Workers at Petrotrin’s refinery who are to be sent home at the end of this month pending the shutdown are being urged to fight for their jobs.
I am under no illusions that the Leader of the Congress of the People, de facto Deputy Prime Minister and current Minister of Finance, Winston Dookeran, is in need of my or anyone else’s defence when it comes to matters of the economy or his ministry. It is, therefore, not in this context that I endeavour to write about matters that fall under his purview and recent developments that seek to distract and detract from what has been, thus far, a commendable performance in a difficult position. Firstly, and since the matter preceded him, I will tackle the issue of Clico and those calling for Mr Dookeran’s head as per their payouts. More specifically, Peter Permell has been talking to anyone who cares to listen, and has, to an extent, successfully gotten quite a significant portion of the population to go along with his ludicrous claims. As per Clico, and I will painfully stand corrected, if wrong, the minister identified approximately 250,000 policyholders/depositors who were affected by the fall-out of the failure of the insurance giant. Of these, 225,000 are traditional policyholders, traditional the word used to describe people who invested their monies in an insurance product familiar to most, namely (i) a life insurance policy payable to a beneficiary upon the policyholder’s death and (ii) an annuity policy payable to the policyholder upon retirement or if death of the policyholder precedes retirement, to his/her beneficiary. The minister has been at pains to point out that these persons are fully covered, have nothing to worry about and their investments are secure.
The second tranche of approximately 25,000 claimants are, in fact, depositors, despite the label of “policyholder” that Permell has managed to successfully introduce via the formation of his group. These depositors invested into a product sold by Clico, namely the executive flexible premium annuity (EFPA). Whether or not they were misled by the company and its agents is a separate matter. By the very sentiment of the minister and the Governor of the Central Bank, these individuals and, in some cases, corporations, invested in a non-traditional instrument. What Permell, in his many ventures to the media and histrionics at meetings, has failed to clearly explain to the public is the nature of these EFPAs. What was the attraction to these “annuities”? Was it the interest rates of 12 to 14 per cent in an environment that, at the time, was paying at best, 5.0 to 7.0 per cent? If not, then what? And, if yes, then the case for greed cannot be made any clearer. In any case, of these 25,000 depositors, approximately 11,000 hold less than $75,000 in assets and will be completely covered by a one-off payment as laid out by Dookeran’s plan in the 2010/2011 Budget. This leaves 14,000 depositors whose claim on the Treasury is approximately $7 billion, an average of $500,000 a client (although a median figure would be more instructive).
Every single one of these depositors will receive an initial payment of $75,000, a total of $1 billion this year. The remaining $6 billion will be paid over the next 20 years in equal payments ($300 million/year), at 0 per cent interest (just about the same that you or I are currently receiving on bank deposits). The important thing to take away from this is that every single depositor would have had the majority of his/her initial capital preserved. A 20-year bond is to be floated to finance this debt that the GORTT has decided to undertake. Permell has either chosen to remain ignorant of the terms of this bond or has taken a conscious decision to suppress the information surrounding this issue.
Depositors have two options.
1. Accept an initial payment of $75,000 and cash in their bonds at 100 per cent of their face value each year for the next 20 years; thereby receiving 100 per cent of their capital back (at an average of 2011-2030 inflation-adjusted dollar values). In a hypothetical case of a depositor with $1 million, and assuming a generous adjusted average inflation/depreciation rate of 7.0 per cent over the next 20 years, the depositor will be reimbursed the equivalent of $581,000 in terms of 2011 dollars. This represents a “haircut” of approximately 42 per cent. This “haircut” will be greater or smaller, depending on the rate of inflation/deflation and appreciation/depreciation of the TT dollar.
2. The acceptance of an initial payment of $75,000 and the immediate cashing in of the 20-year bond. As with any bond being cashed in prior to its maturity date, there will be a discount attached to the face value. Dookeran has gone out of his way to interfere with the free market by negotiating with local banks to accept the first five years of the Clico issue at approximately 92 to 95 per cent of face value. The remaining 15 years, as generally agreed, will attract a discount of approximately 40 to 45 per cent (that is, 55 to 60 per cent of face value).
Again, using our hypothetical depositor with $1 million to receive, he will receive a lump sum of $75,000.
