Title: Jamaica Meltdown: Indigenous Financial Sector Crash 1996
Author: Wilberne Persaud
Publishers: iUniverse Inc Publishers 2006
In Part one of this review, the social and political context were discussed as a background to the Jamaican financial crisis.
The establishment of Finsac came with the realisation that the crisis was full blown and publicly acknowledged.
The author speculates on when the crisis became fully known.
Was it when the Financial Act of 1992 was passed, or the closure of the Blaise Trust in 1994, or the take-over of Century on July 10, 1996?
Two critical issues were part of the problem. First, the regulatory mechanisms were inadequate for the problem at hand, and the extent of the problem in financial terms was not really known.
As an aside, Persaud noted that the Washington based multilateral agencies - World Bank, International Monetary Fund and IDRC failed to come to the aid of a member state in distress.
Operations of FINSAC
In Chapter Three, the author goes into great detail to provide the operational processes and guidelines of Finsac.
The mission was based on two important principles:
First, to rescue the financial sector in support of the economy as a whole, and second, to recognise that the Jamaican social fabric could not survive the devastation of the means of livelihood of such a wide cross section of the population.
The board of Finsac representing a wide cross section of interests and national talent grasped the gravity of the situation from the beginning.
The board, recognising the difficult circumstances, articulated a set of objectives. These were to
1. Create an efficient organisation, operating on the strongest moral, ethical, and business principles
2. Provide as much transparency as allowable in sensitive financial matters
3. Treat every case on the basis of equity and fairness
4. Seek out and obtain the best advice from the finest professionals in the country
5. Keep an accurate record for posterity.
Finsac developed its terms of reference, objectives and a strategic plan.
It also established guidelines for the acquisition, management and divestment of assets as well as developing policies for non-performing loans.
Several chapters go into great detail on the divestment process of banks and life-insurance companies.
In a final chapter the author deals with the subject of fiduciary responsibilities and quotes from the former Governor of the Bank of Jamaica Jacques Bussierres who spoke on the subject:
"Not everyone in the financial sector understands what is meant by fiduciary responsibility. They have exhibited a tendency to believe that depositor's money is their money and have in the process lent to themselves large sums of money to purchase real estate or other assets in pursuit of their own self-ambition."
Ultimately, the good health of any financial sector or institution depends on the confidence that that institution displays.
Conclusions
What conclusions can be drawn from the analysis of the meltdown?
1. Was it the Government's policies as some claim, or the bad management of the locals? My judgement is that you would have to score the script 50/50.
2. Were there other ways to have saved the taxpayer some of the hurt? Possibly, but these are purely speculative. The Government dealt with the problem with a policy geared to the maximum protection of the depositors.
Finsac operated a policy geared to deal with the problem as quickly as possible.
The completion of the task in six years was an excellent operational exercise.
Finsac can be regarded as a success story of an operational group who performed professionally and without a hint of corruption.
3. What was the scale of the meltdown? Many other countries faced banking crises.
A World Bank review of 42 bank crises, lists Jamaica as third, with Argentina's 1980 costing 55 per cent of GDP, Indonesia's 1997 costing 50 per cent of GDP with Jamaica's 1996 in the region of 44 per cent of GDP.
4. What has the long-term effect of the crash been? The author states:
"The crash in the financial sector has left an enduring mark on the economy. It also has, to a great measure, established some strong constraints on the capacity of government to push for policies of growth in the near future.
"Perhaps of greatest significance, however, is the inordinately large proportion of the assets in the financial system that are held by government as a result of its rescue operation - in the region of 45 per cent of total deposits - and the fact that government debt represents close to 150 per cent of GDP."
5. What are the economic prospects for the country? Much time and productivity have been lost in the meltdown and the stranglehold of debt that many companies face is a disincentive to productivity.
Growth rates
In addition, aggressive nations have exploited the advantages of WTO guidelines to the country's detriment. In order to overcome the negative or very low growth rates experienced in the meltdown, significantly much higher - and very unlikely - growth rates will now be necessary to overcome the deficit.
A result of the meltdown and the rescue operation has meant that significant portions of Jamaica's financial resources are now foreign owned.
Some examples:
LOJ was divested to Barbados Mutual. A group of banks: Citizens, Eagle, Island Victoria, Workers, were eventually merged into one bank initially called Union Bank, but subsequently bought out by the Royal Bank of Trinidad and Tobago. Non-performing loans were divested in a quasi-partnership arrangement with Denis Joslin of Texas as the holder of the portfolios. The pension, annuities and individual life policies of Crown Eagle, Dyoll and Mutual Life were acquired by Guardian Holdings, a Trinidadian company. NCB, the subject of a complex set of negotiations, was eventually acquired by Michael Lee Chin's Canadian-based AIC, though in all fairness, Lee Chin has aggressively Jamaicanised the bank to make it the number one bank in Jamaica in terms of assets.The managing director is the former head of Finsac.
There are a number of Jamaican's who were hurt by the meltdown and are now forced to live abroad.
Mention has to be made of Don Crawford and Paul Chen Young. Is there the possibility of amnesty and return to their homeland?
Could the meltdown happen again asks the author? He answers with a final statement.
"It is less likely to happen again ... and if the people who run the system make a difference. They will have to demonstrate competence, integrity, and a willingness to recognise and tell the world when the 'emperor has no clothes'. They will have to infuse in their quest to win, a moral element that attenuates greed, a wisdom that trumps street smarts, and a longer -term view that emphasises strategy as opposed to immediate but merely tactical and apparent financial gain. Whether this is achievable shall be determined only as time passes."
