Clico, the NBS and NIS

Clico is by far the worst financial disaster ever to have hit Guyana. For hundreds of thousands of Guyanese the Clico saga is direct, personal and painful, a real life disaster in which many could be made paupers. And even if that calamity is averted, the so-called guarantee that the people and the opposition have been calling for will have two effects. First, the taxpayers will be worse off by several billions of dollars. And second, having demanded heads for the Clico fiasco, the opposition members of the National Assembly will give the government a crucial let-off. When it did have the opportunity, instead of mounting an investigation into Clico and related matters, the National Assembly simply asked the Economics Affairs Committee to monitor the Clico affair.

Clico in combination with Stanford is the public face of unprecedented fraud in the securities sense of the word, practically non-existent corporate governance, outrageously bad regulatory failures, an arrogant display of political ineptitude, and inexcusable conflicts of interest and duty in various manifestations. The two are our Enron, Madoff and Satyam wrapped in one. They are the stuff of which bestsellers are made; of heroes and villains exchanging roles and of juicy material for the economic historians. They offer the potential for the most intriguing legal cases of breach of fiduciary obligation, fraud, lifting the veil of incorporation in the private sector and misfeasance in the public sector.

Winding up Clico
Despite the urgency of the matter, the Economic Affairs Committee of the National Assembly has done nothing so far. The Judicial Manager of Clico, Ms Maria van Beek is supporting the retention of (former?) Clico CEO Ms Geeta Singh-Knight who up to recently Ms van Beek was saying had persistently breached the Insurance Act. Ms van Beek must be aware that in her other role as Commissioner of Insurance she has a continuing duty to prosecute those involved in such breaches and that her endorsement of the retention of Ms Singh-Knight could be construed as granting her immunity. When Ms van Beek first approached the court she asked, as an alternative to her first choice of winding-up, to be appointed as Judicial Manager. Now she seems unclear of the nature and extent of the duties involved. Even if the Insurance Act is unclear, she should be guided by commonsense, experience, professional advice and as necessary, by the court. Logic dictates that the closest analogy to the Judicial Manager is the Receiver Manager under the Companies Act. That person displaces the management and takes control of the company. What is wrong with that formulation?

Having asked the court for a winding-up order the Judicial Manager seems bent on vindicating her initial judgment. Neither she nor the government has shown any interest in saving Clico. If they wanted to save Clico and jobs then Trinidad provided a most recent and eminently sensible model – take over the company and use the very funds of the Jagdeo guarantee as capital injection. But because of the ambivalence and dithering of the government and the Judicial Manager, Clico is collapsing faster than anyone could have predicted.

Breach of promise
And perhaps there should be a mild reminder that President Jagdeo promised that small depositors in Globe Trust would be protected. Several years later, not a single, blind cent has been paid, despite the finding of the then Chief Justice that the regulator was partly responsible. In the case of Clico, President Jagdeo again has made promises but when it comes to confirming that promise, his party in the National Assembly is silent. They and the President know that the public has become accustomed to broken promises.

Mr Jagdeo has said that Clico is insignificant in the wider scheme of things – only 3%! But does the President realize that the Clico/Stanford duo now pose a risk to the New Building Society (NBS), the National Insurance Scheme (NIS), Hand-in-Hand Trust, Trust Company Guyana Limited and undisclosed pension schemes over several sectors? Mr Jagdeo claims to be guaranteeing the Clico clients but what about the pension schemes – are their members any less important?

Milking the NBS cow
Carefully built up some sixty years ago out of the ashes of its failed predecessor, the NBS through conservative and tight-fisted management under the late Jules De Cambra, was one of the strongest financial institutions in the country. Under Moen McDoom and Nanda Gopaul, that soundness has been slipping away. It is history that the NBS was cajoled into investing in the Berbice Bridge. Its own independent consultant said it was a bad idea, that the assumptions underlying the financial projections were way too optimistic. Some members of the board were scared but not wishing to upset the government opted for a considerably smaller investment − an amount that the NBS could afford to lose. Next the board decided to spend several hundreds of millions of dollars on a state-of-the-art head office, causing two of its directors to resign in protest. Now, as Clico started to sink, the NBS again featured as a lifeline and the politicians went to work – turning up the heat and milking the NBS cow.

