Property of Christopher Shand Christopher.shand@yahoo.

com

POLICYHOLDERS AND INVESTORS EMBROILED IN THE CL FINANCE DEBACLE ARE ENTITLED TO EXPECT A SOLUTION IN THEIR FAVOUR SINCE REGIONAL GOVERNMENTS AND CENTRAL BANKS REPEATEDLY ASSURED THEM THAT THEIR INVESTMENT WAS GUARANTEED AND OR SAFE.

Property of Christopher Shand Christopher.shand@yahoo.com

The recent corporate failure of the Caribbeans largest financial group, the Trinidad based CL Financial Limited, has sparked the interest of many and has also raised a plethora of issues in relation to what many believe to be the worst financial crisis experienced by the region. Central to the discussion surrounding the collapse is the role to be played by the government in the rescue or rehabilitation effort, in light of certain guarantees they had made to policyholders of the groups investment companies and investors of the other subsidiary companies of the group. While some believe that government should intervene to bailout out the group on the ground that it made certain guarantees in relation to the safety of investments, or on the ground that it exercised poor regulation which allowed the group to operate too freely or even on the basis that it was to extend its hand as the lender of last resort to a company that was too big to fail, there are others who take the view that a bailout would serve as an incentive to poor monitoring of a board by the shareholders, it would be at the expense of taxpayers and there would have also been no lesson learnt from the difficulty they had encountered. This paper is divided into six parts. Part 1 will provide an overview of CL Financial Limited (CFL) and the financial debacle in which the group found itself. Part 2 will then outline the role of government in regulating financial institutions and detail the regulatory framework that was existing in Trinidad and Tobago. Part 3 places focus on the role of the Board of Directors to manage the affairs of the company, placing special attention on group enterprises. Part 4 seeks to illustrate the duty of shareholders to monitor actions of the Board and its officers. Part 5 will place the auditors under the microscope. Lastly, Part 6 will provide a discussion as to whether government should intervene to bailout the collapsed institutions in order to make payment to investors and policyholders. CL Financial Limited is a privately owned conglomerate that was established in 1993 as a holding company for Colonial Life Insurance Company (CLICO) which started its operation way back in 1936 and is the flagship of the CL Financial Group. CLICO rose to prominence as the largest insurance provider in Trinidad and Tobago after its acquisition of portfolios of other insurance companies. This rise was also occasioned by the growth of the Holding company CL Financial Limited. To illustrate the rapid expansion of the regional based conglomerate, the Chairman Lawrence Duprey, in a letter to shareholders boasted Today CL Financial has a presence on virtually every major continent in the world, making it the largest, diversified

Property of Christopher Shand Christopher.shand@yahoo.com

conglomerate in the Caribbean. Our investments are spread over 65 companies in 40 countries worldwide with an asset base in excess of TT$100 billion.1 The geographical spam of CLs business grew from Trinidad and Tobago to the Caribbean to later include North America (especially Florida), South America (especially Guyana), the UK and Europe and the Gulf (especially Oman).2 The report also emphasized that the group had diversified its investments to include enterprises operating within the Insurance sector, Banking and Financial Services, Real Estate, Manufacturing, Retail and Distribution, Forestry and Agriculture, Energy and Petrochemicals and Health Services. Several factors precipitated the collapse of CFL, but the most immediate cause was the companys illiquidity when faced with numerous withdrawal requests triggered by a fall in energy and real estate prices, two sectors in which the group had invested heavily. Following a request by the groups chairman Lawrence Duprey to the governor of the Central Bank of Trinidad for assistance, the central bank presented a bailout proposal. This bailout would comprise an immediate payment of $75,000 to depositors with a principal not exceeding $75,000, and those with a principal exceeding that sum would be paid in annual installments over a 20-year period by means of a government bond. One question that remains in the minds of many is how this regional financial giant found itself in this messy financial situation. A number of reasons have been put forward, which includes poor corporate governance of the group enterprise, poor risk management, an ineffective and outdated legal framework for regulation of financial entities among others. It is common knowledge that it is governments duty to regulate the financial entities that offer services to the populace. However, there is far less agreement as to what is the objective of this regulation. While some believe that financial regulation should prevent the failure of a financial institution, others counter that it should only ensure that the conditions existing are favorable to the effective operation of those institutions that are being regulated. It would seem as if the latter view holds to be true. Rohan Barnett, Executive of the Financial Service Commission which is the regulatory agency in Jamaica has stated that the objective of regulation is to protect investors

1 2

CL Financial Limited Annual Report 2007 Stumbling Caribbean Financial Crisis Management, The Gleaner, September 16, 2011.

