Should PNM govt bail out HCU?

 
 
 
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BG VIEW

ANTHONY WILSON

Harry Harnarine, the former head of the HCU, leads employees and shareholders outside the Ernst & Young building in St Clair.
Photo: Shirley Bahadur

What is our record in this country of ensuring that those who led financial institutions into perdition are called to account? What is our record of ensuring that those who were responsible for monitoring and regulating our financial institutions are called to account?

On Monday, an organisation calling itself the Credit Union Members Group (CRMG) called on the Government to provide a $300 million bailout to the HCU Group of Financial Companies. In effect, this group wants taxpayers to provide a loan of $200 million and a straight cash infusion of $100 million to this insolvent financial institution.

According to the CRMG, if the Government does not take action to prevent the liquidation and closure of the credit union, HCU’s shareholders and depositors, who are said to number more than 100,000, will face “imminent financial catastrophe.”

The request for the bailout package is being positioned in the context of the current global financial crisis in which “governments and central banks throughout the world are being called upon to provide trillions of dollars to rescue and bail out ailing financial institutions.”

There are several points that need to be made about the request by this credit union group for taxpayers’ money:

n Governments and central banks have provided support to financial institutions when there is a significant risk that the failure of the institution (commercial bank, investment bank, mortgage institution or insurance company) could lead to systemic problems for economies or financial sectors.

The US Government stepped in to save Freddie and Fanny as well as the AIG because failure to do so would have meant (even more) calamity for mortgage holders, pension deposits and foreign currency reserves throughout the world.

Given the fact that once exotic (but now toxic) financial instruments generated by Wall Street were sold around the world—but apparently not in T&T—there were fears that the collapse of institutions that were considered too large to fail could cause institutions in other countries to come tumbling down.

Apart from stepping in to save specific institutions, in cases where there is no evidence that the closure of a bank will cause systemic risk, governments and central banks around the world have allowed some financial institutions to be acquired by others at a fraction of the value of the assets. In other cases, financial institutions have been allowed to go into liquidation while some investment banks have been forced to change their method of doing business into something that more closely resembles commercial banks.

Question: Will the closure of the HCU cause systemic risk to the local financial sector?

n Governments and central banks around the world will ensure that those who were responsible for the evaporation of trillions of dollars in shareholder value will be held accountable. We are now in the mode of trying to ensure that the fire that threatens to engulf the global financial sector is put out. But as soon as things settle down, it is guaranteed that the billionaire CEOs and their financial wizards will be called to account for their misdeeds. Forensic investigators will be let loose to probe whether there was any hint of financial impropriety in the collapse of institutions. The judgments of those who arranged to receive hundreds of millions in compensation will be questioned....repeatedly. Some of them, no doubt, will be charged, convicted and jailed.

And the scrutiny will extend not only to those who profited while financial companies were collapsing but to the supervisors and the regulators who were being paid to raise red flags but didn’t.

Questions: What is our record in this country of ensuring that those who led financial institutions into perdition are called to account? And what is our record of ensuring that those who were responsible for monitoring and regulating our financial institutions are called to account for doing little when cheques were not honoured.

If one can detect a mood coming out of the financial meltdown it is that those who were reckless and irresponsible with other people’s money should not be rewarded in any way.

What is our record of ensuring that directors who served on the boards of companies that ignored the existing regulations and any semblance of financial prudence are prevented from serving in similar capacities again?

n The most important lessons from the crisis of the last few weeks is that regulation and surveillance are extremely important. What are our regulators doing to prevent further financial failure given our local context of interlocking directorates, insider trading and unregulated related party lending.

n It is clear that the mismanagement of HCU has caused significant financial pain to those who were either blinded or refused to see what was happening there.

There are few governments in the world that would ignore people in pain. On the other hand, it would be extremely reckless for the Government to provide a bailout to HCU without ensuring that taxpayers are eventually compensated and a cleanout of the credit union takes place. However receiving taxpayers’ money cannot be a licence to continue business as usual.

There is significant irony in the fact that the Government is now being called upon to provide financial assistance to the HCU when, six years ago on June 11, 2002, employees of the Hindu Credit Union, led by their president Harripersad Harnarine, converged upon Balisier House, demanding an apology from and the resignation of then junior finance minister Conrad Enill.

