Answering my critics

Omar Davies, Guest Columnist

My piece on FINSAC published in The Sunday Gleaner of May 15 elicited responses in the May 22 edition of the same paper. The responses have come from Mr Claude Clarke, a former minister of trade; Dr Paul Chen-Young, former executive chairman of the Eagle Group; and your regular columnist Gordon Robinson.

Although their pieces are worthy of responses, let me declare that I have no intention of participating in a never-ending debate in the press. There are others whose knowledge of the issues could assist us, and the still unanswered question is: why have they not testified before the commission? One prominent example is former governor of the Bank of Jamaica (BOJ), Mr Jacques Bussières, who was in Jamaica recently to participate in the 50th anniversary celebrations of the BOJ. I can state categorically that Governor Bussières is willing to testify. However, to date, he has not been approached to provide his informed views on the issues. I deliberately say "informed" because he was the first person to give the then administration a comprehensive analysis of the state of affairs in the financial sector - in particular of the situation in the institutions which eventually failed.

I note, in passing, that none of the three gentlemen have seen it fit to comment on my concern, that FINSAC has been without legal representation for most of the hearings of the commission. Am I the only one who sees something inherently wrong with this? Contrast this situation with the depth and quality of the legal representation at the Manatt/Coke enquiry.

Today, I will address the articles by Mr Clarke and Dr Chen-Young, and next Sunday, I'll turn to Mr Robinson.

Mr Claude Clarke

Mr Clarke speaks from a particular vantage point as both a former minister of government as well as a manufacturer/distributor who became a bad debtor. He begins his piece by criticising the liberalisation of the foreign-exchange system. He asserts that "the replacement of the auction system with total liberalisation was catastrophic". This statement makes me wonder whether Mr Clarke was living in Jamaica during the period preceding liberalisation of the foreign-exchange system.

Clearly, liberalisation was a bold and controversial move, but it did not take place in a vacuum, or as an act of madness. The auction system to which Mr Clarke refers was a contrived operation, with the BOJ being a leading purchaser of US dollars in the black market. The participation of the BOJ in the black market was more than ample evidence that the auction system was fatally flawed. Mr Clarke knows that to be the truth. Why, then, does he make this ridiculous pronouncement?

Mr Clarke further argues that the Government's post-liberalisation focus was on maintaining a fictitious value of the currency in defiance of the runaway inflation. Is it that he is arguing that the Government should have allowed the devaluations to continue? More fundamentally: how would he have characterised the exchange rate which existed before liberalisation? Was that not fictitious? It was clearly established that most businesses and private individuals who needed foreign exchange had no faith that the auction system could deliver the needed resources. Consequently, almost everyone participated in the black market in order to meet both personal and commercial obligations.

Mr Clarke also seeks to establish a spurious link between high interest rates and the decision by foreign producers like Colgate-Palmolive, Gillette and Goodyear to leave Jamaica. This is a new one to me. I have always been told that local subsidiaries of foreign firms had an advantage of access to cheaper financing, using the facilities of their head office. Is Mr Clarke's assertion based on empirical data, or simply another 'theory' developed over a drink?

Mr Clarke has commented on the modus operandi employed by FINSAC, and in criticising the approach, he has concocted a false dichotomy between "cash-rich depositors" and the "deeply indebted (mainly productive) class". What self-serving rubbish! Is he suggesting that those persons who, in good faith, had purchased the 600,000 life insurance policies were "cash-rich"? Is he saying that the 75,000 pensioners and current workers, whose pension funds had been mismanaged by the insurance companies, were all "cash-rich"? Is he asserting that the accounts in the failed banks were all to the credit of "cash-rich" persons? This is absolute nonsense, and Mr Clarke knows it.

Restructured bad loans

Within the framework of this false dichotomy, Mr Clarke suggests that the approach which should have been taken by FINSAC would be that the banks would restructure each bad loan "within the realisable value of the securities being held". Presumably, he is arguing that regardless of the total amount owed by a bad debtor, his restructured loan balance would be equated to the realisable value of the collateral being held. What, then, of the difference between the amounts owed and this value? On what basis could that write-down be justified, while simultaneously denying the savers their earned interest? However, most important, what of the thousands of borrowers from the same institutions who had faithfully serviced their loans? Mr Clarke's proposal amounts to punishing them for honouring their obligations, while rewarding the bad debtors.

