A lot of concern has been expressed about the health of financial institutions in Guyana consequent upon the problems with CL Financial and its associated companies, including CLICO in various territories.
A Judicial Manager has been appointed by the Court of Guyana following the petition of the Commissioner of Insurance for the winding up of CLI CO Guyana.
The central bank, various bankers, politicians, insurance executives and others, even the President have rushed to assure the public of the solidity of the banking and financial sector and the safety and security of their policies and investments. For the first time we get to see and hear from the central bank Governor himself as he takes to the airwaves.
It hasn’t been so easy to hear Ms Van Beek, the Commissioner of Insurance, although we can read her signed petition and of course we have not yet heard from Ms Geeta Singh-Knight, Chief Executive Officer of CLICO who also just happens to be Chairman of the Berbice Bridge Company and also a recently appointed Director of Guysuco. Mr Evelyn, Chief Executive Officer of the Hand-in-Hand Group has also been talking to the media and just agreed with Stabroek Business to contribute a “series of articles” “to enhance public understanding of national and global financial issues.” We should all be grateful for this series from such a knowledgeable and astute business executive and investor.
Before we get to the real subject matter of this letter, which is Hand-in-Hand Trust, it may be useful to identify a small group of players − no more than five − who are at the centre of Guyana’s financial crisis. These are the leadership elements of NIS, Hand-in-Hand, CLICO, New Building Society and Office of the President, ie Dr Luncheon, Mr Evelyn, Ms Singh-Knight and Dr Gopaul.
Recently we were informed that New Building Society (Chairman NK Gopaul − OP) quietly bought $1.5 billion of CLICO bonds in the Berbice Bridge Company to help CLICO deal with the run on that institution by policy-holders, annuity holders and others. This raises new questions about the New Building Society itself because this new investment in the Bridge Company would take its total investment in that high risk venture to about $2B (billions not millions). This is approximately 50% of its total retained profits for all sixty-eight years of its existence. This is extremely dangerous. Add to this the NBS plan to invest $800M in a head office building, and then one can easily see the problems with this type of investment ‘strategy.’
For financial institutions licensed under the Financial Institutions Act 1995 there are clear limitations on the percentage of capital − 20% − that these institutions can be exposed to any one borrower. Although the NBS is not licensed under the Financial Institutions Act, the previous board (under the chairmanship of M McDoom) had been trying to operate within that act, the NBS Act having proven to be deficient in many regards.
The quiet disposal of the Bridge Company bonds to NBS raises many pertinent questions such as who got this money − the $1.5B. Was there any preference in dealing with claimants before CLICO was put under Judicial Management? Did the Commissioner of Insurance know about this? And when? And did she approve? Was there any kind of ‘inside trading’ so that a select and privileged group was allowed to benefit from this infusion of new capital while others are left holding the bag? The Parliamentary Committee should probe these issues.
This now brings us to the great incongruity of the CLICO debacle. On the one hand the President keeps encouraging policy-holders to continue paying their premiums and appears to be guaranteeing claims, while on the other hand, the Commissioner of Insurance in her petition for the winding up of CLICO to the High Court states that “records reveal that as a result of disposal by way of sale of bonds, the statutory funds aforementioned would be depleted to the extent that it would be in deficit” (paragraph 7), and that the “Respondent [CLICO] would be unable to meet its obligations to its thousands of policy holders and thereby, would be deemed to be insolvent under the provisions of S68 of the Act” (paragraph 8). Besides the blatant contradiction inherent in these two positions, there is no legal mechanism in place at the present time to accommodate a government bailout of CLICO since any such bailout would have to be underpinned by legislation, especially if funds are to be charged against the consolidated fund.
An additional critical element in this whole disaster affecting the financial sector is the massive exposure of NIS funds said to be in the billions loaned again to the said CLICO and Hand-in-Hand Trust, much of it for the said bridge investment. The tragedy is that NIS remains a COFA institution and therefore its losses are picked up by the consolidated fund. And so we have these recurring decimals of NIS, Hand-in-Hand Trust, CLICO and NBS to all appearances, centrally directed, moving around billions of other people’s money, in a cavalier fashion with interlocking directorships.
The fact of the matter is that you can get away with all this financial tomfoolery for a long time but events completely out of one’s control eventually conspire to not only expose these financially unhealthy incestuous relationships, but they also tend to bring down the whole house of cards as we have seen with the CLICO group. No one ever really made provision for Duprey and his tangled web of companies and inter-company transactions draining money from the poor Caribbean countries for greedy schemes in the Florida real estate market, and sportsman-entrepreneur Allen Stanford and his Ponzi scheme well oiled by smooth-talking salesmen conning highly placed executives, whose gullibility, in retrospect, will be seen as being as legendary as Stanford himself.
