Beware of boasting
At the press conference of January 30, held in Trinidad, and discussed in last week’s column, Chairman Duprey of the CL Financial Group had indicated that the credit squeeze caused by German bankers refusing the company credit was a main reason for its troubles. Just prior to that, however, his statements in regard to the effects of the global economic crisis on the group’s business were very boastful. Duprey claimed there were very good business opportunities arising from the global economic crisis.
Indeed he stated in newspaper reports “with the global economy in tatters and companies everywhere bracing for a reversal in fortunes” his group was poised to “take advantage of the world-wide financial crisis to snap up underpriced assets.” There was clearly nothing to worry about.
He further promised that his brokerage subsidiary (Caribbean Money Market Brokers Ltd), would become the base for developing a world-wide network of brokerage firms. At the time the CL Financial Group had four brokerage firms located in the Caribbean, Central America, New York and London. The development of a global network, he suggested, would transform Port of Spain, Trinidad, into a major global financial centre and along with this the fortunes of the CL Financial Group would rapidly expand.
As he explained it, these developments were to be based on leveraging the network created by the brokerage firms centred on Caribbean Money Market Brokers Ltd.
At that time the Trinidad and Tobago Guardian had also reported that the brokerage houses already in the group controlled an asset value of US$1.3B. This was projected by Duprey to grow by a factor of about 2.3, to US$3B within five years.
That such grand schemes could fall apart so soon after, bringing disaster to the group rested on a very faulty assessment of the global economic crisis and the unprecedented risks which it posed.
At no stage of the crisis so far has it truly represented “a unique opportunity to acquire assets at greatly undervalued prices” as Chairman Duprey put it. This was dangerous rhetoric for a group whose very existence was predicated on continuing prosperity because of the business model it employed.
The moral of all this is to beware of boasting. Let your achievements speak for themselves. Idle boasting has been the ruin of so many.
Flawed business model
From what has been revealed so far, the group’s business model was flawed in several major areas. First, as the Governor of the Trinidad and Tobago Central Bank pointed out, it was too reliant on inter-company related-party transactions. As he puts it: “excessive related-party transactions pose contagion risks.”
When the economy is prospering and rapid growth is taking place, such a mode of operation looks good. A virtuous cycle is set in train. However, as soon as the economic environment turns sour, reliance on related-party transactions puts the entire group at risk. Contagion ensues and the virtuous cycle becomes vicious.
Second, the corporate culture of the group and its unorthodox styles of corporate governance were far too commandist, secretive and lacking in transparency. Modern ethical standards, befitting a global corporation are very different from those the group practised, as its meltdown across the region reveals.
Third, because of poor corporate governance, as the Governor of the Central Bank further pointed out, the group was only too willing to engage in excessive leveraging of assets. I would add to this also, regulatory arbitrage. There is now no doubt that the group routinely exploited regulatory loopholes within and across Caricom jurisdictions.
Excessive leveraging of assets reduces the likely proceeds from disposal of these assets, if it becomes necessary.
Finally, through the practice of regulatory arbitrage the group operated deposit-taking schemes, premised on the payment of unusually higher interest rates than the financial markets would seem to be able to afford. As an example of this aggressive high interest strategy for acquiring funds, a relatively large value of highly liquid high-priced deposits flowed to its insurance subsidiary in Guyana, (CLICO).
This firm, however, was not registered to engage in deposit-taking as a commercial bank is entitled to do in Guyana.
It did so, however, with the knowledge of the regulatory authorities. It did not, however, come under either the regulatory jurisdiction of the Central Bank of Guyana, or the Commissioner of Insurance in regard to its deposit-taking schemes.
As soon as the global financial crisis erupted last September inflows of deposits faltered. And, worse, withdrawals soon began. This experience exposed the flawed business model.
In conclusion, two very important questions arise. One is, why did the Government of Trinidad and Tobago feel it necessary to provide a rescue package for such a firm? The second is, what is being done to correct the regulatory loopholes at the trans-Caricom level? In the former case the answer centres on the notion that the CL Financial Group is “too big to fail.” For the second question, I shall review efforts at the Caricom summit recently held in Belize to address these concerns. These matters will be treated in later columns.
Faculty of Social Sciences
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