When did CL Financial and CLICO actually collapse? Answer: Long before it was announced…

“Virtually $5.9Bn of CLICO Investment Bank assets seem to have vanished in a mere 13 months – a weekly rate of ‘withdrawal’ close to $105M”

In his latest article, our friend Afra Raymond makes a simple observation that other news media seems to have missed or deliberately ignored.

CL Financial bailout

The House on the Corner Part II: More insights into CLICO Investment Bank

by Afra Raymond

The most pressing issue in the financial system is the CLICO fiasco

…This fiasco was caused by reckless corporate governance and the glaring failure of our financial regulatory institutions…

…This crisis was caused by an absence of risk management, excessive borrowing internally and externally to fund high risk speculative investments, and wrong financial reporting…”

Finance Minister Winston Dookeran, speaking on the CL Financial bailout, during his inaugural Budget Speech on 8th September 2010

The examination of CLICO Investment Bank (CIB) continues, based on the affidavits in the Central Bank’s winding-up action.

Firstly, as an overview, I consider the various versions of the accounts and their implications –

  • CIB’s 2007 audit – Was performed by PricewaterhouseCoopers (PwC) as at 31st December 2007, with the Balance Sheet showing Total Assets of $12.587Bn and Total Liabilities of $11.699Bn.  Please note that those accounts were unqualified – PwC gave a ‘clean’ audit to CIB at the end of 2007.
  • CIB’s Management Accounts – As at 31st January 2009, showed Total Assets of $12.264Bn and Total Liabilities of $10.692Bn.  Those figures are broadly in line with the audit figures 13 months earlier, at the end of 2007.
  • Ernst & Young’s Statement of Affairs – As at 31st January 2009, that showed Total Assets of $6.387Bn and Total Liabilities of $11.080Bn.  Virtually $5.9Bn of assets seem to have vanished in a mere 13 months – a weekly rate of ‘withdrawal’ close to $105M – leading inevitably to the estimated insolvency of $4.693Bn.
  • The size of the CIB insolvency – Apart from its size as a proportion of the entire CIB Balance Sheet, this gap can give one an idea of the composition of the missing $76.1Bn from the CL Financial Balance Sheet – see ‘Finding the Assets‘ published in the Business Guardian on 19th November 2009.
  • The Return on Assets – This is a benchmark of company performance, being the net income as a proportion of the total assets. In the case of CIB, according to the PwC 2007 audit, the RoA is less than 1%.  That is an exceedingly poor rate of return which would normally denote weak management, but it seems that CIB functioned well as an operation to raise cheap finance for the CL Financial group.
  • Statutory Deposit – Note 4, at page 45, of CIB’s 2007 financials states a legal requirement for CIB to maintain a non-interest bearing Reserve Account with the Central Bank equivalent to 9% of its deposits and other specified liabilities.  Given that the 2007 Balance Sheet discloses Customer Deposits and accrued interest of $5.509Bn, the Reserve Account ought to have been holding about $495M, as a buffer against just this sort of situation.  Was that Reserve Account credited in accordance with the stated requirements?  Were those funds expended first in the crisis, or has the Treasury taken the full cost of CIB’s failure?

That is an overview of the CIB position, which leaves the burning question – Where did all this money go? For $5.9Bn in assets to vanish in 13 months is an incredible failure of corporate governance and state oversight.  Given paras 5 and 6 of Hiralal’s affidavits – which effectively seek to claim that the events of the 15th January 2009 were unexpected – it seems that neither the auditors nor the regulators performed properly in this case.  But more on that later…

Devilish Details

Here are some details of where the money went and how it was handled.  This is taken from para 7 of the affidavit of Ernst & Young Director, Maria Daniel –