Property of Christopher Shand Christopher.shand@yahoo.com

and to promote integrity, efficiency and transparency in the market. It is his belief that regulators exist not to prevent corporate failure but to increase the likelihood that financial institutions make prudent decisions regarding the funds that have been invested and to also try to ensure that the customers receive the information that is necessary to make cautious and sensible decisions. The myth that the purpose of regulation is to prevent failure was blatantly rejected and put to rest by Mr. Barnett, who says that the notion that any financial regulator can totally prevent the failure of a financial organization is false no system of regulation can ever eliminate the possibility of corporate reporting or governance failures it is impossible to achieve zero failure and any attempt to do so would destroy wealth creation as the regulatory measure that would be employed would artificially constrict market activity.3 This position has also been supported by Terrence Farrell who put it really nice when he stated that fraud may be the trigger for a collapse of an institution, but it is not the business of the financial regulator to prevent fraud, but rather to ensure that financial institutions have corporate governance systems and practices that minimize fraud.4 There has been wide speculation that the legal framework for financial regulation in the twin island republic was grossly inadequate to effectively regulate financial institutions. It has been reported that the Governor of The Central Bank of Trinidad Ewart Williams placed some amount of blame for the collapse on the financial monitoring system which he considered to be rudimentary, non-existent and fragmented. He believed that a number of weaknesses in the operations of the over-leveraged financial group were missed and that this led to the collapse. 5 This conclusion has also been supported by Mariano Browne who suggested that the facts pointed to weak regulation and inadequate legislation as it was not the norm for financial institutions to go bust overnight. To support her stance, Browne noted that there was no effective legislative framework to supervise the operations of the CL Groups flagship company CLICO. She noted that though the amendment to the Banking Act (No 20 of 2004) brought

Rohan Barnet, Executive Director, Financial Services Commission (Jamaica), Presentation Does Financial Regulation Prevent Institutional Failure?, Financial Services Commissions 10 th Anniversary Investor Briefing, Kingston, March 23, 2011.
4 5

ibid CL Financial Collapse a failure of regulation, The Gleaner, March 17, 2010

Property of Christopher Shand Christopher.shand@yahoo.com

Insurance companies under the supervision of the Central Bank, it largely left untouched the provisions of the 1980 Insurance Act and was not a true reflection of the recommendations set forth by the International Association of Insurance Supervisors (IAIS) which presented a set of Insurance Core Principles considered necessary for a supervisory system to be effective and were intended to be the basic guideline to be followed in all jurisdictions. Browne also chronicled a listing of the inadequacies that characterized the legal framework. As it related to regulation of entities with a corporate structure similar to that of CL Financial Limited, Brown hit the nail on its headwhen she explained, Not the least of its egregious deficiencies, the 1980 Act does not provide for the existence of a Financial holding company nor for that matter a diversified one, and therefore provides no guidance on how a diversified holding company would be monitored. This difficulty was a preexisting condition prior to the consolidation of supervision in 2004.6 Wayne Soverall has also lent support to the argument that the financial system in which CL Financial Limited operated was poorly regulated. According to Soverall, although the business model was high risk and dangerously flawed, the regulators were not blameless. deficiencies in the operations of CLICO highlighted the inadequacies in the legislative framework of CBTT [Central Bank of Trinidad and Tobago] which in 2009 still did not have the authority to conduct on-site supervision, share information with other regulators or demand the required changes from CLICO even though since 2004, regulatory authority for insurance companies and pension funds had been transferred from the ministry of finance to the CBBT.7 There have also been assertions that though the regulations were badly in need of modernization, the regulators made a bad situation worse as they failed to enforce violations of what was in place. In an article by William Layne, it is stated that CLICO was allowed to operate for several years in violation of provisions of the Insurance Act. He stated In August 1998, a report prepared in the Office of the Supervisor of Insurance of Trinidad and Tobago [who was then responsible for regulating Insurance companies and from whom the Central Bank took control]
6

