The Liming House

Presented verbatim, here is the full text of the statement made by Central Bank Governor Ewart Williams at the press conference on Friday:

Some of you may know that CIB has been facing liquidity challenges over the past few weeks. These challenges came to a head in the last few days when the bank began to face an unusually high level of withdrawal requests which put a strain on their available liquid resources. Clico has also been facing liquidity problems, though nowhere near the levels of CIB. Of course, given the close integration of these two financial institutions within the CL Financial Group. It is just a matter of time before Clico also begin to come under severe liquidity pressures. The Inspector of Financial Institutions and the Governor of the Central Bank met with the Chairman and Chief Financial Officer of CL Financial on January 7 2009. In a second meeting on January 13, 2009, Clico’s Chairman formally raised the issue of possible financial assistance from the Central Bank.

There is no doubt that the increase in CIB withdrawals and the nervousness seen at Clico have something to do with the depositors’ concerns about the impact of the sharp decline in methanol and real estate prices on CL Financial’s overall financial situation. In the Bank’s view however, the current financial difficulties being faced by CIB and Clico have more to do with four things:

*Excessive related-party transactions which carry significant contagion risks. I should note that the high level of concentration is not specifically prohibited by the present legislation.

*An aggressive high interest rate resource mobilization strategy to finance an equally high risk investments, much of which are in illiquid assets (including real estate both in Trinidad and Tobago and abroad).

*A very high leveraging of the Group’s assets, which constrains the potential amount of cash that could be raised from the asset sales. In our regular monitoring of CIB and of Clico since 2004 (when insurance supervision was transferred from the Ministry of Finance), the Central bank has consistently focused on these deficiencies but have been stymied by the inevitable challenge of change and by inadequacies in the legislative framework which do not give the Bank the authority to demand these changes. The Central bank is very conscious of the contagion risks that financial difficulties in an institution as vast as the CL Financial Group could have on the entire financial system of Trinidad and Tobago and indeed in the entire Caribbean region. For the record, ladies and gentlemen, the CL Financial Group has an imposing presence with potentially systemic consequences for the financial sector and the economy of Trinidad and Tobago and the entire region. For example:

1 The Group controls over ($100) billion of assets in at least 28 companies located throughout the Region and the world.

2 The Group’s financial interests cover several industry sectors including banking and financial services, energy, real estate and manufacturing and distribution. The four largest financial institutions in the Group manage assets of over $38 billion, over 25 percent of the country’s GDP.

3 In addition to Clico, among the Group’s holdings is the British American Insurance Company Limited, which is one of the main insurance companies in the Eastern Caribbean.

After intense discussions over the past week the Central Bank, the Ministry of Finance and representatives of the CL Financial Group have reached agreement on a strategy to deal with the liquidity challenges of CIB and Clico and to address the underlying problems that have given rise to the current financial stress.

The principal objectives of the strategy are to ensure that resources are available to meet withdrawals of third-party CIB depositors and Clico policy holders; to protect the funds of the depositors and policy holders and in so doing maintain confidence in Clico and reinforce confidence in the financial sector as a whole. The main elements of the strategy are as follows:

*The Central Bank will take control of CIB under section 44D of the Central Bank Act.

*Early next week all the third-party assets and liabilities on the books of CIB and CMMB will be transferred to First Citizens Bank. These liabilities will be matched by resources from the sale of CIB’s holdings of certain high quality assets. The Central Bank will provide short term liquidity as needed to ensure that these liabilities are serviced.

*Following the execution of these transactions, CIB’s banking license will be revoked.

*Clico has a sizeable Statutory Fund deficit. CL Financial has agreed to divest additional assets to help fund this deficit. The Government has committed to provide any additional funding that is needed by Clico.

*Government funding will be provided in exchange for collateral and an equity interest in Clico. It will also act as a catalyst for implementing a change in the current business model and corporate governance structure of Clico. The intention will be to return Clico to its original moorings.

I would like to emphasize that these considerable steps being taken – by the CL Financial Group, the Government and the Central Bank are specifically designed to tell CIB’s depositors that your funds are safe and to maintain confidence in Clico which for decades has been the strength of the insurance sector in Trinidad and Tobago and in the region. Clico’s policy holders can also be assured that the long term future of Clico will be guaranteed by the adoption of a more robust and less risky model. Because any stress in one corner of the financial system tends to raise concerns throughout the sector.

