Dookeran comes clean on Clico bailout

Former Minister of Finance, Winston Dookeran, has often shied away from controversy in his long political career. But in an explosive affidavit in response to a lawsuit against the Government’s handling of the Clico affair, brought by his former Cabinet colleague, Ramesh Lawrence Maharaj, Dookeran makes some astonishing revelations, including:

• It may take a further $21 billion to resolve the Clico issue;

• Why Clico’s assets could not have been sold in 2009 and 2010

 

24. CL Financial  is the  parent  company  of  the  Group.  The  Group  includes  companies operating in banking and  financial  services,  manufacturing, trading, retail and distribution, general and life insurance,  medical  services,  forestry  and agriculture, real estate  development, energy  and petrochemicals, marine services  and also in the media and communications sectors. It was the largest privately held conglomerate in Trinidad and Tobago and one of the largest in the Caribbean. In early 2009, the group owned or controlled over 30 companies and numerous additional subsidiaries under many of those companies, located in the Caribbean, the  USA, Europe and the Middle East.

 

 

25. From the information which came to me on assumption of office, it was evident that the group pursued  an objective of international expansion.  It acquired  a number   of  companies    in  the  alcohol   industry   and   to  this   end   acquired   spirits manufacturing   and   distribution   companies   in   the   USA   (including   Todhunter International Inc., and Lawrenceburg Distillers,  Indiana) and Europe.   It also acquired Burn Stewart  Distillers  Limited,  Belvedere SA and Hine Cognac.

 

 

26. These  acquisitions were  largely  funded  by intra-Group lending,  a significant amount  of which came from Clico.

 

 

27. Some  key  members  of  the  Group's  manufacturing arm  included  Angostura Holdings  Limited  (AHL) and  Lascelles de  Mercado  {LdM) and,  in the energy  and petrochemical sector, Methanol Holdings  Trinidad  Limited  (MHTL).   CLF relied on dividend income from such profitable subsidiaries to fund its expansion programme, although  it obtained that income through its direct subsidiaries,  particularly Clico, which owned the shares in the relevant companies.

 

 

28. Apart from those businesses, the other significant sector  in which CLF was involved was financial services. Group companies included:

 

(a)  Clico  Investment  Bank (CIB).   This was another  Group   company  which was frequently used to provide intra- Group funding. Following a run on CIB in early 2009 (due in part to a large portfolio of non-performing  loans), CIB went into liquidation; and

(b) Caribbean    Money    Market    Brokers    Limited     (CMMB),    which    was subsequently transferred to First Citizens Bank Limited (FCB).

 

 

29. Clico  together  with CIB also held a 55 per cent shareholding  in Republic  Bank Limited (RBL), the largest bank in Trinidad and Tobago.

 

 

30. As of December 2007 (latest audited financial statements), the Group's  assets were  declared  to  be  in  the  region  of  TT$IOO billion,  43 per cent of  which  related  to companies operating in the financial services sector.  As TT$IOO billion was broadly equivalent to 70 per cent of the 2009 GDP of Trinidad and Tobago, the size of the Group and its significance  to the economy  of Trinidad and Tobago  cannot  be overstated. Given the magnitude and diversity of the Group's  operations, any insolvency issues within the Group would have created a real potential for systemic risk to the financial system  of  Trinidad  and  Tobago. 

The  Group  borrowed  over  TT$6  billion  from financial institutions in Trinidad and Tobago.  A large portion of this debt was with two  institutions   upon  whom  the  collapse  of  the  Group   would  have  impacted negatively, and such a collapse  would have affected Trinidad  and Tobago citizens directly and indirectly.  This would have put at risk the stability and endurance of the financial system of Trinidad and Tobago.

 

 

31. Due to an apparent lack of effective management and corporate governance structures, the Group lost billions of dollars on its acquisitions, a number of which were  subsequently  sold.    A  number  of  significant  group  companies across the Caribbean are currently insolvent and under judicial management or in liquidation including BAICO (Bahamas), Clico (Bahamas) and Clico (Barbados).

