There is some validity in connecting the events taking place in the international financial markets with the unfolding events in T&T with respect to the CL Financial Group and the intervention of Central Bank. This piece is an attempt to put them into a framework for the purpose of analysis, giving context to the events as they’ve unfolded.
It started out as a “meltdown” in the subprime mortgage market. Essentially, the US housing boom which began in the late 1990s, began to falter by the middle of 2005. The government had no mechanism in place to head off the slump. However, the big firms on Wall Street found an avenue to profit from it. They created private offerings worth trillions of dollars by “securitizing” these subprime mortgage loans and Adjustable Rate Mortgages (ARMs), christening them Collateralised Debt Obligations or CDOs with no government regulator whatsoever scrutinising them.
CDOs became the hottest thing since sliced bread and they were gobbled up by unsuspecting investors as well as banking institutions all over the world. Not only did no government agency or official try to stop these “deals” as they were selling, but Washington cheered this new market because it expanded home ownership…at least until the defaults started piling up. Some firms were selling as much as US$30 billion worth of CDOs in a single month! But as the toxic chain began to take form, cracks appeared that soon became gaping holes despite their AAA ratings from S&P and Moodys. It is the collapse of the CDO market that has triggered everything that has transpired in the international financial markets up to today.
When the high level of default rates threw the CDO market into disarray, problems began to surface in the credit markets sparking off a financial crisis. However, given the “contagion” effect that’s now inevitable in our “globalised” financial markets, a full blown economic crisis ensued. The result is that the US is forecasting negative GDP growth between -0.5% and -1.3% for this year. Japan is experiencing its worst downturn in 35 years. The UK, its worst in 30 years and Germany, its worst in 20 years. There is a complete collapse in global demand; whether in manufacturing, construction, financial services or retail. The mere fact that a financial crisis and an economic crisis are both running rampant concurrently suggests that we are indeed witnessing the first Great Depression of this new century.
THE CLF MODEL
Over 50 years ago, Cyril Duprey founded Colonial Life Insurance Company (CLICO). It is rumoured that Dr. Williams suggested to him that he change the name after the country attained independence and he stubbornly refused. His nephew, Lawrence, took over the reins at a time when CLICO was writing insurance and managing a few pension plans with funds under management standing at a few hundred million TT dollars. Lawrence Duprey has transformed this “little” company into a conglomerate with over 200,000 depositors and policyholders operating in more than 30 countries, employing over 10,000 people, writing insurance business and holding investments in real estate, spirits, methanol, ammonia, banking, non-banking and brokerage operations valued in excess of TT$100 billion. How did he do it?
Duprey took over at CLICO during the Reagan/Thatcher era of dominance, a part of which was overseen by the not-so-watchful eyes of the maestro, Alan Greenspan. The prevailing buzzwords were “liberalisation” and “globalisation” while fiscal and monetary policy combined on the premise that unlimited prosperity can be created by the unlimited expansion of credit with a little guidance from Adam Smith’s “invisible” hand. Duprey grasped both the mood and the machinations of the times by travelling extensively and observing the ways of the world. He probably has more “flying” hours than most seasoned pilots.
In 1989, he purchased the 44 per cent of Republic Bank owned by Barclays Bank, via a loan from the same Barclays Bank, at $2.00 per share. At the time of writing, the share price is $86.00. He invested in methanol at a time when its price on the commodity markets was at an historic low. People in the know predicted then that it was going to be the final undoing of CLICO. When production began, the price of methanol soared to unprecedented highs. He went on to invest in real estate, buying out Home Construction. He got into spirits, buying a large chunk of Angostura, and proceeded to establish the CL World Brands platform in Scotland with a slew of alcoholic beverages. Of course, not everything he touched turned into gold. He invested in the Caribbean Tyre Company in Point Fortin which went bust. He bought over British American Insurance which is now the subject of a Central Bank’s intervention that has come years too late.
He couldn’t accomplish all this without a vision. Clearly, he’s the quintessential dreamer; no doubt with empire creation uppermost in his mind. But dreams have to be financed. Therefore, we need to look at these huge investment undertakings in the context of a grossly underdeveloped capital market in T&T that lacks both breadth and depth. Enter the EFPA, acronym for the Executive Flexible Premium Annuity, which was a product created at CLICO due to some loophole(s) in the Insurance Act. This product possessed the nomenclature of insurance but in reality it operated as a simple fixed deposit. The EFPA began selling like hot cakes and CLICO’s army of agents were being handsomely rewarded.
This generated a pool of funds large enough to finance the dreams. Naturally, problems would arise since the funds were being placed for short periods (up to 5 years, I think) and were being invested in projects with much longer gestation periods. The solution to this was to set the agents bigger and bigger targets every year and, of course, increase their commissions. While the agents did deliver in large measure, this also had the adverse effect of increasing the company’s cost of funds. Thus they had to keep on increasing the EFPA rates (to the point where they were way above market rates) to counteract the mismatch in maturing liabilities and assets. Incidentally, this is similar to the events of the 1980s when the Finance Houses began to crash, one by one, with their liquidity issues.
However, markets have elastic limits too. Thus one could argue that the sales of EFPAs began to fall off because of market saturation rather than any risk metrics being employed by investors. The simultaneous collapse of methanol and ammonia prices served to worsen the situation. Once the cash cows stopped delivering, liquidity problems were bound to surface. Thus, unable to met depositors’ claims , Mr. Duprey approached the Central Bank for liquidity support, apparently not realising that there’s no way the Central Bank would even contemplate such an action without taking full possession of the Group’s assets; which is exactly what it did.
THE WAY FORWARD
That the Central Bank did the right thing is beyond question. However, when Governor