Mariano Browne, Address Too Big to Fail: An Expensive Lesson, The 4 th Biennial International Business, Banking and Finance Conference, Port of Spain, June 22-24, 2011.
7

Soverall, Wayne (2012) CLICOs Collapse: Poor Corporate Governance, American International Journal of Contemporary Research, Vol. 2, No. 2

Property of Christopher Shand Christopher.shand@yahoo.com

indicated that a review of the files of Colonial Life Insurance Company (CLICO) had since 1992 found it difficult to satisfy the Statutory Fund Requirement.8 This was a very dangerous situation that the regulators had allowed to exist, considering the fact that the purpose of the statutory fund was to serve as a fund to indemnify all policyholders in the failure of the insurance company. It is common knowledge that though ownership of a company is usually in the hands of shareholders, these individuals are however unable to have the relevant control, this essential element of corporate governance is usually vested in a Board of Directors and their appointed officers. This foundational principle has been enunciated by many, including well known jurist Lord Hoffman who says that Under company law the management of the business of a company is entrusted to the board of directors.9 In all corporate governance systems, a board, which is selected by shareholders and acts collectively, is given central role in the operations of the company, existing primarily for the purpose of making the key corporate decisions and supervisingthe management. This role has been summed up nicely by Salacuse, who says that, Together with guiding corporate strategy, the board is chiefly responsible for monitoring managerial performance and achieving adequate return for shareholders, while preventing conflicts of interest and balancing competing demands on the corporation.10 The control granted to the Board is exercisable by the Board alone and it is only exceptional circumstances that the shareholders will be allowed to interfere with their actions. There is extensive case law on this principle, with the most oft-quoted passage being that of Green LJ in John Shaw and Sons Ltd v Shaw. In this case, Green LJ stated, A company is an entity distinct alike from its shareholders and its directors. Someof its powers may, according to its articles, be exercised bydirectors, certain other powers may be reserved for theshareholders in general meeting. If powers of management are vested in the directors, they and they alone can exercise these powers. The only way in which the general body of the shareholders can control the

http://bajan.wordpress.com/2012/03/06/recent-financial-failures-in-the-caribbeanwhat-were-the-causes-and-whatlessons-can-be-learnt/
9

Hoffman, Leonard H. (1997) The fourth annual Leonard Sainer lecture: the Rt Hon Lord Hoffman, Company Lawyer
10

Salacuse, Jeswald W. (2004) Corporate governance in the new century, Company Lawyer

Property of Christopher Shand Christopher.shand@yahoo.com

exercise of the powers vested by the articles in the directors is by altering their articles, or, if opportunity arises under the articles, by refusing to re-elect the directors of whose actions they disapprove.They cannot themselves usurp the powers whichby the articles are vested in the directors any more thanthe directors can usurp the powers vested by the articles in the general body of shareholders.11 Directors, by virtue of their office owe certain fiduciary and statutory duties to their companies. These duties have been imposed to ensure that the Board is kept within the limits of the power that has been conferred. It has been articulated that a director like a trustee is in a fiduciary relationship with his company and is expected always to act in good faith and for the benefit of the company as a whole.12 Consequently, directors are usually mandated to act for a proper purpose and in the best interest of the company. They are usually required by law not to have a conflict of interest and duty, neither are they allowed to make a secret profit. The statutory provision says that Every director and officer of a company shall in exercising his powers act honestly and in good faith with a view to the best interest of the company.13 It has been suggested by a leading Caribbean academic, that this reformed statutory provision is a catch all standard [that] encompasses the various fiduciary duties established at common law with room for additional duties to be implied.14 Hence, it is clear that directors will not be allowed to act in a manner that does not conform to the objectives for which they were appointed. There is no shortage of allegations that the Directors and Officers of CL Financial were not blameless in the execution of their duties to the company. Allegations that have been levied include financial misconduct, poor risk management, conflict of interests, interlocking directorships, excessive related-party transactions and others. An article in The Freeport News reported that an ongoing Commission of Enquiry into the management of the Collapsed Colonial Life Insurance Company (CLICO) has revealed that executives paid themselves hefty
11 12