Assuming the bond attracts a discount on the lower end for both the first 5 years and the remaining 15 years, the depositor will be reimbursed $212,750 for the first 5 years and a further $381,562.50 for a total of approximately $670,000; a haircut of 33 per cent. Note well that this sum will be a lump sum ($75,000 from GORTT and $595,000 from the commercial bank to which the bond will be sold). If the bond is cashed in at the higher end, the payment would be in the region of $710,000, a 29 per cent loss on capital. This lump sum will be obtained almost immediately from the date of the first payment, tentatively scheduled for March 2011 (as indicated by the Ministry of Finance and Attorney General). In addition to this, provisions have also been made for individuals to receive money where a case of need is made out. Provisions have also been put in place for credit unions, which had no business investing in these types of products in the first place and which recklessly and irresponsibly weighted their portfolio heavily in the EFPAs, to be paid greater sums. All this flies in the face of the suggestion that the minister is being vindictive or that people will have to wait for 20 years to get “their money.”
What it means is that these depositors will have to experience some loss on their initial investment, not a large price to pay in a situation where they would otherwise receive nothing. What Permell is strangely quiet about is the concept of personal responsibility when it comes to investment. Clico was not, and is still not, a state-owned entity. Where is the criticism for the directors of the company which essentially ran a Ponzi scheme on EFPA deposits? Where is the criticism for those investors who piled all their money into a single investment, regardless of whether or not it was deemed risky at first, or if it was approved by the Central Bank? The long and short of this sham story by Permell is that these depositors chased after fast money and lost. It is NOT the responsibility of the REGULATOR to reimburse losses. The REGULATOR is not a GUARANTOR. If there is a facility for guarantee of funds, such as the Statutory Fund, it is my understanding that Clico is responsible for contributing to that fund. If said money was not deposited, it is not the responsibility or obligation of the Central Bank, the REGULATOR, to meet that commitment. Just because the GORTT has extended a facility to these depositors does not mean that the Treasury should be used as a cash cow for these accounts.
As was stated soon after the election, the CL Financial Group had a net liability of $20 billion. This means that the group as a whole, of which Clico is a 100 per cent owned subsidiary, is insolvent. There are NO net assets for anyone to receive. The assets which exist, as explained by the minister, are heavily leveraged or encumbered. As such, any monies being paid are as a result of an assessment by the ministry and the Central Bank as to an amount deemed sufficient to prevent contagion to the financial system. Rest assured, if this were a similarly private, smaller insurance company or financial institution; investors would be fending for themselves and holding empty hats. It is noteworthy, also, that despite the best efforts by Permell to misrepresent, both S&P and the IMF have approved of the way that the minister has handled the situation; S&P even suggesting that the GORTT has been more than generous in handling the Clico affair. What Permell has conveniently failed to mention is that the Sovereign Rating of A is as a RESULT of the GORTT’s handling of the Clico matter, not a licence to sweeten the deal. So, Permell, it’s about time you came clean on this whole charade. Depositors, as rich or poor, young or old as they are, are lucky to be receiving anything in the first place.
Admit that the only reason this came to a head was the order by the minister to issue a stop on the payment of interest at the ridiculous rate in this fiscal environment. Admit that responsibility for this fiasco lays least in the hands of the Central Bank and the former and present Minister of Finance and most in the hands of the company’s directors and irresponsible investors. Accept responsibility for risks associated with your investments, something that you seem averse to, as evidenced, not only by this case, but also by the fallout from the closure of BWIA where investors, including yourself, are seeking to recoup a premium to the approximately $0.20 a share that the company was delisted at. It is a sad and lamentable fact that many unsuspecting citizens were caught up in the failure of this institution, but it cannot be the responsibility of taxpayers and the Treasury to pay for the irresponsible decisions by directors, shareholders and clients of a private company.
The GORTT has a responsibility to ALL citizens, not just the one per cent (14,000 clients) affected in this case who are claiming 17 per cent ($7 billion) of projected 2010/2011 revenue. It is most interesting that despite the claims of the EFPA group and the delays in payment, that no legal action has been formally filed. Is it now that legal counsel has advised the group that this is a losing cause and there are absolutely no legs to stand on? The lesson from this for everyone is that individuals need to be more careful and seek financial advice if they are not competent to make such decisions on their own. The Central Bank needs to review insurance companies to ensure that they comply with relevant laws. Finally, and most importantly, the AG needs to ensure that justice must not only be done but seen to be done with respect to the directors of companies who mismanage funds leaving individuals in dire straits while they are allowed to enjoy the fruits of their ill-obtained gains.
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