Hylton answers critics on treatment of 'intervened' institutions
Published:Sunday | May 15, 2011 | 12:00 AM
This is the second instalment of the statement by former managing director, of FINSAC Limited, Patrick Hylton, to the commission of enquiry.
Questions have been asked, including by Paul Chen Young, of Dr Omar Davies and Jeff Cobham when each gave evidence about whether some institutions such as NCB were treated more favourably than others, and whether the different treatment of each was justified.
It must be underscored that while there were some common issues, each institution presented its own challenges.
Our analyses, and those of experts we engaged, justified maintaining some institutions - such as the merged Union Bank of Jamaica Limited, Life of Jamaica Limited, and NCB - as going concerns.
For others, the state of the institutions, particularly the significant insolvency, their size, and the composition of their balance sheet made rehabilitation either impossible or not feasible.
In the case of NCB, the decision to maintain it as a going concern was informed by several factors, among them:
a) NCB's size and interconnectedness. It was our view that there needed to be at least one other large institution in the commercial banking space to compete with and prevent a total dominance by BNS. The other challenge with liquidating an institution the size of NCB, and which was so entrenched within our economy, was managing the fallout on numerous other entities, sectors, and large numbers of persons. This could become a nightmare and undermine the stability which had been restored to the sector while we worked through the problems.
b) Our analysis supported NCB having greater value as a going concern not only in relation to its intrinsic value, but also in terms of its role as a facilitator of economic growth, and its contribution through taxes, etc, in the years ahead.
c) NCB would serve as a useful vehicle for further sector consolidation. Finsac had to intervene in a number of very small merchant banks, etc, and having determined that these were no longer viable as going concerns, it would be easy to transfer their deposit portfolios to NCB and pay NCB with Finsac paper, which was our only resource.
Non-Finsac institutions would not have taken Finsac paper as compensation and would have required a premium to take on those portfolios.
If we look at the treatment of majority shareholders in NCB as against other intervened institutions, we find that its major shareholder, Jamaica Mutual Life Insurance Company, was completely taken out.
The only reason they were compensated for their NCB shares is because they were being intervened anyway, and being a mutual, FINSAC could not take shares in the company.
Any purchase of NCB shares from Jamaica Mutual at a discount would have resulted in at least a similar increase in the support required by Jamaica Mutual and would have sent a premature signal to an already jittery market that NCB was distressed.
That decision was taken under my predecessor's management.
Subsequent to the purchase of shares from Mutual Life and the intervention in NCB, the minority shareholders in NCB - as in other intervened institutions - had their shareholding diluted so that Finsac was able to achieve a controlling 75 per cent shareholding, which it would later be able to sell.
FINSAC DIVESTMENT
At the end of the period of intervention, FINSAC had a massive holding of assets apart from shares in numerous indigenous financial-sector entities.
These included numerous hotel holdings, large and small commercial and residential real estate, non-performing loans, companies engaged in several real-sector activities spanning the gamut from farming through media to shipping, and a number of entities domiciled overseas to include the United States, the United Kingdom, and the Caribbean.
A lot has been made of the fact that none of the financial institutions were sold to local entities or operators.
While this is true, there was nothing precluding local operators from acquiring any of these entities once they met the criteria established.
I personally met with and encouraged several business persons to make an offer to buy, say, a Union Bank, but they were either unconvinced, or did not have the resources.
What we could not do was sell the institutions to some local entrepreneur primarily because they were locally based.
Mexico learnt the dangers in such an approach, resulting in them experiencing a crisis twice within a decade.
Such an approach often ignores the need for the buyers to be fit and proper, with the requisite skills, and having the necessary capital. This does not lead to a sustainable rehabilitation.
Thus, I felt the approach had to be that local entrepreneurs could purchase once they met the necessary criteria.
Our process for the sale of the institutions was generally to approach, through our advisers, prospective institutions regionally and globally, and to receive competitive proposals.
These proposals were then assessed by us and our advisers using the professional valuations we had obtained on the institutions.
These informed the selling price and the selection of the best bidder.
We would have a due diligence exercise conducted on the bidders being considered for selection before making a final decision.
We sometimes used a New York law firm with expertise in conducting due diligence exercises. I believe the name of the firm was Paul Weiss, with the responsible attorney-at-law Chuck Googe.
We also sometimes had the exercise arranged through the Jamaican Embassy in the US, or if the exercise was being carried out on a bank, arranged/conducted by the Bank of Jamaica.
Sometimes, a combination of these approaches was used. The successful bidder also had to satisfy the regulator's fit and proper requirements for substantial ownership.
It should be noted that all the institutions we sold went through the challenges of 2003, the global financial crisis of 2008, and the Jamaica Debt Exchange Programme of 2010 unscathed.
This is suggestive of the health of the institutions post-intervention and divestment.
One fact that gets lost in the debate is that the majority of hotel properties, large and small, as well as numerous pieces of commercial and residential assets were sold to local operators.
These were institutions and individuals who had the confidence and vision to come to FINSAC with their hard-earned resources to purchase assets.
Chief among that group would have been Sandals, headed by Gordon 'Butch' Stewart; SuperClubs, led by John Issa; and the Hendrickson Group, headed by Karl Hendrickson.
Their purchases may have represented good deals for them, but they were not cheap, and they paid real money.
In any event, it was good for us in creating and building the momentum for a rapid series of divestments.
The confidence and purchases of all the various investors and purchasers were critical to helping us resolve the challenges facing us.
The series continues this week.