oh, well, now someone is pouring oil on flames? What's a petrol economy got to do with it all, anyway? Who is going to be held over a barrel?

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.