 

 

32. One  particularly  significant  member of  the  Group  is Clico,  which  is  a 

regulated insurance company under the Insurance Act, Chapter 84:01.  Clico writes traditional policies, which generally involved the payment of regular premiums, with the policies providing benefits either at a particular point in time or upon the occurrence of a particular event.

 

 

33. Clico  also wrote a range of STIPs, including EFPAs,  which were sold to resident as well as non-resident individuals and groups. Clico was also the sponsor, manager, and distributor of a series of mutual funds.

 

34. Clico  was one of the largest financial institutions in Trinidad and Tobago, with a customer  base of around 250,000 clients, representing approximately 20 per cent of the population of Trinidad and Tobago, and including more than 15,000  pensioners and around  100 credit and trade unions. Of those clients,  225,000  held traditional policies and 24,800 held EFPAs or mutual fund investments.

 

 

35 .In  accordance  with  section  37  of  the  Insurance  Act,  Clico  and  British American Insurance Company (Trinidad) Limited (BA) were required to establish statutory funds in respect of their liabilities under all of their long-term insurance business,  including  the  EFPAs  (these  funds are  herein referred  to together  as the statutory funds,  and the fund relating to Clico is referred to as (the statutory fund), though by 2009 the assets in the Statutory Funds were not sufficient to cover the liabilities. The statutory funds were created in accordance with section 37 of the Insurance Act and no separate trust deed governing the operation of the Statutory Funds exists.

 

 

36. Although GORTT has intervened in both Clico and BA, I will confine my evidence  largely to Clico as  it is that intervention which is  in issue in these proceedings.

 

 

38. As to paragraph 16 of the Maharaj Affidavit, it is admitted that there was a run on CIB and a rush of depositors seeking to withdraw their assets. I am unable to say whether the financial crisis, of which Ms. Maharaj speaks, led to a loss of confidence and the run on CIB.

 

 

40. Paragraph 18 of the Maharaj Affidavit is admitted save and except that the MOU makes no  reference to GORTT providing collateralized loan financing to Clico and BA.  The MOU in fact states that in the event that there is a shortfall in the sale of assets, CLF warrants and undertakes to provide collateral which may include a secure charge on the assets of CLF, Clico  and BA, sufficient to secure any financial assistance to be provided by GORTT.

 

 

49. As  to  paragraph  30  of  the  Maharaj  Affidavit,  Karen Tesheira's   statement  to  the Parliament referred to was not made on 16 June 2009.  It was in fact made on 24 June 2009.     In respect of the statement  attributed  to the KNT, I say that it must be taken in its proper context.   Hansard records show that Tesheira stated at page 340:

"However,  the Government and you read the agreement - there is a restructuring agreement and that is carried out in the Memorandum of Understanding   signed   with   CL   Financial   - is   committed  to restructuring  CL  Financial  as  a  going  concern  to  ensure  that  if investments are realised and all those persons including the creditors, shareholders  and all those persons are not left wanting, they, at the end  of  the  day  will  get  back  and  recoup  all  of  their  losses  and potential losses, but to guarantee is not a guarantee to them. We guarantee the policyholders and residents of this Country that is our guarantee,  but we are committed  to seeing that Clico  becomes  a going concern because we want to ensure that the moneys that the taxpayers  have invested are recouped and in so doing the persons to whom you spoke will therefore benefit because that will be part of the whole exercise of creating solvency for Clico and CL Financial. "

 

 

50. As  to  paragraph 31  of  the  Maharaj  Affidavit,  I  have  read  the  statements attributable to KNT as contained  in exhibit "VM13" to the December 2011  Maharaj Affidavit. I am unaware  that the statement  referred to in the said paragraph 31 is in response  to policyholders who had kept their funds in Clico  beyond maturity.

 

 

52. As to paragraph 33 of the Maharaj Affidavit, I am unaware as to the media conference  referred  to  therein  and  to  the  Governor's purported  statement  that  he planned to put a general scheme to the Cabinet for its approval.

