State failed HCU depositors

The scathing criticisms levelled against Clico’s head, Lawrence Duprey, by PM Manning and Finance Minister Nunez-Tesheira echo the criticisms levelled against Harry Harnarine and the Hindu Credit Union. This is hardly surprising, because Harnarine received most of his financial training at Clico, and sought to pattern the astronomical growth and expansion of the HCU along the same lines as Clico.

Both Clico and the HCU wooed depositors with attractive rates of interest, and used their money to invest in new ventures that had precious little to do with their core business. Thus, Harnarine diversified the HCU and created furniture stores, travel agencies, a communications group, real estate and security, auto care, and wholesale companies. Clico diversified into methanol, international alcohol brands, property development and local and foreign real estate, to name a few. The idea was that these investments would yield great profits that would more than cover the high interest rate promised to depositors.

Thus, a credit union and an insurance company mushroomed and transformed themselves into full-fledged conglomerates; standing on one foot anchored in deposits from John Public. High-rate investments usually have the potential for higher profits, but they also have the same potential for larger losses. It is for this reason fiscal prudence requires a mixed basket of high-, medium- and low-risk investments that will protect the integrity of the financial core business and cater for depositors’ expectations. The complicated network of international banking is based on the simple premise that everyone will not seek to withdraw, simultaneously, their deposits.

This is what allows banks to invest a portion of the monies deposited, but they must hold in reserve a sufficient sum to meet depositors’ foreseeable day-to-day withdrawals. There was no balance or stability in the diverse investment opportunities pursued, and the disintegration and collapse are, therefore, a serious indictment on the failure of executive management to ensure that there were significant safe and stable investments in the conglomerate basket. It also highlights the danger of having “yes” men manning the internal checks and balances in a company that should raise a red flag and prompt restraint. The reason given by the Central Bank governor for not bailing out the HCU is amusing and pathetic.

He claimed (while sitting next to the Minister of Finance) that the Central Bank did not have jurisdiction over the HCU. The truth is, whilst the Central Bank may not, the State did, and it failed miserably in its duty to protect depositors in the HCU. In fact, the Commissioner of Co-operatives probably has more power over credit unions than the Central Bank governor does over Clico. PM Manning accused Opposition Leader Panday of bringing “ethnicity” into the debate in Parliament on the bailout for Clico. Whilst the majority of HCU depositors are Indo-Trinidadian, the Clico empire can hardly be described as a black institution.

People of all races invested in Clico, are employed by it, and they are all suffering the same way. It is a relevant factor that Clico’s instability could have affected the entire financial system, but the primary stated motive of the Government has been “to protect depositors and policy-holders.” If this is the aim, then why should the State move to protect one set of depositors and not the other? The US Congress has stoutly opposed the use of taxpayers’ money to bail out failed corporations. It refused to be bullied and blackmailed on the basis that it is necessary to improve the overall health of the financial system.

Closer to home, many financial institutions have failed without any government support. Workers Bank and BCCI are but two recent examples. The problem is not limited to the financial sector. I have judgments for injured road accident victims against many insurance companies that have folded. These victims are sometimes paralysed or disabled, and have no money to care for themselves, but nobody rescued them when Citizen Insurance and Goodwill Insurance went belly up. The size of the hole that would have been created in the economy by Clico versus HCU ignores the larger principle of government intervention and bailout using public funds to resuscitate failed private commercial ventures whose profits, in the good years gone by, were theirs to keep.

The HCU has asked for a loan of $300 million, and I supported the Government’s decision not to assist the HCU, because taxpayers should not foot the bill for Harnarine’s mismanagement. The bailout of Clico, however, has caused me to rethink this position. What is good for Clico must also be good for the HCU, regardless of how small it may seem in the larger scheme of things. The cry of discrimination by the HCU has picked up steam, and is bound to leave a sour taste in the mouth of HCU depositors.

By Anand Ramlogan  2009-02-07