Monday, March 2, 2009

Clico and the failure of leadership

Clico and the failure of leadership

Posted By Stabroek staff On March 2, 2009 @ 5:01 am In Editorial | 4 Comments
On January 30, the day Trinidad was rocked by the news that the government would in effect be bailing out C L Financial – or CLICO – as it is branded in the region, a terse statement was issued in Georgetown by the Chief Executive Officer of its operations here, Ms Geeta Singh-Knight to the effect that Clico (Guyana) was “solid” and that none of its assets were intertwined with the troubled Clico (Trinidad) or Clico Investment Bank and that developments involving the parent company had no financial impact on it. However, she never uttered a word about The Bahamas.

With the placing of Clico (Guyana) under judicial management on Thursday, Ms Singh-Knight’s statement may well go down in insurance history as the most audacious attempt to throw a positive light on what was clearly a disastrous situation. That attempt collapsed in ignominy after the liquidation of Clico (Bahamas). One can almost understand why the statement was made. Ms Singh-Knight was presiding over a volatile situation and the slightest slip of the tongue could trigger an enormous run on the business. After all, confidence is the name of the game. But what if it did precipitate a run of seismic proportions? A well-operated business with the requisite statutory funds salted away and a prudent mix of short-term and long-term investments should be able to withstand a stampede to its doors while at the same time assuaging those who might have been thinking of doing the same. That was clearly not the case. Nearly 53% of its assets were locked away in the doomed Clico (Bahamas) which had in turn sunk most of its monies in other C L Financial subsidiaries which had in turn gone on a riotous real estate spending spree in Miami only to see that market implode leaving assets not easily converted into cash and worth much less than they were purchased for.

So when the inevitable run began on Clico (Guyana) it came under enormous pressure and quietly sold its Berbice Bridge bond to the New Building Society all the time hoping for the best. The liquidation of Clico (Bahamas) ended the charade as there was no chance of liquefying the petrified Miami assets.

As we said, Ms Singh-Knight’s stance could almost be understood. What however was inexplicable were the stances adopted by President Jagdeo, Finance Minister Singh and Insurance Commissioner van Beek. While the Finance Minister did summon a meeting on January 30 with Ms van Beek and Ms Singh-Knight it remains unclear what his objectives were as he did not spell them out. He requested some information from Ms Singh-Knight though it was never made clear what was requested, what was supplied and what he then expected to happen.

A GINA statement on that meeting said the following “Minister Singh requested that the company supply to the Commissioner of Insurance by Monday further information on the financial status of the Group, details of the transaction agreed with the authorities in Trinidad and Tobago, and of the implications of these developments for the operations of the Group as a whole and the Guyana company in particular.”

Given what is now known about Clico (Guyana’s) asset impairments the Minister of Finance did not act decisively although it must be noted that the Commissioner of Insurance is fully empowered under the Insurance Act 1998 to act on her own. What Minister Singh should immediately have heard from Ms van Beek was that Clico (Guyana) was heavily invested in Clico (Bahamas) and this had been a constant source of worry to the Insurance Commissioner, which the public learnt from President Jagdeo at Thursday’s press conference. Minister Singh should also have been apprised of a large debt to Clico (Trinidad) which could have potentially been called in since the Trinidad government was now in charge of it. These dangers should then have been raised immediately by the Minister with Ms Singh-Knight and failing a convincing response or one shorn of inspiration beyond `we are solid’ the Minister could very well have communicated his deep concern and the best course of action would have been to move to have Clico (Guyana) placed immediately under judicial management as is catered for by the law with the option of a return to normal business if the situation stabilized. What was unacceptable was the issuing of a statement that didn’t reflect the seriousness of the matter. Notwithstanding the Minister’s position, the Commissioner of Insurance was free to act on her own but did not.

