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Critical issues for the the FINSAC Enquiry

Published: Sunday | December 6, 2009

R. Anne Shirley, Business Writer

Despite the often-dramatic questioning during the ongoing FINSAC Enquiry and the obvious pain and suffering that have been faced by persons who lost their businesses, their homes and in fact, their very lives as a result of the financial sector meltdown, it is critical that an attempt be made to get rationally to the heart of all the elements that combined to lead to the collapse of the indigenous banking system in Jamaica in the 1990s.

For many persons, it is a done deal - the obvious culprit is the People's National Party (PNP) administration's insistence on a high interest-rate regime and the pursuit of reckless fiscal policies that led to the collapse of the indigenous financial sector. But this in and of itself cannot be the entire answer. There are some other variables that also need to be carefully examined. These include:

The corporate model that was pursued by the holding companies of the indigenous financial institutions - Most, if not all, of the local commercial banks were part of conglomerates that had significant holdings in non-financial institutions. In contrast, the foreign banks were part of financial groups that did not venture out of their core areas of business. An important issue that needs to be explored is the extent to which, and the speed with which, the local institutions moved into non-banking activities, and the possible conflicts of interest that this might have created.

How the local banking groups financed their expansion activities - Most of the indigenous banks and their subsidiary companies were inadequately capitalised. And as the Bank of Jamaica and other regulators stepped up the pressure for the entities to be better capitalised, it would be interesting to look at the activity on the Jamaica Stock Exchange during the 1990s and the fact that properties and other assets were 'sold' within a group of companies among sister companies on the basis of property valuations that became the basis for increasing the capital base of the group, rather than having the majority owners going into their actual pockets and funding the companies with hard cash.

The use of pension funds and other funds under management to purchase strategic investments that were of strategic importance to the entities trusted in managing these funds - It would be useful for the FINSAC commissioners to examine carefully this issue. A prime example would be the use of funds under management by Mutual Life in the building of the North Tower that was supposed to be its corporate headquarters. Another was the decision to sell the Holiday Inn Hotel to the Eagle Unit Trust, and the skew that this would have created in the portfolio mix. And there are many other examples.

The provision of loans to connected parties with no or limited collateral.

The black-market system in foreign exchange that existed at the time - The purchase of a significant block of US dollars by the Century National Bank (CNB) Group in a Dutch auction conducted by a Citibank subsidiary at a rate that was above the "established official rate" was one of the trigger points of the problems between CNB and the Government of Jamaica.

The commissioners need to get a true picture of the actions of the Bank of Jamaica and its agents, and the spreads that were operating in the black market for scarce foreign exchange.

It is widely accepted in financial and business circles that large blocs of foreign exchange went for rates significantly higher than the official rates. Importers and users of foreign exchange also regularly kept documents in the official auction system while purchasing funds on the black market and sending these ahead to their suppliers.

The personality conflicts that became apparent as the financial meltdown took place - This included the breaking up of friendships/working relationships between the top members of the boards in a number of the financial groups, reluctance to give up ownership and management of the entities, conflicts with the minister of finance, etc.

The bottom line is to examine whether egos and personality clashes impacted on any of the critical decisions taken during the crisis.

These issues need to be analysed with 20-20 hindsight in the context of the impact that the decision to protect 100 per cent of deposits and the other costs of the FINSAC intervention had on the 40 per cent increase in the national debt and the overhang that is still impacting the Jamaican economy today.

One of the critical questions that must also be brought to light is, just how much did the Bank of Jamaica technocrats estimate that the FINSAC intervention would cost initially, and on which basis the decision by Dr Davies and the PNP administration decided to proceed? How far off was this original estimate to the actual final cost?

With hindsight, was the Century National Bank Group of Companies the worst of the lot? And what would have happened to Don Crawford if, initially, he had been given terms similar to those offered to other local banking groups prior to the financial meltdown? How genuine was the group of local bankers and the promises that they made to the minister re taking over the CNB Group? What assistance could have been provided by others, including the foreign banks?

The issue of "too big to fail" is also worthy of serious consideration in light of the recent failures of banks and financial institutions within the region. The FINSAC Enquiry is particularly relevant to the Jamaican economy today given the symbiotic relationship between the local financial institutions and the size of Jamaica's public debt. If dominoes start to fall, what else will come tumbling down?

Feedback may be sent to columns@gleanerjm.com.