“The CL Financial Agents, many of whom masqueraded as ‘Investment Advisors’, appealed to people to close-off their other accounts and sell other investments so as to put as many eggs into that one basket as possible. “
The Colman Commission – Cloudy Concessions
The Colman Commission held its first session of Hearings in the last week of June, so we were able to have moving reports from witnesses who had lost-out from various investments with the Hindu Credit Union (HCU).
I read those transcripts and it was painful to see the shape of this problem. The most striking aspect for me was that the various attorneys seemed to have struck a compromise as to the parts of that evidence which would form part of the public record.
The main concession was that those witnesses did not have to state the amount of their investments for the record. The reasoning seems to have been a stated fear of crime, but it is my view that this concession will compromise the effectiveness of the Colman Commission. Given that the Commission is scheduled to resume its Hearings on 19th September, it seems timely to put these matters forward now.
To begin with, the two Golden Rules of investment are –
- The Risk and Reward paradigm – Risk and Reward have an inescapable relationship – i.e. the greater the Risk, the greater the Reward and vice versa.
- Investments need to be spread out so as to avoid undue concentration of risk – in colloquial terms, you should not put all your eggs into one basket, or bet all your money on one horse.
From these time-honoured ‘Golden Rules’, we derived the ‘Prudential Criteria’ which guide how financial institutions balance risk and reward.
Yet, despite the ‘Golden Rules’ the CL Financial and Hindu Credit Union chiefs were able to devise products which tempted tens of thousands of people to abandon those basic safeguards and invest in their products. People who were normally sensible were tempted to abandon good sense and break both ‘Golden Rules’. That is the measure of this tragedy. Continue reading