I would also take the opportunity to remind the national community of the tremendous strength of our financial system, which indeed is the envy of the region. Excluding CIB, the banking system now boast of an average capital adequacy level of 18 per cent, compared with a recommended minimum of 8 per cent; in contrast to the illiquidity of CIB, the rest of the banking system is plagued by excess liquidity; the overall level of non-performing loans is an impressively low 2 per cent and the banks have more than adequate level of provisions against bad loans.

Let me support the point raised by Minister Tesheira on the need to accelerate some aspects of the new Insurance Act on which we have been working for some time in collaboration with industry stakeholders. We absolutely need updated insurance legislation to regulate the insurance industry in normal times as well as in times of financial stress.

The ‘fast track’ amendments to the 1980 Insurance Act that are being proposed will provide us with the authority to conduct on-site supervision; will give us the legal basis to share information with other regulators (I should note that CLICO and its affiliate British American have vast regional operations) and will allow the Central Bank to take prompt corrective action to protect depositors, if and when necessary. Before ending I would like to acknowledge the high level of cooperation that we have received from Mr. Duprey in our efforts to address what must be a very difficult period for the CL Financial Group.

I should also recognize the role of First Citizens Bank in doing its part to help stabilize the banking system. Resolving the problems of Clico will call for continued collaboration between CL Financial, Government and the Central Bank, but moreso on the collaboration of the entire financial community led by ATTIC and BATT. While it is currently a CL Financial problem, only the concerted and vigorous action of the entire financial sector would stave off financial contagion. This is not the time for companies to take advantage of CIB/Clico’s problems to expand their balance sheet; this is the time to let competition take a back seat and to support the Government and the Central Bank to keep Clico as a functioning entity and to ensure the continued stability of our financial system.

The actions that we will be taking over the next several weeks and months will only work if they have the support of the community of depositors and policyholders as well as the entire financial sector. We are confident that the proposed strategy will lead to a financial sector that is more resilient to deal with the adverse currents now buffeting the global economy.

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First, some housekeeping.

To Mike, who commented on “This is not the time to not know what you’re talking about“, here is my belated response:

Mike – I stand by my assertion that Ms Marajh’s coverage of the RBC/RBTT deal was textbook, which is what irks you. You criticise it as “routine” – I invite you to show me a comparable piece of business coverage from any other reporter at a Caribbean publication. My intention was not to compare her work to that of the FT, the WSJ or the NY Times – and I have seen worse at all three of these papers – but to highlight her as an outlier amongst her peers.

Further, Ms Marajh did scoop the international media; the deal was small but significant for RBC from a strategic standpoint. Your criticisms of the story – e.g. “is RBTT bloated? Will there be
job cuts to generate cost savings?” are not unfair, but I would contend that they are usually addressed – even in the major papers – in secondary analysis pieces, or in the second take on the news. This is often because, especially in a deal that has not yet been made public, the details are not available and are secondary to the fact of the transaction.

Yes, the story would be considered routine at a major international daily; but the Express is not the FT. Given the dross typical of the content of our local newspapers, the coverage stood out.

You then criticize Curtis Rampersad’s Express story, which I characterised as having done a decent job of summarizing a complex topic. You contend: “I see no real understanding of the complexity of the situation facing financial markets. He mostly quotes local “experts” opining on the implications of the meltdown for local businesses. This isn’t journalism; it’s stenography.”

I riposte – there are very few journalists even at the WSJ and the FT who have a thorough grasp of this financial crisis. Indeed, there are but a handful of global policymakers who have not been proven to be out of their depth. And yet, despite Rampersad’s lack of expertise and his even further remove from expert sources than a journalist in the US or UK, he produced a decent story. And if he committed stenography, by your definition, then thousands of journalists across the world are doing the same every day.

Sometimes, you have to give credit where it is due.

The Liming House

The CL Financial Bailout – Central Bank Statement

T&T Gov’t to bailout CLICO, British American and CLICO Investment Bank

Now, where was I?

"we brandish words like rapiers"