Finally, Mr Clarke knows that in instances, these "deeply indebted (mainly productive) persons" did not suffer from high interest rates in that several of their loans were never serviced. I say no more.

Dr Paul Chen-Young

I now turn to Dr Chen-Young's piece. In an interesting way, although his arguments are self-serving, I found Dr Chen-Young's contribution very useful.

To begin, in an amazing admission, Dr Chen-Young contrasts the modus operandi of local, as opposed to external, banks. He states: "Yes, the foreign-controlled banks survived by following strict conservative policies." Dr Chen-Young, that's precisely what one wants bankers to do - to follow strict conservative policies. Banking is a unique activity in that institutions are entrusted with the savings of other persons, not to take wild gambles, financing inadequately assessed projects developed by "connected parties".

Dr Chen-Young also seeks to justify the difference in outcomes of the failed and successful domestic institutions - in particular an organisation such as Jamaica National. He argues that "their portfolio was limited to relatively safe mortgage loans and they were able to absorb whatever losses that occurred". Dr Chen-Young, that is what a building society should do. In fact, the adventures embarked on by the proprietor-owned building societies like Eagle were one of the major factors influencing the regulatory changes which were introduced after the crisis.

Dr Chen-Young claims that my attack on executive chairmen of some of the financial institutions is "a straw man and a red herring". Dr Chen-Young may not know of the forensic audits conducted on all the institutions, but he should acquaint himself with the findings of that carried out on his institutions. Could anyone, other than an executive chairman, have taken the decision to embark on the ill-conceived town house project, subsequently changed to the Crowne Plaza hotel? It would be of immeasurable assistance if Dr Chen-Young were to make public the analyses supporting the financing of the town house project, and its subsequent conversion to a hotel.

The "straw man and red herring" assertion forces me to return to the question of why the commission has been selective in inviting persons to testify. Dr Gladstone Bonnick, who was a high-school colleague of Dr Chen-Young and the first chairman of FINSAC, was specifically given the task of negotiating the Government's takeover of the Eagle Group. The country would benefit greatly from him testifying about his total experience but, in particular, about his findings in the Eagle Group.

I now come to an interesting part of Dr Chen-Young's response. He argues that the two lieutenants of the insurance company executive chairman, who pleaded with me to intervene in their institution, were guilty of "treachery". This is an amazing statement. Is Dr Chen-Young arguing that subordinates are supposed to agree with their bosses regardless of the correctness or legality of their actions?

I have noted the facility with which those who are opposed to the Government's establishment of FINSAC and its operations switch and expand their positions. Once we heard about the corrupt nature of the modus operandi of FINSAC, whereby political interference influenced decision-making; then we heard that the crisis was caused by the high interest-rate regime. We have also heard that the "premature liberalisation" was the root cause of the problem.

Scratching for excuses

In Dr Chen-Young's piece, he has thrown together various factors, beginning with irresponsible fiscal policy and ending with my "run wid it" speech. (For the record, this speech was made in 2002, long after the worst of the financial crisis). Clearly, Dr Chen-Young is simply scratching around for excuses for his irresponsible handling of the savings and investments of individuals entrusted to the care of his group of companies.

Dr Chen-Young further argues that FINSAC had an obligation to help troubled financial institutions return to viability if that could be realistically done under a workout plan. On that we agree. However, the fundamental area of divergence between Dr Chen-Young's solution and that of the Government was the clear realisation that the owners and senior management team of those institutions could not be allowed to stay in place. To have permitted this would have been an act of irresponsibility. One would almost be guaranteed that, if not the same "bag of tricks", they would have developed new approaches to circumvent current regulations. The experience in Trinidad of the Clico Group is a clear indication that the tendency for persons in the financial sector to devise ways of circumventing existing regulations is not solely a Jamaican phenomenon.

Dr Omar Davies, a former finance minister, is now opposition spokesman on transport and works. Email feedback to columns@gleanerjm.com.