Next Monday, January 30, marks the eighth anniversary of the news conference at the Central Bank, at which then Governor of the CBTT, Ewart Williams, announced the bailout of the insurance company Clico and its affiliated companies Clico Investment Bank (CIB), CMMB and British American Insurance.
At the news conference, the former Governor said both Clico and CIB faced liquidity problems with the latter being subjected to unusually high level of withdrawal requests and “given the close integration of these two financial institutions within the CL Financial group, it is just a matter of time before Clico also began to come under severe liquidity pressures.”
At the news conference on January 30, 2009, Mr Williams said the liquidity challenges faced by Clico and CIB were the result of depositors’ concerns about the impact of the sharp decline in methanol and real estate prices on CL Financial’s overall financial situation.
But, he added, their financial difficulties had more to do with:
• Excessive related-party transactions, which carry significant contagion risks. He noted that the high level of concentration was not specifically prohibited by the present legislation;
• An aggressive high interest rate resource mobilisation strategy to finance equally high risk investments, much of which are in illiquid assets, including real estate both in T&T and abroad;
• Very high leveraging of the group’s assets, which constrain the potential amount of cash that can be raised from asset sales.
In justifying the intervention by the CBTT and the government, Mr Williams underscored the fact that the T&T authorities were “very conscious of the contagion risks that the financial difficulties in an institution as vast as the CL Financial group could have on the entire financial system of T&T and indeed in the entire Caribbean region.”
In reflecting on the events of the past eight years, it is important to note the length of time that a final resolution of this issue has taken and the failure of the current Minister of Finance to update the country on the discussions towards a resolution.
But, I believe T&T would have failed to progress as a nation if its regulators, legislators and investors do not learn the right lessons from the collapse of the CL Financial empire:
1. Was Lawrence Duprey’s model appropriate for T&T?
If the CL Financial model can be distilled down to its core element, it would be this: how does T&T mobilise the savings of local individuals and institutions to invest in companies and projects that use local resources to produce internationally competitive and demanded goods and services?
In effect, what Mr Duprey did was channel the premiums and deposits from investors in Clico, CIB and CMMB into world-class investments in methanol, banking, alcohol and real estate development.
In doing so, Mr Duprey developed world-class assets on the Point Lisas Industrial Estate, at Angostura and in the group’s other holdings in the alcohol sector, in a majority ownership stake in T&T’s largest indigenous financial institution, Republic Bank, and in real estate developments such as Trincity Mall, One Woodbrook Place and the Buccoo estate in Tobago that is now coveted by Butch Stewart’s Sandals group.
I believe that Mr Duprey’s vision of mobilising local capital to invest in the commanding heights of the T&T economy was first rate and absolutely necessary for the private sector led development of the country.
For T&T to advance out of its current economic downturn, it needs entrepreneurs who are able to spot opportunities for investments that are net generators of foreign exchange.
The CL Financial vision, it seems to me, was not about buying an American franchise for fast-food or coffee, or building one more cineplex to show mostly American movies for the entertainment of the masses or even constructing yet another shopping complex to sell clothes, wide-screen televisions and trinkets made in China.
It should be obvious that investments in Starbucks and TGI Friday (by Prestige Holdings) or MovieTowne (by Derek Chin) or the C3 shopping plaza (the Allum family) are net users of the foreign exchange generated by T&T’s depleting oil and natural gas resources.
What T&T needs is a new paradigm that is able to mobilise local savings to extract value out of the country’s tourism assets, its high-quality cocoa, Scorpion pepper and in the trading, financing, insuring, transporting and marketing of the products from T&T’s natural gas sector.
2. While the Duprey-led CL Financial empire had an appropriate vision for the development of T&T, clearly there were serious issues in the execution of the vision:
• There was a lack of transparency in the products of Clico, CIB and CMMB. In other words, a local institution or individual investing in a CIB Certificate of Investment or a Clico Executive Flexible Premium Annuity in 2008 may not have been aware that their money would have contributed to the purchase of Lascelle deMercado for significantly more than the Jamaican producer of rum was worth;
• There was a mismatch in the terms of the investment products sold to customers and the nature of those investments. By this is meant that it is never a good idea to sell a two-year, fixed-rate investment that is going to be used to purchase a company in which the return on investment will be in five years or more;
• There were serious issues in consistent, up-to-date, accurate financial reporting of the performance of the investments and products;
• Lawrence Duprey’s developmental vision does not seem to have extended to allowing investors to have a direct ownership stake in his empire. He started CL Financial with equity that included people who worked at Clico or had investments in the insurance company. The group never expanded its capital base.
In my view, the Duprey vision would have been more sustainable if he had offered shares in CL Financial to individual and institutional investors in an Initial Public Offering, creating a publicly listed company with strong independent directors, proper oversight from board committees and an obligation to submit quarterly accounts to its shareholders and to the regulators.
A public company would have ensured that there was a more appropriate mix between the group’s debt and its equity.
3. While I am a strong believer in the Duprey vision, there is the issue of accountability for the collapse of the CL Financial empire.
In that regard, reference is made to a press release issued on June 7, 2011, in which the Central Bank and Clico announced that they had “filed civil proceedings against Lawrence Duprey, Andre Monteil, CL Financial, Dalco Capital Management Ltd and Stone Street Capital Ltd arising from the failure of Clico, following the CBTT’s exercise of emergency powers under section 44D of the Central Bank Act in respect of Clico.”
The press release continued: “The claims include allegations of mismanagement of Clico and misapplication and misappropriation of its income and assets to the detriment of its policyholders and mutual fund investors.
“CBTT and Clico are seeking damages, equitable compensation and declarations related to certain agreements and property of Clico.
“The statement of case alleges breach of statutory and common law duties and related accessory liabilities on the part of the defendants and highlights egregious transactions involving the use of Clico’s assets and income to its detriment, such as:
—transactions related to shares in Republic Bank;
—drinks transactions including LascellesDeMercado;
—energy transactions including the sale of Clico’s stake in Clico Energy Ltd
—Florida property transactions; and
—the sale of seven million HMB shares”
The press release added that the pleadings highlight the subordination of the interests of Clico, its policyholders and mutual fund investors to the private interests of Mr Duprey and Mr Monteil and their companies.
The pleadings also highlight the lack of proper governance and serial mismanagement and improper dealing with Clico’s assets and the funds of policyholders and mutual fund unitholders. The release concluded by noting that the action was based on the forensic investigations commissioned by the CBTT into the affairs of Clico and that the “forensic work is continuing and may result in the expansion of this claim and/or further action.”
I draw no conclusion from the above, but ask: what has become of this civil action initiated in 2011?
The author is a shareholder of Angostura Holdings Ltd.
