Former finance minister critiqued FINSAC ‘victim’ narrative
Published:Friday | October 18, 2024 | 12:09 AM
Former Finance Minister Dr Omar Davies said it is a travesty that several owners and senior managers who “egregiously mismanaged the funds of investors and savers” during the 1990s financial meltdown are seeking to portray themselves as FINSAC victims.
There has been an avalanche of criticism from several quarters and blame heaped on the then P.J. Patterson administration for the major crisis that unfolded in the financial sector, which ultimately led to many persons, including pensioners and businesspersons, losing significant portions of their investments.
Many, including Dr Karl Blythe, a then senior Cabinet minister, said a high interest rate policy led to the financial sector debacle.
Blythe said the Government should be blamed for the financial sector meltdown of the period.
“I personally apologise to all those who may have suffered during this financial crisis,” he said in a release in May 2011.
“I further apologise for any mistake made by the Government, of which I was a part, which resulted in the suffering of any Jamaican,” added Blythe.
He reasoned that the PNP administration “erred significantly in maintaining the high interest rate for much too long a period”.
MAJOR PROBLEM
But in a November 2009 submission to the then FINSAC (Financial Sector Adjustment Company Limited) Commission of Enquiry, Davies said Jamaica had a major problem related to the predominance of the position of executive chairmen in several local financial institutions. He said this position provides the holder with excessive powers and inadequate checks and balances.
According to Davies, the then Government engaged international experts in forensic auditing to examine the operations of the institutions for which FINSAC had intervened. The forensic auditors were Lindquist Avey of Canada, Ernst and Young of the United Kingdom, and PriceWaterhouseCoopers from Canada. He said their reports were formally documented and were available to the commission and the Government.
“If pursuit of the facts is really an objective, these reports should be released to the public,” Davies said.
Davies said innumerable violations were identified, some of which, “we were advised”, would have led to criminal charges in jurisdictions with more rigorous financial legislation.
“Violations included the ‘ever greening’ of loans and the making of excessive, undercollateralised loans to ‘connected parties’.”
‘EVER GREENING’
The term ‘ever greening’ describes the corrupt practice whereby a bad loan in a group company is sold to another at face value, thus removing it from the portfolio of the first company. If this process is repeated, it becomes almost impossible for the regulators, through one-off audits, to spot the deception.
Davies said in his submission to the commission that corruption and malpractices discovered in these institutions bordered on the incredible.
He said in the case of one major financial entity, it was found that the external auditor was himself a bad debtor.
Davies said the situation was worse within the context of a group of institutions controlled by a set of “Executive Chairmen”, who called themselves “The Owners Club”.
He said loans to “connected parties” were often transferred between institutions in order to avoid detection by the regulators.
Following the completion of the forensic audit, Davies said it was revealed that many of the bad debtors were simultaneously clients of several institutions.
“These clients used their contacts and connections to secure loans from several domestically owned banks, with few of these loans ever serviced in line with the loan agreements,” he said.
Davies argued that FINSAC was established after it became apparent that the problems in the financial sector were widespread.
“It is inaccurate to speak of FINSAC having ‘clients’ who were treated badly. All these ‘clients’ of FINSAC were inherited from failed institutions, with existing contracts made with those institutions,” he said.
Davies contended that FINSAC was established to protect the thousands of savers in the failed institutions, including pensioners and employees whose pension funds were mismanaged by the failed institutions and the insurance policy issued by the failed institutions.
It was a matter of record, said Davies, that at an emergency Cabinet meeting held one Sunday night at Vale Royal, former BOJ Governor Jacques Bussieres advised Cabinet that it should act decisively against a set of local institutions.
He said the BOJ’s analysis had identified many of the deficiencies and corrupt practices, which were later confirmed by the forensic auditors.
Challenging claims that it was the high interest rate policy of the 1990s that triggered the collapse of the financial sector, Davies argued that similar financial crises had occurred worldwide, and in many of those jurisdictions such as Scandinavia, Japan, and the United States, they occurred during periods characterised by low interest rates.
He said objective analyses of the causes of such crises invariably point to bad operational practices in the institutions and the failure of the regulatory system to either detect such practices or to act quickly once they are detected.
The former finance minister conceded that although there was a period where interest rates were high, the use of this lever of macroeconomic policy cannot be taken out of context.
“Many persons who assert that high interest rates represented the fundamental cause of the crises fail to take into consideration, either deliberately or unwittingly, the context in which these rates were applied.”
Davies acknowledged that the first half of the 1990s was characterised by high levels of inflation and instability in the foreign exchange market. He said Jamaica experienced inflation in excess of 100 per cent in fiscal year 1993-94.
He argued that for some years since the liberalisation of the foreign exchange system, the market demonstrated extreme instability.
“The cry at the time, from both the general public and the business community, was for inflation to be controlled and stability to be imposed on the foreign exchange market.”
With a few policy tools available to the authorities, said Davies, liquidity was tightened in order to make it more costly for currency speculators to buy speculative holdings of US dollars, a practice, he said, that had been driving up the exchange rate and inflation.
Davies said there was the legitimate question as to whether the policy ought to have been pursued as aggressively and for as long as it was.
He said during that period, attempts to move “gingerly” had borne very limited results. He said the twin challenges of rapid devaluation and high inflation had sown seeds of an impending social explosion.
After spending more than $150 million across administrations, the then FINSAC Commission of Enquiry was unable to produce a report.
Finance and the Public Service Minister Dr Nigel Clarke made the decision to upload submissions from the enquiry to the ministry’s website.