  • Financial Records – “…The financial record keeping in CIB was weak.  The financial accounting system was not appropriately designed and implemented…
  • Bank Records – “…Bank reconciliations were not properly prepared.  CIB’s reconciliations contained numerous errors that were not corrected on a timely basis …
  • Loan Portfolio – “…In general the loan portfolio comprised a significant percentage of high risk real estate projects…and the rest of the portfolio was of poor credit quality.  Additionally, there was a lack of supporting documentation and/or appropriate security for many of the files inspected.  There was little evidence to suggest that the loan portfolio was being properly administered by management, and generally, recovery efforts on delinquent loans were inadequate…
  • Loan Arrears – “…The arrears report as prepared and presented by CIB’s management as at 31st January 2009 showed only $111M in arrears, which is approximately 5% of the loan portfolio…” That 5% bad-loan proportion would be considered acceptable by banking norms and would raise few alarms.  Given that CIB was in crisis, it seems unbelievable that this crucial indicator was at 5%, but the very next sentence reads – “…However, upon further examination Ernst & Young identified at least $1Bn in loans that should have been classified as non-performing or on a watch-list…”
    • From those figures it seems that the true level of delinquency in the loan portfolio was of the order of 45% and one can only wonder what CIB’s management were trying with the 5% arrears story.
  • Investment Portfolio – “…The profile of the investment portfolio was not commensurate with the liquidity requirements on the funding side of CIB’s balance sheet, with less than 1% of the portfolio invested in government securities and money market instruments…In addition, 88% of their investment portfolio, including the investment in Republic Bank shares, represented investments into other CLF Group companies…”

I said ‘some details’ and the full affidavits can be viewed at www.afraraymond.com.

William Lucie-Smith

Well, William?

William Lucie-Smith, the erstwhile Managing Partner of PwC until his retirement in June 2004, commenting on the CL Financial bailout, recently stated “…Indeed I dont (sic) know why anyone assumes the books were wer (sic) wrong at any time and did not reflect accurately what was happening…” – see http://www.trinidadexpress.com/commentaries/CL_Financial_A_new_strategy_required_.html.

Mr. Lucie-Smith, the people questioning the accuracy of those CL Financial books now include Ernst & Young and our Finance Minister, not just this Chartered Surveyor.  Given the quantity and quality of the information presented here, I am wondering if you are going to stick with that opinion.  Will Lucie-Smith resile from those views?  That kind of reversal would require real character and integrity.

This leads into the next verse…

Where does the Truth Lie?

If PwC’s audits were properly done, based on true accounts received from CIB and the relevant accounting standards, then the Inspector of Financial Institutions has been at fault to allow this failed institution to retain its licence.  If, as an alternative, the Inspector relied on misleading accounts, then one could hardly lay the full blame onto them.  In the latter case, either CIB’s in-house accountants, or the auditing firm PwC bears a heavy responsibility for this entire crisis.  Compare and contrast the different results of the PwC 31st December 2007 audited Balance Sheet and the E&Y 31st January 2009 Statement of Affairs.  The discrepancies between the CIB Management Accounts and E& Y’s Statement of Affairs of 31st January 2009 are astonishing.

One can be escapist and say ‘on the one hand this, but on the other hand that‘ for only so long before reality sets in.  The fact is the group collapsed because it ran out of money.  Exactly how it ran out of money is a huge story of our age, supposedly an enlightened and more educated one.  That is the $57,000 question.

But the allocation of responsibility would also have to go beyond the role of the auditors to include the failure of the Inspector to detect the fact that CIB had filed no Corporation Tax returns for 2007.  Or was it that the Inspector’s office did note that and simply took no action?

Auditing the Accountants

What is the role of ICATT in all this confusion?  I tried with an open letter on 19th October 2009 and several dialogues with various of their Board of Directors.  Is ICATT investigating any aspect of this fiasco?  Does ICATT have any concerns over the MoU/Shareholders’ Agreement and its terms?  Does ICATT exist solely to advance and protect the professional interests of its membership?  Is it unreasonable for the general public to expect ICATT to have spoken out on these burning issues?  With all respect to the people concerned, ICATT’s silence is resembling a cover-up.

What is the meaning of ‘Fit and Proper’?

Our laws sets the penalty for murder as hanging, so, even if one does not agree, it is clear that the penalty is final to both indicate society’s intolerance of taking another human life and to prevent a recurrence.

The ‘Fit and Proper’ regulations are meant to regulate the behaviour of the Directors and Officers of Financial Institutions, since they are the people to whom we entrust our monies.  Any recklessness or dishonesty on their part can lead to severe loss of capital and ‘Fit and Proper’ ensures that those acts are punishable by loss of your privilege to serve in those high-powered positions.  The Companies Act even makes it illegal for Company Directors to ‘mismanage’ the affairs of a company.