[1935] 2 KB 113 at 134

Abugu, Joseph (2011) Directors' duties and the frontiers of corporate governance, International Company and Commercial Law Review
13 14

Trinidad and Tobago Companies Act, s. 99(1)

Goldson, Suzanne (2003) The Commonwealth Caribbean Territories: The Reform of the law relating to the duties of Directors, Company Lawyer

Property of Christopher Shand Christopher.shand@yahoo.com

salaries to the detriment of policyholders and investors.15 In supporting this claim, it was later revealed that Gita Sakal, the former corporate secretary of CL Financial, was paid a U.S. $35,000 monthly salary and was entitled to a U.S. $2 million annual bonus. [The Former Chief Financial Officer of CLF, Michael] Carballo said [that] a debit of U.S. $5 million was [also] made from CL Financials U.S. dollar account at Royal Bank to pay Sakals consultancy firm, Corporate Consultants Ltd.16 This clearly points to the conclusion that the Directors were acting not for the general benefit of the company but only for their individual financial gain. This situation is even worsened when regard is had to the fact that it has been said that Gita Sakal signed both the invoice and the bank instructions to have the U.S. $5 million funds debited to her consultancy firm17, which also highlighted the improper segregation of duties and that the corporate secretary who was an essential officer of the company was in a position where she had two competing interest, one to CL and another to her own firm. It is well known that the CL Financial group invested in many high-risked ventures which were considered too risky for insurance companies. The Governor of Trinidads Central Bank, Ewart Williams is reported to have stated that one of the more glaring vulnerability within the group was the total absence of a risk management framework18 It is no wonder he believed that the glaring vulnerabilities within the management of the group when coupled with the poor regulatory environment was a potentially lethal combination, that was made even worse with the decline of energy and real estate prices which were two very risky markets in which they had invested heavily. Mariano Browne also believes that management was engaged in too much risk taking. She said that the indicators point not merely to an over leveraged financial institution in breach of many core principles, but there was also weak risk buffers or reserves. In short the group and the financial firms were severely undercapitalized and over exposed to risk.19

15 16 17 18 19

CLICO Enquiry reveals trail that led to collapse, The Freeport News, March 3, 2012. ibid ibid CL Financial collapse a failure of regulation. The Gleaner, March 17, 2010.

Mariano Browne, Address Too Big to Fail: An Expensive Lesson, The 4 th Biennial International Business, Banking and Finance Conference, Port of Spain, June 22-24, 2011.

Property of Christopher Shand Christopher.shand@yahoo.com

Another well-known fact is that there was no effective separation of the assets of individual companies. The norm it was, for assets to be taken from the more profitable subsidiaries such as CLICO, and reinvested into other ventures, such that CLICO became widely regarded as the cash cow for the CL Financial Group. Soverall believes that this contributed significantly to the collapse. He said that under the business model adopted by the corporate group, CLICO was the primary source of deposits that were used to finance CLFs expansion through investments and acquisitions held in the name of other entities in the group. Some of these enterprises were wholly owned and managed by CLF, others were simply investments in which CLF did not participate in management, and some were a mixture of both. In some cases CLF borrowed from financial institutions to invest, and in most cases, it used CLICO, CIB, BA, and CMMB as the conduit to purchase investments or borrowed from them to do so. In short, CLICO became the guarantor for many of CLFs assets most of which were heavily pledged and, therefore, limited in terms of the potential proceeds from asset sales.20 It is extremely clear that there was no shortage of incompetent management behavior and practices at the CLF Group. However, it should be noted that this problem is not new to corporate governance as other jurisdictions have been trying to figure out how to grapple with such situations. Sulacuse in his writings has noted that, the principal concern of investors, practitioners, and scholars of corporate governance in the United States has been how to protect the legitimate rights and interests of shareholders when faced with managers who control the corporation.The collapse of Enron and the financial scandals at other large American corporations have re-ignited public concern with the question of corporate governance in the sense of how to devise systems, rules, and institutions that will induce corporate executives to manage corporate assets in the interests of the shareholders, ratherthan their own.21 This Salacuse believes is a direct result of the divorce of ownership which rests in the hands of shareholders from control, which has been delegated to the directors and officers. When one considers the plentitude of powers that have been delegated to those in control, it raises the question, who is responsible for ensuring that the use of such powers is not abused or
20