My understanding is that the Board of the NBS, which does not have any financial specialist and did not even meet in person to decide on buying Clico’s bonds in the bridge for $1.5B. However that decision may have been made, Dr Gopaul and his fellow directors have a duty to justify their decision to the members of the NBS. So far, the bridge is generating far less than Mr Jagdeo had predicted. It did not meet its 2008 interest obligations in their entirety. While the bridge company enjoys the most generous package of tax concessions imaginable, it will struggle to meet its obligations to pay interest or redeem the bonds as they fall due. To add to the risks, there is explicitly no government guarantee.

Despite the slippages, the government and the Bank of Guyana seem very comfortable with NBS remaining completely unregulated. The soundness of the NBS which this column has consistently praised has been undermined by the decisions and practices of the board and its bridge investment. That investment which had to be sanctioned by the Minister of Finance became possible when government did an underhand amendment to the NBS Act, through the Berbice Bridge Act. The NBS’s investment in the bridge now amounts to 40% of its reserves – an over concentration in a single company. No doubt we will hear from the President that we should not worry, that such investment represents only a small percentage of the assets of the financial sector. That is what the government said about Clico and the Bank of Guyana repeated in relation to the Hand-in-Hand Trust.

As political players gain the ascendancy at the bank it is becoming increasingly subservient to the Ministry of Finance, its role diminished to collecting statistics and undertaking bank inspections. It is abandoning − or doing very badly − one of its most important roles, the oversight of the financial sector.

Milking the NIS
The other institution under severe stress from Clico and the bridge is the NIS. Again we see the overlapping roles of the Minister of Finance, other government politicians and public and private sector functionaries at various levels, but connected in one way or the other to the Office of the President. One of the members of the NIS Board is also a director of the Berbice Bridge Inc. Two leading companies have used NIS funds to invest in the Berbice Bridge and have been rewarded with seats on the board of the Bridge Company − the same company in which Mr Winston Brassington confidently guaranteed “investors” in the bridge that the “NIS will not have a director” or be able “to exercise any influence” (Business Page March 12, 2006).

Several weeks ago, I wrote the Minister of Finance about the legality of the NIS investments, having in mind the bridge, Clico and the Hand-in-Hand Insurance Company. Investments made by the NIS are required to be approved by the Co-operative Finance Administration of which the Chairman is the Minister of Finance and who appoints all its directors. He has not responded to me. The board, it seems, is operating under an Investment Framework prepared by Mr Patrick van Beek. That framework had no reference to the restrictions imposed by the act but was accepted by cabinet. If it turns out that the investments are unlawful surely there are many who should be held responsible including the entire board of the NIS.

The NIS directly and indirectly is the largest investor in the Berbice Bridge which the government likes to boast is a private sector initiative. The manner in which Mr Brassington cajoled the NIS into investing in the bridge is a matter of public record, and the country’s collective failure to take note then is coming back to haunt us. Of course this is not the first time that the government is undermining the NIS’s finances. We recall that the government forced the NIS to lend it US$4M for the part-financing of the construction of the Caricom Secretariat. That loan is repayable over 25 years at a rate of 4% in the first 15 years and 5% in the next ten years. Those rates are well below the rates of inflation, but does the government care how the cow is milked?

The cost of the Clico failure is mounting, but with ‘Clico fatigue’ already setting in public interest may wane. For the NIS and NBS the implications are huge. The Minister of Finance, the government, the regulators and the directors of the NBS would be the beneficiaries of ‘Clico fatigue.’ The misuse of the NIS funds which began with small sums now involves billions. The risky investments of the NBS have likewise increased from millions to billions. The public has to show more interest while the opposition parties need to be more consistent and persistent.

Will we ever get to the bottom of the Clico saga? Unlikely. The PNCR, which endorsed the assurances given by the government on a Clico bailout, is now calling for an “urgent and impartial” inquiry. Aware that any inquiry will only confirm their massive failures and deception of the public, the government will stoutly resist such an inquiry. As far as the Finance Minister is concerned he has outmanoeuvred the opposition by his 16-page rambling in the National Assembly. The actions (or inactions) of the government and Clico’s Judicial Manager suggest that Clico will soon be dead and gone. All it will leave to its Children of Guyana are massive debts.

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