Betraying Century

Edward Seaga, Contributor

Below is more analysis of the financial sector meltdown in Edward Seaga's autobiography. The second excerpt was published last week.

Credit to the private sector showed the pattern of an investment spree. The annual average growth in loans and advances by commercial banks between 1989 and 1992 was 27.3 per cent, compared to 41.4 per cent annual average between 1993 and 1996, almost twice as high. Yet, incredibly, despite the investment spree, GDP growth was an insignificant average of 0.9 per cent per annum in the first half of the decade, and job creation was flat for the period.

These excesses and anomalies forewarned of a coming disaster. But no one listened, until the requirements by the banks for overdrafts from the Bank of Jamaica to cover the accelerating amount of bad loans signalled a need for urgent action to forestall growing financial casualties and turbulence.

Century National Bank (CNB), established in 1984, was one of the many new institutions that were added to the banking sector. CNB became one of the fast-growing financial institutions largely because of the dynamic, expansionist personality of its chairman, Don Crawford, who had graduated from the ranks in banking. As a member of the black middle class, he was also particularly welcomed, in keeping with the policy expectation that private ownership of the heights of the economy would be more mixed racially in the future than it was in the past.

Don Crawford received effusive praise publicly from the minister of finance, Omar Davies, for his expansion programme. He was acclaimed nationally for his bold step in purchasing and linking two large adjoining hotels on Turtle Beach, Ocho Rios, to develop the single largest convention hotel, the Jamaica Grande Renaissance with 720 rooms. This he did with a valuable partner, Liberty Go-Go, the largest tour operator supplying guests to Jamaica, which greatly benefited the prospects of the venture.

Shortage of foreign exchange to keep up the pace of development of the hotel led CNB to outbid other financial institutions on a bloc of foreign exchange being auctioned by the United States Embassy. These funds were one of many instances in which the US Embassy auctioned the foreign exchange received from Washington. But in so doing, the CNB bid exceeded the unofficially proclaimed 'official' rate of exchange of J$22 to US$1 promoted by the Bank of Jamaica. CNB bid J$25.10.

This was embarrassing to the Government because it signalled a meaningful depreciation of the rate of exchange - although it was well-known that the BOJ was paying more for foreign currency bought by their street agents. (These agents were authorised non-employees of the BOJ who were financed with millions of dollars of BOJ cash in the trunks of their cars to buy dollars on the street, a project which came to an expected infamous and abrupt end with one of the street buyers being robbed of millions of Jamaican dollars).

This instance, Don Crawford claimed, was a turning point which later triggered official comments from the minister of finance implying weak performance of the bank. Audits by the BOJ followed and CNB was called on publicly to make heavy injections of new funds. This sparked rumours which resulted in huge withdrawal of funds.

Acceleration of withdrawals

The public manner in which the affairs of CNB were being handled, without circumspection, caused an acceleration of withdrawal of deposits, weakening it further. Price Waterhouse International, Canada, was contracted by CNB to determine a viable course for the bank. CNB, like the other indigenous banks, was overextended, but the Price Waterhouse model showed that, with prudent management, the desperate situation could be saved. However, prudence was not the mode used. Davies listened to the Price Waterhouse proposals and eventually settled on an arrangement to deal with the problem, but he insisted that Crawford give up the executive role of the chairmanship and that some new directors be added by the minister.

Considering that the bank was haemorrhaging, only a change of chairmanship could help to restore credibility; the minister's offer was reasonable. It should have been accepted, allowing Crawford to save face, which would have offset the loss of his executive power. But it appeared that Crawford was taking advice elsewhere that held out more hope.

A further $170 million was withdrawn in panic in early July 1996. The BOJ determined that the bank was no longer viable and advised the minister to act. In the urgency of the crisis, the minister proceeded, closing down the Century National Bank and its related entities on July 10, 1996. It was a sad end for an institution that had grown from one branch in 1984 to seven by 1996 and had done what the policy of both the JLP and PNP had urged - invest your money in expansion at home.

This episode made clear the need for recognition of the fragility of the financial system, of the danger of overexpansion and the importance of careful and confidential handling of its affairs. Unfortunately, the CNB failure opened the minds of the banking public to fears of other possible failures. This was heightened by the disclosure that CNB had $3 billion more in liabilities than assets and that a substantial amount of funds was allegedly found to be unaccounted for.

Prophetically, I had asked Dennis Lalor, Paul Chen-Young and Oliver Jones, leaders of three powerful financial groups, to come to see me individually shortly after the CNB closure. My message to them was - judging from the way the CNB matter was handled as an exposé - 'They are coming for you next'. This warning was born out of my background experience of how the People's National Party thought and acted in regard to the issue of wealth. The party was historically anti-wealth and socialist, and had always resented established big private business, particularly if the wealth was not bonded with its leadership in terms of its racial and political preferences. Lalor, Chen-Young and Jones did not fit this bonding profile.

Now that it had been demonstrated that a bank could be brought to its knees by the mix of a weak financial position and official action that was not careful about confidentiality and rumour, it would be possible to replicate the CNB disaster, providing the institution was overextended with high-risk loans, bad loans and high interest rates, which were common features throughout the indigenous banking system.

Edward Seaga is a former prime minister. He is now chancellor of the University of Technology and a distinguished fellow at the University of the West Indies. Email feedback to columns@gleanerjm.com and odf@uwimona.com.