Sunday, March 1, 2009

Business Page - Clico, contagion, containment and concealment

Business Page - Clico, contagion, containment and concealment
Posted By Christopher Ram On
Stabroek News, March 1, 2009

If a loss of public moneys should occur and, at the time of that loss, a Minister or official has caused or contributed to that loss through misconduct or through deliberate or serious disregard of reasonable standards of care, that Minister or official shall be personally liable to the Government for the amount of the loss.

This is a direct quote from section 49 of the Fiscal Management and Accountability Act which President Jagdeo signed into law in late December 2003. The Clico affair and related matters may be a good time to draw attention to the provision which has never been tested at the higher levels. When the dust settles, the taxpayers, NIS contributors and beneficiaries, members of pension and medical schemes and depositors in Clico and potentially in Hand-in-Hand Trust (HIHT) and the New Building Society could lose collectively several billions from the fall-out in the financial sector.

Other consequences will be equally severe, if not always as direct. Jobs will have to go. Moreover, with perhaps billions invested in Stanford Investment Bank (Stanford) by the HIHT and other so far unidentified pension schemes and individuals, their losses and their income stream - all in US dollars – will be gone. With the assertion that our economy is ring-fenced having proved naively misleading, and claims by Clico, the President, the Minister of Finance and the Commissioner of Insurance - all acknowledged as very bright persons - having proved to have been misguided at best and been guilty of misrepresentations at worst, there is a loss of confidence not only in the judgment and competence of our economic managers, but also in the independence and ability of the regulators to protect the public interest.

Last Wednesday, Ms Maria Van Beek, the Commissioner of Insurance, presented a petition to the court seeking an order that Clico be wound up or alternatively, that a Judicial Manager be appointed. One day later, Ms Van Beek was granted her wish by Chief Justice Ian Chang in an order returnable tomorrow, Monday, appointing her as Judicial Manager of the entity which she has supervised for more than five years. Instead of immediately issuing a statement advising affected persons – numbering tens of thousands – of the implications that flow from the order, Ms Van Beek proceeded to the Office of the President for a press conference, where along with the Minister of Finance Dr Ashni Singh and the Governor of the Bank of Guyana (the Bank) Mr Lawrence Williams, she sat silently as the President made excuse after excuse for the failure of Clico and gave vague statements about protecting pensioners without once using the G word – guarantee - which is what people, worried about their savings, pensions, medical schemes and jobs most need.

Blame The Bahamas
President Jagdeo, who is not the responsible Minister, told the nation that it was the collapse of Clico Bahamas that triggered the action by the commissioner. Yet that is not what the commissioner said in an affidavit sworn to the court one day earlier. She said it was the business model and investment policies pursued by the company. The President, seeking to protect Ms Van Beek and by extension his Minister of Finance, told the nation that the commissioner had told Clico more than one year ago that they should have regularised their investment position. So, did the commissioner write the company and then sit back as they breached the law even further? The problem with the President’s style of intervention is that at best, he does not check the accuracy and implications of the statements he makes and increasingly often, he is wrong. There is no need to remind anyone of the damage caused by such lack of respect for accuracy as we saw in the saga of tax concessions necessitating an amendment in the law to facilitate Queens Atlantic Investment Inc’s tax concessions.

In matters financial details are important and so is judgment, particularly when it involves self-serving statements. When the President assured the nation on February 5 that Clico’s assets were sufficient to meet its liabilities he was repeating a company line without having read the December 31, 2007 analysis showing that 81% of the company’s assets was invested in related parties, all of which were under various degrees of threat (SN February 7 and Business Page Feb 8 reported on this analysis). In fact as Minister-Extraordinaire he should have known that the 2008 figures had shown some deterioration, suggesting that the commissioner’s call was ineffective and/or ignored. Both he and the Minister of Finance should have wondered how a company that issued “insurance policies” with premiums running into billions of dollars only needed a statutory fund of under fifty million dollars.

Disregard for reasonable care
The disregard for reasonable care does not end with them. The nation would have expected the Commissioner of Insurance and the Bank of Guyana to recognise that those policies were investment products dressed up as insurance. It is hard to believe that such a major issue would have escaped the attention of the Bank with illustrious directors of the calibre of Drs Gobin Ganga, Prem Misir and Cyril Solomon.

Given the poor oversight exercised by the regulators in general and the Commissioner of Insurance in particular, the court would have been reluctant to appoint Ms Van Beek to manage the operations of Clico under its supervision. Her demonstrable failures to act expose her inappropriateness for such a job, or even to have been the lead regulator for an industry which also required legal expertise. The problem for the court is that the law appears to have given it little choice. Yes, the court could have made a winding up order on the ground that Clico is insolvent, and use the more practical test of “inability to pay one’s debt on demand” that may very well have been the case. But the Insurance Act makes it a bit more difficult for the court by requiring a determination of the value of a troubled company’s assets and liabilities, never an easy task even for accountants. The President compounded the difficulty by volunteering that he hoped that the entire sum from The Bahamas company would be recovered even as he failed to address the billion dollar debt owed by CRL, the Guyana forestry product subsidiary of the troubled CL Financial which has guaranteed the debt.

Once the court chose not to go with the winding-up option – though this may still happen at some time – section 68 of the act gave it no choice but to appoint the commissioner as the Judicial Manager. Apart from the fact that her past supervision of Clico inspires little confidence, and her inattention to detail was embarrassingly exposed when she wrongly identified the name of Clico in her petition, what then becomes of her statutory role and function as Commissioner of Insurance over Clico and the rest of the industry, including Fidelity, which would ordinarily require full-time attention? Additionally, there appears to be a conflict between her two roles which the court would have to consider given that the court itself is not equipped to make business judgments.