Look at the case of the failed insurer, Goodwill Insurance, the Central Bank took a winding-up action which ended in two of its Directors – Johann Lambkin and Lennard Woodley – being fined $20M and banned from serving as Directors or Managers in any company incorporated in here for 5 years – see http://guardian.co.tt/business/business-guardian/2009/08/05/case-against-goodwill.

“Why is the Central Bank not proceeding against the CL Financial Directors?”

The Timing Thing

So far I have been writing about this CL Financial collapse as if it took place in January 2009 and that is a position in need of a re-think.

When a marriage ends, the first ‘official notice’ of that is when one of the parties files for divorce, but there is often a stage before that when one of them moves out or moves on, and a stage before that one at which they stop having sweet times together.

I think the CL Financial ‘official notice’ was when they wrote for help on 13th January 2009, at some point before that, key people moved out or moved on and at some point before that, the group was failing.

When did the CLF group actually collapse?

Afra Raymond is a Chartered Surveyor.  This series on the CL Financial bailout can be viewed or readers’ comments made at www.afraraymond.com.

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10 Comments

Filed under Barbados, Business & Banking, Consumer Issues, Corruption, Offshore Investments

10 responses to “When did CL Financial and CLICO actually collapse? Answer: Long before it was announced…

  1. "Bobol" to quote Trini!

    NAFF money get chuh-way, den?

    So glad not one cent of it was mine, praise de Lord!

  2. reality check

    This is not rocket science.

    1) Financial institutions must have a sufficient diversity of stable income producing assets to pay off their obligations to the lenders.

    2)Non producing income assets such as land for development that does not have any such steady income should probably be no more than 5% of any prudent financial portfolio with other income producing assets covering this extra risk side.

    3) Value the land not on an income producing basis but on several sales that “stupid foreigners” who have oodles of cash have actually paid or developers have created on paper that doesn’t really exist nor could the money ever be paid back.
    Take that number and triple it based on the greater fool and greed theory.

    4) Make sure the money isn’t yours and go out and buy huge tracts of Florida swampland and make sure management or friends of mangement receive a number of luxury homes and unearned fees and kickbacks along the way.

    5) Make sure the auditors get lots of fees and don’t dont do independent real estate assessments of what the price of the property really might be worth, on a conservative basis. Better yet, ask the Financial Institution for their own comparables so you don’t really have to worry about the shareholders getting a truly independent appraissal and a fair assessment.

    Everywhere in the world, this phenomena creeps up on us despite regulation to the contrary. Politicians and regulators look the ohter way mesmerized by the bling, inducements or fearful of the consequences of demanding strict adherence to finacially prudent regulation. The little guy and taxpayer ends up paying the price and those in charge reap the benefit withfew or no penalties.

    Free market does not work without minimum regulation and integrity standards.

    The latest asset backed, sub prime debt crisis is only a line of many similar stories over time such as the Savings and Loan Crisis in the 1980’s and 1990’s
    http://en.wikipedia.org/wiki/Savings_and_loan_crisis

    Its called fraud and greed.

    Recessions have a way of bringing these companies front and center.

  3. 75

    Interesting assessment -many thanks!

  4. rasta man

    What does this mean for British American?

  5. Robert

    This article is not totally accurate.
    CLF(Barbados) NEVER, NEVER, collapsed.

    It is an outright to suggest it did.

  6. reality check

    “It is an outright to suggest it did”

    I think you meant to say lie but in reading the headline Clico collapse and financial bailout, all the references are to the Clico Financial Bank

    Whether some of these sub-entities propped up by government assistance or guarantees still exist doesn’t appear to be mentioned in this newsclip.

    Even though the Clico group had many of the same cast of characters running thougout its organization, The Barbados government and CLF Barbados could quickly resolve any concern Barbadians may have by releasing detailed, diligent and independently verified audited financial statements to the public with a link to these free blogs. Audited statements are required by Barbadian Law if my memory serves me correctly.

  7. 67

    Reality Check you think you gine see ‘audited’ statements you crazy. Thompy was Clico lawyer all the while Clico neva made the statements. Why dey start now? Cha!

  8. 13142356784-46457-56M

    As the new Gov’t. in Trinidad discovers more and more bobol
    details about CLICO’s demise are unfolding
    within the general national economic mess they inherited.

    News to come shortly, I’m told?

  9. 227

    Things were noted as odd, cash flow wise around June 2008.

  10. Pingback: CL Financial and CLICO bailout: The bizarre endgame « Barbados Free Press