Trinidad finance minister slams CLICO fiasco
Published:Friday | September 10, 2010 | 12:00 AM
Linda Hutchinson-Jafar, Business Writer
Trinidad and Tobago's Finance Minister Winston Dookeran was bitterly critical of the handling of highly indebted CL Financial, which he said was caused by reckless corporate governance and a glaring failure of the country's financial regulatory institutions.
Speaking during the 2010-11 budget presentation on Wednesday, Dookeran said the issue was handled badly by the authorities from the start.
"This fiasco was a colossal, inexcusable, multibillion-dollar mistake. This fiasco has cost this nation enormously on several levels. This fiasco has put on hold the lives of thousands and endangered their financial future," he said.
In January 2009, the previous government entered into a memoran-dum of understanding with CL Financial "to protect the interest of depositors, policyholders and creditors of CLICO Investment Bank, CLICO, and British American Trinidad and Tobago Limited".
Dookeran, a former central bank governor, said at the time of the intervention that the authorities assumed the liquidity issue was one that could be funded temporarily by the government and recovered in the short to medium term.
Describing that assumption as reckless, he said the impact of the troubled financial institutions on the country and on the Caribbean had been grossly underestimated.
The intervention, he said, has cost the country significant public funds, involving more than 10 per cent of the country's GDP, and affected 250,000 citizens.
"This crisis was caused by an absence of risk management, excessive borrowing internally and externally to fund high-risk speculative investments, and wrong financial reporting," he asserted.
Up to May, government had provided total funding of US$1.2 billion to save CL Financial.
As of June, CLICO and British American combined had total liabilities of US$4 billion but total assets of only US$3 billion.
Policyholders affected
The number of traditional, long-term policyholders affected by this crisis, covering pensions, life and health insurance, is 225,000, and accounts for US$953 million in liabilities, the finance minister added.
He said CLICO also sold short-term investments or deposit accounts with 3-5-year durations, and which earned interest rates significantly above market rates.
The company also guaranteed the liabilities of a mutual fund that also paid above-market interest rates with terms similar to the short term investments.
Some 25,000 customers were left holding the short-term contracts, and the liability to them is US$1.9 billion.
"It was from these short-term contracts that CL Financial financed many of its large acquisitions and speculative investments which have fallen tremendously," said Dookeran.
To stop the drift and indecision and bring order to CLICO and British American within the confines of fiscal responsibility, he said, the government will separate the insurance business from the short-term investment and mutual funds business to protect the insurance policyholders.
The obligations of 225,000 policyholders will be honoured, he said, backed by the statutory fund.
It will also restructure and merge the traditional insurance businesses of CLICO and British American and prepare the merged business for divestment.
Government will make an initial partial payment of a maximum of US$12,000 to depositors in the short-term investment and mutual funds.
He said this will fully pay off approximately 40 per cent of the 25,000 investors in these products, including more than 140 credit unions and 15 trade unions.
Short-term investment and mutual fund depositors whose principal balances exceed US$12,000 will be paid through a government IOU amortised over 20 years at zero interest.
"This government IOU would be structured in such a way that it could be traded on the secondary markets, thereby creating a measure of immediate liquidity for the deposi-tors," he explained,
Government also plans to conduct a detailed review of CL Financial and its subsidiaries and will introduce measures, including the divestment of assets, to reduce CL Financial's debt and recover public funds.