 

 

53. In further response to paragraphs 15 to 33 of the Maharaj Affidavit, I state what follows hereunder.

 

54. On 13 January 2009, Mr Lawrence Duprey informed CBTT that:

(a) the global financial crisis was affecting the availability of liquidity in Trinidad and Tobago;

(b) the Group had been seriously affected by this and many customers were withdrawing their funds;

(c) Group  companies   had  met  their  obligations  to  customers  to  date,  but  a contingency plan was being developed in case the trend of withdrawals continued; and

(d) Group assets could not be readily liquidated without incurring significant loss, and liquidity support may be required.

 

 

55. Meetings between CLF, GORTT and CBTT commenced on 15 January 2009. On 30 January 2009, KNT, acting on behalf of the Former Administration, and CLF (acting for itself and its affiliates including Clico, CIB and BA entered into a Memorandum of Understanding (the MOU)  in an attempt to correct the financial condition of CIB, Clico and BA.  

 

 

56. On  13  February  2009,  CBTT  exercised  its emergency  powers  pursuant  to section 44D of the Central Bank Act (the CBA), and assumed control of Clico.  

 

57. Pursuant to  the MOU  and  following  further  discussions  between CLF  and GORTT, on 12 June 2009, CLF and GORTT (amongst others) signed a shareholders' agreement (the Shareholders' Agreement). The main purpose of the Shareholders' agreement   was  to  regulate  and  formalise  certain  aspects  of  CLF's   affairs  and GORTT's dealings therewith. 

 

58. Since the problems with Clico came to light in 2009, GORTT has provided various funds to members of the Group and to Clico in particular.   Initially some TT$5 billion was provided to Clico.  This comprised: 

(a) an initial advance of $1.9  billion in cash to meet initial liquidity demands after the first stage of the intervention; and

(b) a further sum  of approximately  $3.1   billion in the form of long-term GORTT bonds  with varying maturities and coupon rates. 

 

 

59. Since  that   initial   tranche   of   funding,   GORTT   has   further   committed significant sums, including, as at 9 July 2012, approximately $9.542 billion which has been paid to EFPA policyholders with policies worth more than $75,000.

 

 

60. Assuming  that  the  restructuring   of  Clico  proceeds  as  detailed   below, GORTT will advance further funds totalling approximately $12.097 billion for payments to EFPA policyholders with policies worth more than $75,000.

 

 

61. I reiterate that the above numbers are approximate and represent a summary of the funds GORTT has paid out to date and is likely to advance, depending on, inter alia, the number of policyholders who accept the offer referred to below.

 

 

62. In 2010, GORTT established a Commission of Enquiry into the failure of CLF.  Karen Tesheira provided a statement to the Commission of Enquiry.    I have read that statement and verily believe that the former administration took the position that the financial condition of CIB, Clico and BA threatened the interests of depositors, policyholders and creditors of those institutions and po

sed a danger of disruption or damage to the financial system of Trinidad and Tobago. 

 

 

63. At paragraph 48 of W.D.4, Tesheira expressed concern that there may be a run on Clico, which could cause its collapse and lead to contagion in the wider financial services sector.  Tesheira was particularly concerned because Bear Stems, a major US investment bank, had recently collapsed over the course of a single weekend.

 

 

64. The  former administration's actions by entering into the  MOU, and the statements it made to reassure depositors and policyholders, was necessary to prevent a run on the Trinidad and Tobago financial system and to preserve the integrity of and confidence in the financial sector.  

This point is well made in paragraph 38 of the statement annexed as W.D.4, which states that if news of the issues facing the Group "leaked out and the rate of withdrawals continued and other developments were made public this would undoubtedly result in a run on CIB and Clico with a very real risk to the stability of the financial sector and ultimately of Trinidad and Tobago.”

 

 

65. In a statement to the House of Representatives on Monday 2 February 2009, KNT stated that "the actions [GORTT] has taken will permit an orderly restructuring of the institutions and safeguard the interests of our citizens who are depositors, insurance   clients,   and   pension  fund   members".      She  further  stated  that  the intervention was "timely   and  necessary",  and that  it  was "taken   to  protect  our financial system".  