The only crime that Enill committed was saying that the HCU was being probed by the Credit Union Supervisory Unit of his Ministry and expressing “personal concerns” about the rapid growth of HCU.

Isn’t it incredible that for saying things which now appear prescient, Enill was required to apologise under the duress of a mob of HCU employees calling for his blood?

Will Enill, who is now chairman of the PNM and arguably T&T’s most important minister, forget his HCU experience in 2002? Will it matter?

It is a testament to the mood in the country that a surprisingly large number of educated people are so sour and pessimistic about what’s happening in T&T at this point that they are just waiting for the sky to fall and crush the Government, which includes the Manning administration and the Panday-led opposition.

There are many who argue, for example, that if our neighbour’s house is on fire that we should immediately start looking to douse our mansion before we even stop to analyse why our neighbour decided to build his house with straw, who decided that it was a good idea to spread litres of gasoline on neighbour’s floor and when was the flambeau thrown in.

Even now, I am hearing people shouting at their salmon-coloured tabloid: “You foolish boy. If your neighbour’s house is on fire, you don’t have time to conduct a prior forensic enquiry.”

So very true. But there are neighbour and then there are neighbours.

Although the residents of neither community would ever acknowledge it, Goodwood Park and Carenage can be described as neighbours and the folks who live in Haleland Park can be described as the neighbours of those who live in Bourg Malatrese.

The way the unfolding events in the US financial markets (the nationalisation of Freddie and Fannie as well as AIG, the bankruptcy of Lehman Brothers and the sale of Merrill Lynch) should be framed is: If a house in Carenage was on fire, would the people of Goodwood Park need to form a bucket brigade to wet their houses? Probably not.

Unless, of course, all of Carenage has burnt to the ground and the winds are blowing in the direction of Goodwood Park.

To extend the analogy between neighbourhoods in Trinidad’s western peninsula and what’s happening on Wall Street in New York, it could be argued that a significant portion of Carenage is on fire and it may be that the wind is threatening to change.

Certainly, if the US Government had allowed AIG to collapse into bankruptcy the contagion effect of the resulting fall-out would have caused smoke to get in the eyes of many people in this country—or at least dust in their face.

But, even so, AIG is a huge, well-diversified company and, according to New York newspaper reports yesterday, its problems were with the group’s London-based financial products unit, which was exposed to securities tied to the value of home loans.

The more interesting question is whether T&T’s housing market could experience a melt-down similar to what has taken place in the US and what is taking place in Britain now.

The issue is not simply the decline in house and property values. In T&T, as in all other free market systems, the price of assets go up and come down as a result of the underlying economic conditions.

The problem in the US was exacerbated by the fact that the houses of cards of AIG, Lehman Brothers, Citigroup, Merrill Lynch and others were built on the sand of an interconnected web of risky, debt-backed paper which was destined to collapse once the primary asset (houses) began to decline in value.

As the New York Times put it in Wednesday’s edition referring to AIG, “The financial products group sold credit-default swaps, complex financial contracts allowing buyers to insure securities backed by mortgages. Many of the buyers were European banks. As home values have fallen, the value of the underlying mortgages has declined, and AIG has had to reduce the value of the securities on its books.”

The problem in the US was not so much the decline in property values but the fact that mortgages there had been securitised (bundled into securities which could then be sold) and leveraged (monies borrowed against the value of the asset, which was liable to decline.)

Our secondary market for mortgages is not nearly as developed, widely-held or as profitable as the US. And, one hopes that the bankers who have granted mortgages over the last consecutive years of positive economic growth would have been more prudent than their colleagues in the US.

A related point which should be noted is that there is a direct relationship between Government spending and the value of the property and housing market in this country just as there is a direct relationship between Government spending and the number of T&T nationals who are employed.

While less government spending will probably lead to a lower inflation rate, it will also lead to higher unemployment in T&T.

More people out of jobs in this country means lower aggregate incomes which will lead to lower aggregate demand which could lead to problems in T&T’s real estate and retail markets.

 

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