Soverall, Wayne (2012) CLICOs Collapse: Poor Corporate Governance, American International Journal of Contemporary Research, Vol. 2, No. 2
21

Salacuse, Jeswald W. (2004) Corporate governance in the new century, Company Lawyer

Property of Christopher Shand Christopher.shand@yahoo.com

that the exercise is within the limits of what is allowed. The traditional watchdogs of the use of management powers have been the shareholders themselves who are considered to be owners. According to McConvil, It has traditionally been assumed that company directors were sufficiently accountable to shareholders as owners given that directors are normally elected by shareholders at a general meeting, as well as because directors are constrained in the way in which their power can be exercised owing to a number of legal duties (under statute, equity and the common law) to which they are required to adhere.22 Shareholders can exercise their supervisory role through their general meeting in which they have an opportunity to fully discuss the actions of the directors and if allowable, take necessary action. The importance of the general meeting received attention in the case of Isle of Wight Railway v Tahourdin, where the court refused the directors of a statutory company an injunction to restrain the holding of a general meeting, one purpose of which was to appoint a committee to reorganize the management of the company. According to Cotton L.J. It is a very strong thing indeed to prevent shareholders from holding a meeting of the company when such a meeting is the only way in which they can interfere if the majority of them think that the course taken by the directors, in a matter intra vires of the directors is not for the benefit of the company.23 It must however be noted that a later case clearly established that the division of power between the board and the general meeting was entirely dependent upon the statutory contract, the articles of association, which in our context refers to the articles of incorporation. Furthermore, individual shareholders can take steps necessary to become cognizant of the actions of the Board to which they should be privy. According to Rohan Barnett, by far the best way for the customers of financial institutions and investors in financial markets to protect their monies is to do research, ask questions and play an active role in monitoring their investments.24 He further goes on to say that while the regulators have a very important role to play in the regulation of financial institutions, their function cannot replace the responsibility of the prudent institutional or individual investor.

22

McConvil, James (2005) The separation of ownership and control under a happiness-based theory of the corporation, Company Lawyer
23 24

(1884) L.R. 25 Ch. D. 320

Rohan Barnet, Executive Director, Financial Services Commission (Jamaica), Presentation Does Financial Regulation Prevent Institutional Failure?, Financial Services Commissions 10 th Anniversary Investor Briefing, Kingston, March 23, 2011.

