Jamaica, Wall Street and CLICO meltdowns - parallel or unique?
Published:Friday | June 17, 2011 | 12:00 AM
Last Tuesday, Trinidad and Tobago's central bank and CLICO sued former CL Financial chairman Lawrence Duprey, high flying CL executive André Monteil and three associated companies.
The companies are CL Financial, the parent or 'group' company of CLICO; Dalco Capital Management Limited, a company whose beneficial owner is Lawrence Duprey; and Stone Street Capital, a company owned by Monteil.
The civil suit arises from CLICO's meltdown in January 2009 - informed sources do not rule out, or rather, suggest criminal proceedings may be in the pipeline.
The central bank alleges that monies belonging to CLICO, ultimately its policyholders and investors, were used to fund its parent company CL Financial - in particular in the form of "advisory fees" or "management fees".
It claims that in 2007, as much as TT$200 million were paid in such fees, while dividends deriving from Republic Bank and Methanol Holdings (Trinidad) Limited (MHTL), or sums equivalent to such dividends were diverted from CLICO to CL Financial.
Republic Bank, formerly Barclays DCO in Trinidad, resided as one of the jewels in the CL Financial stables, while MHTL is one of the world's largest methanol producers, dominating the United States market and supplying a significant quantity of European demand.
The central bank's claim also alleges that Dalco Capital got "payments and financial assistance totalling TT$468.9 million" from 1997 to 2008 in the form of commissions and other payments. Monteil and Stone Street allegedly received salaries and consultancy fees of TT$45.6 million.
CLICO spread its wings across the Caribbean, from Guyana in the south right through the OECS chain in the north, inclusive of Barbados where its statutory fund was US$150 million in deficit. Its demise left innumerable souls in jeopardy with already fiscally weak governments unable to cope. CL Financial is entirely similar, a clear parallel to the groups of indigenous financial-services firms in Jamaica that suffered meltdown in mid-1996.
The first move is to create a group or stable of financial-services firms. Solicit funds for legitimate financial instruments such as mutual funds and unit trusts, insurance products that are in effect, fixed deposits with no withholding tax. Use these funds to acquire or develop businesses in completely separate fields. Pay principals of the group enormous sums in actual money, property holdings and/or other assets, regardless of the value of their inputs and obviously with no regard to fiduciary responsibility.
The CL Financial business model, should one take the latitude of so describing this procedure, was one of offering high fixed interest deposits attached to insurance or annuities defined and accepted by the authorities in Trinidad and Tobago as insurance products.
top-dog interest
These instruments paid top-dog interest and snared many, including university professors and public servants, who put the entirety of their lump sum retirement payments in CLICO's control.
The claim also indicates CLICO was used to provide funds, security and/or guarantees for other entities within the group, business in which CLICO had no interest or such limited interest to be deemed insufficient to justify its level of financial input. These included Florida real-estate investment, acquisition of Jamaican company Lascelles deMercado and Angostura Holdings Ltd. The central bank claims that over the years, CLICO "was caused to loan increasing amounts to Clico Investment Bank," mainly as fixed deposits, which totalled TT$4.24 billion, according to the insurance company's 2008 accounts, filed after the central bank's intervention in January 2009.
Of this TT$4.24 billion in fixed deposits, CLICO had to make an impairment provision of TT$2.5 billion. Amazing as it might seem to any sane person, TT$1.22 billion of this amount was in the form of unsecured, interest-free, short-term debt and the central bank claims loans were "often in return for worthless or wholly inadequate purported consideration and/or security."
The Florida real-estate investments allegedly include Capri Project, Palazzo Las Olas, the Merrick Park Project and The Wellington Preserve Project.
CLICO allegedly provided primary financing from 2001 to 2009, including eight guarantees of a US$245-million loan to Capri Resorts and Capri Hotel in 2006, and a further US$18.5 million in loan restructuring. CLICO is said to hold no equity in the project.
Similar to the Jamaica meltdown, speculative real estate purchases or developments made up a big portion of the group's investments.
They were consistently underperforming while liabilities and payment obligations were funded by new issues of Executive Flexible Premium Annuity policies (EFPAs).
EFPAs might be compared to the lump sum interest-sensitive insurance policies issued by our companies prior to the mid-1996 meltdown. Remember, Jamaica Mutual Life created 'Mutual Investor Plus', Crowne Eagle created 'Asset Investor' while Dyoll Life mimicked with 'Fortune'. All these policies were really deposits with a minimal element of insurance coverage—primarily investment vehicles funded by a single lump sum deposit.
Dissimilar to the Jamaica meltdown, CLICO's Republic Bank did not suffer a deluge of non-performing loans.
The non-performing loans were all of CL Financial's making, particularly as a result of its real-estate development efforts. In this regard similarities abound. CLICO was heavily invested, speculatively, in land purchases as well as real-estate construction in Barbados. The move away from core competence is a common thread.
Comparing the Wall Street meltdown of 2008 is interesting. The dissimilarities are stark and obvious. There was no need for Wall Street principals to create consultancy and capital advisory companies. They raked in huge bonuses based on unearned revenues sitting on the books. That these would evaporate was of no consequence since compensation contracts, different from Union GM wage contracts, were deemed by Congress sacrosanct and untouchable.
Wall Street, as opposed to Jamaica and CLICO, actually intensified efforts in its core competence - derivatives, credit-default swaps and subprime mortgages - and were indeed moving into the deeper reaches of its financial expertise.
The basic similarity among all three episodes of meltdown, however, is one that haunts all financial arrangements in capitalism.
It is the upsurge of euphoria as asset prices rise and bubbles expand; everybody wants in, nobody wants to miss out. Lawrence Duprey was thought of as a wizard, one with the Midas touch through whom everybody could expect to be enriched.
CL Financial was a world beating amalgam of businesses conducted by a private-jet-hopping CEO of immense skill, charm and political clout.
No doubt, he was innovative, positively beneficial to the Trinidadian economy and people in the companies' initial efforts. The problem occurs when one begins to drink one's own kool-Aid.
His uncle, Cyril Duprey, who started the company in 1937, must have turned a couple times in his grave.
Wilberne Persaud, Columnist