The poor NIS could stand to lose six billion dollars in investments in Clico which may not have been made in compliance with the NIS Act. This is no small change. It is the equivalent of more than 20% of earnings accumulated over forty years by the Scheme and about one year’s benefits payment. To check on the propriety of the investments, I wrote Minister of Finance Dr Ashni Singh a letter on February 24, pointing out that the NIS Act only allows the NIS to invest in securities approved of by the Co-operative Finance Administration (COFA) established under the Co-operative Financial Institutions. I pointed out that he is not only the Chairman of COFA but as Minister, appoints the Board of COFA. The Minister of course also appoints the Board of the NIS. I asked him the following questions:

1. The names of the persons he appointed to COFA currently serving as members of the administration, and the commencement and termination dates of their appointments.

2. The securities which COFA approved for purposes of investment.

3. Whether the NIS had sought and received approval for any investments other than those determined by the administration and if so, the securities which have been so approved.

4. Whether the administration during his tenure as Minister has ever taken the opportunity under section 4 of the act for its Chairman or Secretary to attend any meeting of the National Insurance Board, and in particular the meeting at which any decision was made by the board for any special investments.

I am awaiting his response. But if it were owing to the Minister’s “misconduct or through deliberate or serious disregard of reasonable standards of care” COFA did not approve of NIS investing in Clico the Minister would have some serious questions to answer, not to Business Page but to the nation.

To make matters worse for the NIS, Clico was allowed, even while Commissioner Van Beek, the Minister of Finance, the President and the Bank of Guyana were “monitoring” the imperilled insurance company, to divest itself of $1.5 billion dollars of bonds in the Berbice Bridge Company Inc. The Board of the NIS, all the members of which are either ducking or hiding, needs to explain to the nation whether the terms of their $6 billion investment in Clico were breached by the sale of the bonds and whether the Scheme feels that its investment is any safer now.

The New Building Society
More than ten years after privately as a director of NBS and publicly as a columnist, I advocated that the country’s only building society with more than one hundred thousand persons’ savings and loans involved be brought under the supervision of the Bank of Guyana, the Bank exercises no jurisdiction over the NBS. During that time the government has drastically increased the lending limits while relaxing the conditions and security required to back the loans made. One only has to consider the Savings and Loans crisis in the US in the late eighties to appreciate the possible consequences of such laxity. But there is more to worry about. The board has also become increasingly politicized with its current Chairman being Head of the Public Service in the Office of the President and the decision about the new Head Office involving hundreds of millions of dollars being made against technical professional advice. Quietly, the NBS has been joined in the failed attempt to prevent the demise of Clico. The NBS has bought over $1.5 billion dollars of bonds in the Berbice Bridge Company Inc from Clico, and it is unlikely that this would have happened without the official agreement and sanction of the Office of the President in which both the Chairman of the NIS and the Chairman and one director of the NBS are based, or the Ministry of Finance which has to approve investment in securities issued by the Berbice Bridge Company.

The danger is obvious. The NBS with assets in excess of $30 billion is unsupervised and unregulated but subject to powerful political influences. If the bridge company which is proving the sceptics right about the hugely optimistic traffic projections, and the board, which is chaired by the Clico CEO, cannot meet its financial obligations to bondholders, $1.8 billion of the funds of the NBS – representing about 40% of its reserves – would be at risk. That is real money which added to the Head Office being constructed at a cost of approximately $800 million could pose real trouble for the society.

Once again the recurring players are the President, the Minister of Finance and the Bank of Guyana, the last-named of which has failed to assume any jurisdiction as it should have. Of course this in no way exonerates the Chairman and directors of the NBS from their fiduciary obligations.

Hand-in-Hand Trust
The President also referred at the press conference to the investments made in Stanford by the Hand-in-Hand Trust, which holds depositors’ funds and manages some of the country’s largest pension schemes. He said that in the case of the HIHT, “total current exposure” to the Stanford Group amounts to $827 million or US$4 million, in addition to $297 million or US$1.5 million invested on behalf of pension funds. He then went on to confuse the nation by referring to the direct exposure which he said represented 9 per cent of the total assets of HIHT.” Whether it is 9% or closer to 10% is less important than the fact that this is not how one measures exposure. With the head of the Bank of Guyana and the Minister of Finance sitting in at the press conference as his technical advisors, the President as an economist should know that the measure should have been total exposure of the company – direct and indirect – relative not against total assets which do not belong to the company but only to equity which does. In other words he was downplaying the problem in more than one way.

The question has also been raised whether it was permissible for the HIHT, regulated by the Bank of Guyana under the Financial Institutions Act, to place so much of its funds in a single investment – what lay persons would refer to as putting too many eggs in one basket, but which the more technically-minded Bank of Guyana would call asset concentration. In the case of the failed Globe Trust, the Bank of Guyana received more than a mild criticism from then Chief Justice Carl Singh for its poor oversight. It must now hope that by some miracle the investment by HIHT in Stanford will be recovered. If that does not happen, then the Bank can expect not only a strong rebuke but perhaps even a lawsuit.

Faced with a financial crisis, the first step is containment. Instead we had concealment with the consequence that it has widened and enlarged now including, with potential negative and costly consequences, the National Insurance Scheme, the New Building Society, pension schemes and savings accounts of hundreds of thousands. Confidence is also crucial but this comes only from the competence, judgement and independence of our leaders and regulators. None of these qualities has been adequately demonstrated in this instance by the President, the Minister of Finance, the Commissioner of Insurance, the Bank of Guyana, the National Insurance Scheme and the New Building Society.

The rest of the financial sector and perhaps with one exception the insurance sector all appear very solid. Every effort must be made not to contaminate them and to restore confidence in the entire system. I believe that the National Assembly needs to take an active role in this.

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