Property of Christopher Shand Christopher.shand@yahoo.com

Shareholders of a company are usually greatly assisted by the reports of independent auditors who are empowered to present an accurate report of the financial position of the company. This allows for an objectively ascertained indication of the financial status of the company. Abugu considers the auditor to be the shareholders watch dog on corporate finance. He accordingly believes that audit is the process by which compliance with statutory and accounting standards are measured so asto ensure that management presents a true and fair view of a company's financial performance. 25 Layne has suggested that the auditors must also take blame for the collapse as they were found lacking in the execution of their duties. In support of his position, he said that though CLICO Trinidad and Barbados Life Company had failed to satisfy their obligations under the statutory indemnification fund, no mention was made of this in the companys audited statements. Consequently, policyholders would have been effectively prevented from realizing the true financial position of the company. Other concerns have also been raised, one such being the disparity between the audit done by Price Waterhouse Coopers and another accounting firm Ernst & Young of CLICO Investment Bank. When the audit was performed by Price Waterhouse Coopers in December 2007, the balance sheet reflected assets totaling $12.587 Billion and liabilities totaling $11.699 Billion. Another audit done by Price Waterhouse Coopers showed that at January 31, 2009 the assets of the company amounted to 12.264 Billion and liabilities amounting to 10.692 Billion. However, the audit done by Ernst and Young of the same period brought startling findings, showing total assets of a mere $6.387 Billion and liabilities of $11,080 Billion. The revelations made have caused a lot of eyebrows to be raised amidst claims of poor financial assessments and inspections. Accordingly, Afra Raymond has asked, Where did all this money go? For $5.9 Billion in assets to vanish in 13 months is an incredible failure of corporate governance and state oversight it seems that neither the auditors nor the regulators performed properly in this case.26 Raymond also sites paragraph 7 of the affidavit of Ernst and Young Director Maria Daniel to support his point. In the affidavit, it was stated that The financial record keeping in CIB was weak. The financial accounting system was not
25

Abugu, Joseph (2011) Directors' duties and the frontiers of corporate governance, International Company and Commercial Law Review
26

http://barbadosfreepress.wordpress.com/2010/09/17/when-did-cl-financial-and-clico-actually-collapse-answerlong-before-it-was-announced/

Property of Christopher Shand Christopher.shand@yahoo.com

appropriately designed and implemented27 The affidavit also stated that bank reconciliations were not properly prepared and that CIBs reconciliations contained errors that were not corrected in a timely manner, there was little evidence to suggest that the loan portfolio was being properly administered by management and that there were inadequate efforts to recover delinquent loans, amongst other problems relating to loan arrears and their investment portfolios. With all these prevailing conditions it would seem as if the fiscal management when combined with the other shortcoming of the CF group made for a lethal combination. Having considered all the relevant facts, one can then tackle the central issue, whether the government should be obliged to intervene to compensate investors and policyholders for their loss, and to the extent that such investors agree to. Though the government has traditionally been expected to be the lender of last resort, it is my opinion that they should not extend their hand any further than they already have, to help in any rescue or rehabilitation of the failed Caribbean corporate giant. Several reasons account for this which I will deal with individually. These include the moral hazard of intervention, the use of taxpayers money to fund a bail out as well as allegations of excessive political interference that existed. Moral hazard, a term used widely in economics, posits that if some one pays you for your accidents, you will spend less time trying to avoid them.28 It consequently suggests that if government is to engage in a bailout of financial institutions then that institution would have an incentive for engaging in risky behaviour, as government would step in to assist where there was financial difficulty. Ayotte and Skeel Jr expressed their view in another way, stating, Moral hazard is the familiar concern that someone who is protected against the consequences of a risk has less incentive to take precautions against the risk.29 The effect of government intervention has negative consequences on corporate governance that goes way beyond the particular company being rescued. Dijkstra and Faure have even taken the position that intervention may encourage reckless behaviour from such companies. They accordingly state that when depositors know ex ante that the government is going to bail out large financial institutions

27 28 29

ibid Stern, G.H. and Fieldman, R.J. (2004) Too Big to fail: The Hazards of Bank Bailouts, Brookings Institution Press Ayotte, Kenneth &. Skeel, Jr., David A (2010) Bankruptcy or Bailouts, Journal of Corporation Law, Vol. 35:3