The business-as-usual stance was continued by President Jagdeo at a press conference on February 5. When asked about Clico (Guyana), he said that the only problem he could envisage in the short-term was a mismatch between liabilities and assets but evinced no major cause for concern. It now transpires, based on his statement at Thursday’s press conference, that even at this time his government was in touch with The Bahamas to determine how the situation could be retrieved and options such as purchasing the Miami real estate were considered. This effort by Guyana failed and that in itself was disappointing. Was Bahamian Prime Minister and Finance Minister Ingraham approached about the prospect of the failure of Clico (Bahamas) precipitating the collapse of Clico (Guyana)? Could he not be importuned to consider some option that would keep both subsidiaries going until the real estate knot was disentangled? Couldn’t both governments make simultaneous deposits in the subsidiaries as a means of boosting confidence as was done by the government in Barbados? That was the kind of effort that was required if a real attempt was to be made to protect the policyholders and depositors of Clico (Guyana). Indeed, the Bahamian government only sought the liquidation of the company after what it said were “discussions with the principals of the company over many months urging and directing them to inject additional capital and liquidity into the company but to no avail”.

All along, however, the ball was in the court of Commissioner van Beek and she unfortunately chose not to act. If she was concerned about the scale of the Bahamas deposit for more than a year and had even communicated this recently to Clico (Guyana) why didn’t she take steps against the company as the Insurance Act permits? The only conclusion that can be drawn from this inaction was that she did not think that the $6B Clico (Guyana) deposit with the Bahamas company could be in any jeopardy, did not anticipate the liquidation of Clico (Bahamas) and did not expect that Clico (Guyana) would eventually be in this crisis.

At his press conference on Thursday, President Jagdeo read a statement entitled in part `The Government of Guyana takes steps to protect policyholders of CLICO…’ Those steps came four weeks too late. In the four lost weeks, there is a real possibility that those with better knowledge of what was going on and with access to market information were able to make sizeable withdrawals of deposits at Clico (Guyana) and surrender their policies while hundreds of salt-of-the-earth policyholders who were less aware of what was going on were left in the lurch though they, too, should have had an equal opportunity to redeem their investments in Clico (Guyana). Moreover, it was also possible that there continued to be transfers from the Guyana company to its parent company and subsidiaries. In the judicial management process, all of the transactions that ensued between January 30 and last Thursday should be detailed for further inspection by the regulatory authorities.

In the light of all of the information that is now available, it was unacceptable for President Jagdeo not to detail on February 5 the fullness of the danger that faced Clico (Guyana). In particular, he should have spoken about the danger to the National Insurance Scheme’s $6B deposit in Clico (Guyana) which pertains to thousands of ordinary Guyanese. His role was not to put the best spin possible on the situation but to tell it as it was warts and all. That’s what leaders do and that’s what the Guyanese public would have expected.

The way forward requires action on two fronts. Legislative reforms are clearly necessary. It is inappropriate for the Commissioner of Insurance to be assigned the role of judicial manager when her actions or lack thereof could have contributed to the debacle at Clico (Guyana). Management should be under the jurisdiction of the court but executed by someone other than the Commissioner of Insurance.

The Insurance Act doesn’t adequately address the case of insurance companies which also act as deposit-taking institutions like Clico (Guyana) was. The Act establishes benchmarks in relation to the insurance business but is silent on the impairment of ordinary bank-like deposits that could arise from this commingling and did arise from the general conduct of the company’s business. There should be explicit provisions on what a multi-purpose company of this type is obligated to do to provide reasonable protections to depositors and the steps necessary to prevent risk from the insurance side demolishing the deposit accounts.
Moreover, given the labyrinthine-like related-party transactions that led to the ravaging of Clico (Guyana) and other subsidiaries the legislation must expressly set out limits on the value of transactions that can be conducted with related parties and the types of securities that would be absolutely essential to these transactions. Allied to that the Commissioner of Insurance must be adequately resourced and accoutred to track the maze-like transactions engaged in by companies like Clico (Guyana) and to test the safety of the investments. Presumably the Caricom financial services agreement referred to on Friday by former Barbados PM Owen Arthur would be helpful in this case.

Finally, no matter how sound the legislation, if it isn’t properly utilized by the regulator the law will be of no use. We can find no good reason why Ms van Beek didn’t act earlier and decisively. Even before the winding up point, Clause 65 enables broad intervention powers which include requiring the realization of investments before the period specified and to take whatever actions are necessary to protect policyholders from the risk that the insurer might not be able to meet its liabilities. Clause 32 also mandates the appointment of an actuary every three years into the financial condition of the insurer. It would be interesting to see what the last triennial report on Clico (Guyana) said. Ms van Beek’s deferring to the Minister of Finance and the President suggests that they were the ones calling the shots. That should not have been the case.

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