 

 

66. Between January and April 2010, as part of the ongoing discussions aimed at formulating  a comprehensive  approach  to the  problems at  Clico,  GORTT again considered the reasons for intervention.   It was clear that the objectives of the intervention were:

(a) to  protect  the  country's   economic  and  financial   system  from  risk  and  to restore confidence;

(b) to protect  resident policyholders and depositors in the insurance and financial services companies of the 

CLF group;

(c) to continue Clico and BA as going concerns as the means of restoring confidence and maintaining system 

stability;

(d) to repay third partyCIB depositors;

(e) to protect other system exposures that might be trans mitted through CMMB;

(f) to determine and pursue accountability within the group for the problem; and 

(g) to recover funding from wherever possible within CLF

 

 

67. In the period from GORTT's  initial intervention until early in 2010, various statements  were  made  in  relation  to  Clico,  all  of  which  are  referred  to  in the Maharaj Affidavit and/or in the exhibits thereto.

 

 

68. In order to protect the country's  economic and financial system from risk and to  restore  confidence,  and  to continue  Clico  as a going  concern  as a means of restoring   confidence   and   maintaining   system   stability,   it   was   essential   that policyholders   and  investors  maintained  confidence  that   their  investments  were protected. It was to this end that those statements were made.

 

 

69. Even at this early stage, GORTT was aware that certain statements had been made creating an expectation on the part of Clico policyholders resident in Trinidad and Tobago arising from the following words: "I wish to reiterate this Government's commitment to ensure that depositors' assets will not be at risk' as stated by Tesheira in the Statement for the CIB\Clico Media Conference of 30th January 2009. In the media release of GORTT  and  CBTT  dated  30th January 2009, it is further stated: "The  Government  will provide funding support to fully back Clico and BAICO to meet any Statutory Fund deficits that might emerge after the company has made all possible arrangements to place satisfactory levels of cash and other assets into the Statutory Fund in order to ensure the short as well as medium and long term liquidity and stability of Clico".

 

 

70. It was clear from April 2009 that Clico and the wider Group needed to be restructured.    Otherwise,  Clico  would  have  been  forced  into  liquidation,  which could have had a devastating effect on the financial system and the wider economy.

 

 

71. Between  30  April  2009  and  March  2010,  GORTT  and  CBTT  worked  to manage the initial public panic and to begin to ring-fence risks within the CLF group. In  relation  to  the  insurance  companies,  GORTT  focussed  on  the  deficit  in  the Statutory Funds and provided an injection of funds to Clico, which is explained in greater detail below. Similar action was also taken in relation to BA.

 

 

72. This  injection  of  funds  had  allowed  GORTT  significant  breathing  space, quelled   panic,   and  allowed   Trinidad   and  Tobago   to   satisfy   the  concerns   of international  rating agencies  (which  had  immediately  put the country  on  negative watch  when  the  crisis  broke). However,  the  funds  made  available  could  not realistically cover a demand for liquidity that could have realised all the short term policies, including EFPAs, issued by Clico. The liabilities under those policies amounted to approximately $13 billion.   It was therefore imperative that GORTT find a way to address the issue of Clico's liabilities and restructure its business.

 

 

73. From the information that came to me it appeared  that at the time that the MOU was signed the intention had been that certain valuable group assets,such as shares  in  RBL and  MHTL,  could  be sold  or  collateralised.    However,  it  became apparent that this could not happen, because:         

(a)  the majority of Clico's RBL shares were held in its statutory fund (which was significantly in deficit); 

(b) the remainder of Clico's RBL shares were subject to security in favour of CIB;

(c) most  of the RBL  shares  owned  by CIB  were  

hypothecated  to  secure  that company's  borrowings; 

(d) dealings in the MHTL shares owned by the Group were subject to the terms of a shareholders' agreement.

 

 

74. Given  the  size  and  scope  of  the  Group's   business,  and  notwithstanding GORTT's intervention,  there  remained  substantial  systemic  risks  inherent  in  the financial situation and condition of the Group.  These included its third party as well as its related party debt, particularly as they impacted on state-related institutions and on Clico itself.