Property of Christopher Shand Christopher.shand@yahoo.com

whenever they fail, they have little incentive to monitor these institutions themselves due to the fact that they will not face any damage at all30 They even extend the argument to include directors whom they believe will, in the event of a bailout have faced no legal consequences because depositors would have incurred no damage. The case has also been made that the moral hazard presented by the rescue of conglomerates such as CL Financial Limited may have even greater consequences due to the reach of the risks that they take. Herring has noted that a market perception that such firms will benefit from official support in times of stress gives them a competitive advantage completely unrelated to their ability to add value to the financial system. It dulls the incentives for creditors to demand disclosure of risky positions and monitor such exposures. Weakened market discipline will enable such institutions to take larger, riskier positions without paying appropriately higher risk premiums to their creditors. The result may be larger potential insolvencies that require still larger bailouts to forestall systemic risk.31 It is therefore clear that a bailout by government has the potential to rob the investors of the necessary lesson they were to receive as to the importance of monitoring the operations of the company they are considered to be owners of and why they must be prudent when making their investments. The argument has also been raised that a rescue will set a bad precedent as other companies will come to expect a solution in their favour irrespective of their failure in effectively managing and monitoring the affairs of the company. Furthermore, government interference is exacerbated by the fact that the moral hazard created is always at the expense of taxpayers. It is puzzling that government should correct the mistakes of CFL when high ranking company officials were allowed to blatantly squander the companys money right under the watch of these investors, and out of the public purse. In a letter to the ruling Peoples Partnership Government, attention was drawn to this. The author who is anonymous states, Why should the 25000 CLICO depositors pressure us into paying our tax dollars to fund the repayment of their loss in CLICO, when they knowingly invested in high risk ventures? Where were they when they were raking in their profits? Now they say they want 12
30

Dijkstra, Robert J. and Faure, Michael G. (2011) Compensating victims of bankrupted financial institutions: a law and economic analysis, Journal of financial regulation and Compliance
31

citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.197...

Property of Christopher Shand Christopher.shand@yahoo.com

Billion Dollars because they are dying and in need. This is another case of the poor people of Trinidad being forced to bear the burden of the mistakes of an entitled minority.32 The writer then goes on to talk about the depressing social and economic conditions of the masses and suggests that the amount being request should be used to improve their situation. This is a timely consideration owing to importance of the tax dollars within the economy and any reallocation of these funds to compensate investors for the risks they have taken on. Also relevant to this discussion is the infiltration of political interference that may lead to claims of political prefence or political bias. The possibility exists that where government rescues one financial institution and fails to do the same for another company in a similarly situated position, there may be allegations of political favouritism. CLICO has become intensely political. Its former chairman, Lawrence Duprey, was openly aligned with the former leader of the UNC, one of the constituent parties of the current administration, the Peoples Partnership, while the CL Financial Group Financial Controller, Andre Monteil, was the Treasurer of the PNM and a constituency campaign manager. The former Finance Ministers late husband was a senior executive of CLICO and the former Junior Minister of Finance was himself once a senior executive of the CL Financial group. Two other senior CL Financial executives were government ministers in the UNC government. CLICO is known to have made campaign contributions to the PNM and more than likely to the UNC as well.33 When one considers the level of political connections and cronyism between CF Financial Limited and the ruling Peoples Partnership government, it is almost certain and justifiable that political questions will arise. It will be argued by many that a bailout may be necessary as CFL was too big to fail due to its size and its reach. It is argued that CFL played a very integral role in Caribbean economies and that its failure would possibly threaten the solvency of other institutions throughout the region that were financially connected to it and to each other. The Governor of the Central Bank has given support to this argument, stating that the difficulties being experienced by CFL presents significant contagion risks to the entire financial landscape of Trinidad and Tobago and possibly

32 33

To the Peoples Partnership Government, Trinidad Guardian, October 29, 2010.

Terrence W. Farrell, Presentation on The Political Economy of Financial Regulation: Global and Caribbean Perspectives, The 25th Adlith brown Memorial Lecture, the 42nd Annual Conference of the Caribbean Centre for Money and Finance, November 10, 2010.

Property of Christopher Shand Christopher.shand@yahoo.com

the entire Caribbean. While this may be true, there is clear evidence that the end to be achieved is not justified by the means. It is my belief that a rescue of such large institutions rather than assisting economic recovery, actually further promotes a culture of moral hazard within the corporate environment. Additionally, it provides an unfair competitive advantage to those companies that engage in risky practices against the others that put into practice principles of prudent corporate governance and fiscal management. All in all, a government rescue in this case will do more harm than preserve the solvency of an important corporate giant, it will make the government hands more constrained when it comes to public spending.