straight to the point – from different points of view

The bailout explained – Part 1 by David Walker

The bailout explained – Part 1 by David Walker

I have to say that I am pleased with the response to my last column “Afra, the deviant”. Readers were rightly appalled by the notion that our government should deny us information about how 20 billion dollars of our money has been spent. They also expressed disgust at the mere idea that even more money is to be spent on expensive attorneys to fight what they see to be an unjust cause.

 

What pleased me the most is that readers are asking for explanations that will help them to understand the “bailout” better. I put bailout in quotes because this was anything but a bailout. In more than five years since the first announcement was made about the problems at CLICO and CLF, we have witnessed a litany of transgressions in the execution of what should have been a standard bailout.

 

In a series of short papers I will attempt to lay out in everyday terms, what has really transpired, and how we have ended up at this unfortunate and costly position. I will try to keep these as short as I can without sacrificing the meaning I need to get across. Today I begin by describing what a bailout should be, and has been everywhere else, in countries both large and small.

 

A bailout is usually requested by a company when it runs into financial difficulties and is unable to pay its debts as they fall due. This is what we were told transpired at CLICO et al. The management claimed that because of the global financial crisis, their assets were underperforming causing the difficulties previously alluded to. We all know that the global crisis was real and deeply felt. We all knew that some of the largest companies in the world buckled under its effects and needed support (bailouts) from their own governments.

 

In every other instance that I have examined, the home government advanced money (liquidity) to the relevant companies under strict terms. These terms were usually similar to those a bank might apply and contained the following as a minimum.

  1. Presentation of Financial Statements underpinning the request
  2. Security against company assets to cover the loan
  3. Indemnity against misstated accounts
  4. Rate of return on funds
  5. Timetable for repayment with penalties for failure
  6. Representation, or in extreme cases control of the Board of Directors
  7. In some cases, writing down of the value of existing shareholdings

 

Those terms would be familiar to anyone who ever borrowed from a bank. Except for the last two, they are terms we should expect when money is advanced by one party to the other. At this stage, the lender i.e. the government holds all the cards. They are able to effectively dictate the terms of the transaction. In the US for example, after AIG repaid the advances, it sought to claim that the terms had been too onerous. Bailouts should not be a giveaway when dealing with companies with a strong asset base (as was CLICO).

 

Here in Trinidad and Tobago, we chose to complicate matters by negotiating with shareholders about the terms under which we would lend them taxpayers’ money. Out of those negotiations came a Memorandum of Understanding (MOU) and a Shareholders’ Agreement (SA), the latter of which conferred rights to the shareholders which should never have been given in a bailout where management and shareholders came to the taxpayer with cap in hand. We are paying a price for that folly today, as I shall explain in a later piece.

 

We should not have negotiated with shareholders in 2009, and we most certainly should not be having to satisfy their demands now, ahead of policyholders and creditors.

 

Our second point of departure from standard practice was to invoke the powers of the Central Bank Act and take control of the financial institutions in the group. This has created confusion and crossed lines in several ways. Firstly, Central Bank control applies only to financial institutions. It was the group however, that was in trouble. Rather than simply be the lender of last resort, the administration wanted to gain control through the Central Bank, but needed a means to extend the support to the rest of CLF. It did this clumsily and ineffectively, via the MOU and SA as described above.

 

From the outset therefore, there was confusion as to what the government was committing our taxpayers’ dollars to. There was also the little legal thorn whereby the very Act that was used to gain control of CLF specifically stated that they must direct the company’s affairs in the interests of policyholders and creditors. Those are the only two groups the Act identifies as being of concern to the Central Bank in using its controlling powers.

 

From the get-go therefore, confusion and failure were the inevitable consequences of the way the “bailout” was managed. Incredibly, over the next few years matters got worse. You will see from the upcoming explanations, why it was, and still  is necessary for the administration to refuse all reasonable requests for supporting financial data.

 

Part 2 follows next week.

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