FINSAC as football: Alas, what is the goal?
Published:Friday | May 27, 2011 | 12:00 AM
When it comes to Jamaica's financial-services sector, several active politicians, past politicians, current and past entrepreneurs, and commentators all give the impression of being engaged in a scrub game of football on a dry, dusty, pockmarked field — a field not devoid of rocks and apparently oblivious to them all, filled with potentially dangerous potholes.
If ever there was a notion of 'national interest', it seems to have evaporated, scorched by the high temperatures of the political altar and active psychological denial states producing efforts to rewrite history, deny established facts, create new facts, or perhaps simply confuse an ill-informed public, soon-to-be-active electorate.
I refer particularly to the FINSAC enquiry and in passing, the JDX debt buy-back scheme for which the minister of finance seems to have taken credit and had baskets of roses and praises showered upon him, with no one indicating that this is actually an episode of default, leaving only harsh conditions, requiring significant sacrifice in the near term.
Yes, fuzzy discourse attends Jamaica's financial meltdown of mid-1996. It creates intense heat, emotional outbursts and political partisanship. I recall a most vivid description of the 'mushroom treatment' described by a foreign forensic accountant who, in 1997, was reviewing documentary materials of failed financial institutions.
Local staff complained of not knowing what was going on, of being kept out of the loop in the investigations.
The expatriate forensic accountant, when questioned as to why this was so, if indeed it was, said he was meting out the "mushroom treatment, that is, keep them in the dark and feed them with s—t".
Yes indeed, mushrooms thrive on a bed of cow dung in darkened, damp conditions. He was trying to protect the integrity of his investigation.
Is this what we should say about reporting on the FINSAC enquiry, diverse testimony and assorted comments? Are we subjecting the Jamaican people to the 'mushroom treatment'? I fear this is so, and that leads to despair the truth shall ever prevail.
Over the past 200 years, there have been at least 250 cases of sovereign external debt default, 70 cases of default on domestic debt and numerous financial crashes in Asia, Europe, Latin America, North America and the former Eastern bloc.
Reliable time series on debt, interest rates, inflation and so on, are hard to find from any one source or in any one place.
Government debt is not as transparent as people think. Despite this, however, economists and economic historians richly document and discuss world financial history.
Thus, economists and an interested reading public have a good understanding of the bases of financial crashes. Their genesis always links back either to policies such as clipping precious-metal coin, thereby debasing the coinage — creating inflation — to pay for wars generated by early European squabbles, or to asset bubbles whether they be tulips from Holland, internet start-up com-panies or real estate, swaps and derivatives as in the most recent Wall Street meltdown. Sovereign debt default historically, has occurred in both high and low interest rate regimes, in countries with both relatively low and high debt to GDP ratios.
The general theme is always the same but there is no really 'one size fits all' explanation for each episode of failure and crash.
Blaming government policy, high interest rates, mismanagement, etc, turn out to be rather lame attempts at explanation—though they are great as efforts at mobilising political support.
The fact is that Jamaica's indigenous financial-services sector meltdown of mid-1996 may be attributed to a range of factors among which the latter do feature. There was deficiency of capital. Our corporate governance was a caricature of its true meaning, leading to bad intra-group transactions.
Our banking legislation was out of date, particularly in face of developments that took place in the previous two decades. Some CEOs and managers were guilty of practices that in other jurisdictions would warrant jail time.
Risk assessment and prudential standards fell prey to euphoria as real-estate prices escalated. Financial-services firms spread into businesses they knew nothing about, losing their shirts. This and much more accounts for our indigenous financial-services sector demise.
It is peculiar and difficult to explain how at least two Ponzi schemes, Cash Plus and OLINT, flourished in Jamaica immediately after the meltdown. Now fifteen years later, comes the FINSAC enquiry, whose findings I can predict based on press reports of proceedings and evidence, cannot provide us with a credible explanation of the crash.
What is worse, though, unlike the US Financial Crisis Inquiry Report which published the commissioners' opinions and findings, including dissenting views and thousands of pages of evidence, our FINSAC enquiry will leave buried, all the hard evidence sensible people may use to make their own conclusions.
Thousands of pages of reports from un-connected and unbiased professionals exist; so do court documents, depositions and affidavits. Why hide them even as we continue to kick around FINSAC as a political football? Ignore the ground upon which we play and the casualty will surely be our capacity to nurture sound financial- services development.
Disclosure: Your columnist served on the Board of FINSAC.