Hand-in-Hand Trust Corporation Inc is licensed under the Financial Institutions, Act (FIA) of 1995 and is supposedly regulated by the Bank of Guyana. The act is very clear in its requirements for unimpaired Paid-up Share Capital, Section 7; Assigned Capital, Section 7; Concentration of Exposure, Section 14; Permissibility of Investments, Section 19; Minimum Liquidity, Section 19; and Liquid Assets, Sec 21, and so on. And so the loss of $822 million of investment in the Stanford scheme will affect the Hand-in-Hand Trust in such a fundamental way that puts it in clear breach of the provisions of the FIA and require the central bank to take possession of the Trust Corporation under Section 42 of the act because the capital of the institution is not only “substantially exhausted with no reasonable prospects of its timely restoration” but also because “substantial dissipation” of its “assets or earnings” has occurred as a result of “unsafe and unsound banking practices.” This would obviously mean the investing of hundreds of millions of dollars in Stanford’s Ponzi scheme.
Now, at June 2008, the last available Audited Financial Statements of Hand-in-Hand Trust, the total equity of the company (Capital Reserves plus Retained Earnings) was $982.5M, so that a loss of $822M would represent approximately 84% of this equity. This is quite substantial and virtually wipes out its capital and reserves position so that it no longer satisfies the requirements of the act and becomes a candidate for possession by the Bank of Guyana. Now there are two things to note here. First of all, $822M is merely 9.7% of total assets of $8.4B, but this figure of $8.4B has to be adjusted because it includes a large amount of accrued interest − $275M, some of which is probably attributable to Stanford’s Ponzi scheme.
So although some may wish to needlessly focus on the percentage of “‘total assets,” the fact is that the investment loss wipes out the equity. In any event, the interest income of $427.2M in the income statement includes this Stanford interest accrued which is no longer available, and this adjustment to the income statement truly exposes the profitability or lack there of the Trust Company.
Even allowing for this mirage, the total income of the Trust was $508.6M and operating expenses $511.7M, thus producing an operating loss of $3.lM. An adjustment to the Provision for Losses amounting to $108.4M turned this loss of $3.1M to a handsome profit of $105.4M. A serious restatement of interest accrued from Stanford would probably undo all the benefit of these creative accounting techniques. The bottom line at Hand-in-Hand Trust for 2008 is that not only did it make serious operating losses but the equity of $982.5M is consequently overstated to the extent that the Returned Earnings position is overstated and its assets of $8.4B billion is also similarly overstated by this very amount. Therefore, a loss of $822M on a restated equity is now approximately 93% of equity lost forever.
The Trust has suffered a substantial dissipation of assets and earnings and the capital is substantially exhausted. The requirements for the central bank to act have been met and the Governor must now discharge his statutory duties. In its press statement published on March 5 the bank stated that the Trust Company “has since provided the Bank of Guyana with an action plan to address any impairment of its exposure to Stanford.”
The problem is much more than an impairment of a particular exposure. It has to do with the ramification of such impairment in relation to the FIA. The act does provide in Section 50 for a reorganization plan to be developed, but this is to be done by the bank or an administrator appointed by the bank under Section 35 after the institution has been seized.
In conclusion, the Bank of Guyana must do what the FIA requires it to do and improve its monitoring and inspection activities, and especially be on the lookout for these shuffling of billions of dollars between institutions like the shuffling of cards, particularly where the main operatives operate financially incestuously and allow themselves to chase imprudently after a fast buck, an unsafe buck and are susceptible to political or central direction, persuasion or blandishments.
The Commissioner of Insurance needs to do this too. History will record that NIS, Hand-in-Hand and CLICO have found themselves in this predicament because of cozy relationships, and it is therefore not coincidental or accidental that these particular institutions have found themselves in trouble. As for the NBS, we shall continue to watch them but their exposure in the Bridge Company is extremely dangerous.
We sent a copy of this letter to Mr Keith Evelyn, Group CEO, Hand-in-Hand Group of Companies for any comments he might have wished to make, and received the following response:
“Thank you for this opportunity to reply. I would also like to thank Mr Gaskin for his kind compliment. “I do not intend here to discuss what he has written about NBS, CLICO, the Berbice Bridge, NIS or the Central Bank; I think much has already been said by the competent authorities with respect to these organisations. One day I hope as an academic exercise to write for public consumption my views on these issues. I will then deal with capital and human greed, bank supervision in an increasingly global economy, the Caricom Act as it impacts our own Insurance Act, the marketability of bonds, public and private sector partnerships, the developments in ‘marked to market’ accounting, how statutory funds are calculated, and the supervision of multinational financial groups. I urge interested persons to read up on these topics since this knowledge will better one’s assessment of the many statements made in the public forum today.
“As regards, Mr Gaskin’s other assertions; I believe that we too have already said it all. The facts are, once more, and we have made no secret about it, that Hand-in-Hand Trust indeed considers a significant amount of its own capital as impaired as regards its Stanford deposits. Our depositors’ funds were not impaired but our capital adequacy has of course suffered. We have implemented a plan to recover this capital and restore our capital adequacy. We are near completion and will soon make an announcement about this. Our plan is being worked out under the supervision of the Bank of Guyana in every legitimate manner.
“It is neither my intention to lecture Mr Gaskin on basic financial analysis and accounting; suffice to say that his analysis is very wrong.
“Finally, I gather that Mr Gaskin has developed a theory that there exists some sort of unhealthily close relationship between Hand-in-Hand, notably me, the government, NIS, NBS and one of our major long-time competitors, CLICO. You’re kidding, right Mr Gaskin?”