CL Financial Bailout—Lessons from the Financial Crisis
By AFRA RAYMOND
This is an edited version of an address to the 4th Biennial Business Banking and Finance Conference (BBF4) held at the Trinidad Hilton from 22nd to 24th June, 2011. It was presented
during a session titled ‘Lessons from the Financial Crisis: The Resolution of Failed Entities’.
I want to start by shifting focus to the arena of the mind and the existence of elements such as moral and ethical values, as well as social standards. In 1971 there was a famous series of psychological experiments in which selected students entered a two-week role-play as prison-guards in control of other people who were playing the role of prisoners.
That experiment was conducted at Stanford University in California and the results were that most of the prison guards adopted cruel behaviour with most of them being upset when the experiment was stopped after only six days. The entire experiment was filmed and the prisoners suffered from regular acts of wickedness, abuse and sheer perversity – one-third of the guards acted sadistically.
The Stanford Prison Experiment as it is now known, was heavily criticised as being unethical and unprofessional. Of course the other aspect is that it re-opened the perennial discussion into the nature of things. The nature of our nature, as it were – ‘Are we humans naturally evil and cruel?’ The learning seems to be that well-adjusted and reasonable people can very quickly lose their moral compass in a situation with a lack of the conventional controls such as disapproval and laws.
No surprise to those familiar with history and politics, but the lesson for us in T&T is that if you let people get the idea that they can never be punished, there is virtually no limit to the rules they will break. Asset-stripping, Bribery and Corruption can become the new norms of a governing class and that is what has happened in our country.
We have never had a strong tradition of detecting and punishing white-collar criminals, so if we are to make a start in terms of the resolution of failed entities, that has to be the starting-point. We cannot reconstruct or resolve the failed entities if we do not change that aspect of our culture – the absence of consequence has to be abolished.
The absence of consequence is inimical to any development – personal, national or regional. It is no point bringing new regulations or ‘approaches’ to this huge problem, until and unless the basic culture changes.
So that is the challenge for us – we have to change the way we think and behave around these issues of White-Collar Crime. It is a very damaging type of crime which can affect the lives of many, many people – as we have seen in the CL Financial fiasco. But we have to make that choice to change our culture around these issues.
The current financial disaster amounts to the greatest ever destruction of capital in peacetime – these are literally epochal events, but we do need to be careful as there is yet another big lie out there. It suits the CL Financial chiefs to rationalize their actions and promote a version of events that has the blame attached to the Wall St events of 2007/2008. The people promoting that version are buffoons, whose story is unable to withstand serious examination. I call it the Wall St hoax and it is useful since it allows the CL Financial chiefs to escape the reality of their failure, to put it charitably, by blaming events way beyond their control.
Nothing could be further from the truth. We need to be very clear on the scale of this particular lie and the public mischief it represents. Even close examination of CL Financial’s 2007 audited accounts shows only tiny exposures to Wall St. But what is worse is that the entire CL Financial pattern of behaviour and the burning question of the extent to which the CLF chiefs were ‘fit and proper’ are not new issues. If we consider the 15th July 1996 ‘Circular Letter to Shareholders’ issued by Republic Bank Limited under the hand of then Chairman, the late Frank Barsotti, it is all there. Fifteen years ago we knew the threat to which we were exposing this country by letting CLICO take over Republic Bank…it is 66-pages long, but very important to read – it is on my blog.
We don’t have a Wall St problem, what we have here is a St Vincent St problem. Yes, from the Central Bank (at the foot of the St) to the Treasury (paying for the whoLe entire wretched bailout) to the Red House (where the real discussion has never taken place), right up to #29 – the CL Financial headquarters. Yes, is a real St Vincent St problem we suffering from. This is we own creation we fighting with.
The CL Financial fiasco is estimated to be costing at least ten times as much, as a proportion of GDP, as the Wall St crisis. Yet we still have misleading comparisons between the two, if only to justify the bailout.
A powerful parallel with the Wall Street crisis is the fact that the CL Financial fiasco was also characterized by ‘Shadow Banking’, meaning vast sums of money solicited from investors and being traded outside of the conventional regulatory umbrella. The EFPA is just one of CL Financial’s ‘Shadow Banking’ products in this entire collapse and Minister Dookeran was saying as much when he singled them out in his first budget.
The final point we need to drive home is that, whatever the temptations, we must not lay the entire blame onto Lawrence Duprey & Andre Monteil. It took plenty more than the main CL Financial chiefs to get us to this point. There is a network of lawyers, accountants, agents who pretended to be financial advisers and of course, the many Board Directors. That network is hundreds of people, some of whom share a responsibility, perhaps even culpability, for this crisis. The Colman Commission has to work very hard to preserve its effectiveness.
Afra Raymond is a Chartered Surveyor. He is President of the Joint Consultative Council for the Construction Industry and Managing Director of Raymond & Pierre Limited. This series on the CL Financial bailout can be viewed or readers’ comments made at www.afraraymond.com