An­tho­ny Wil­son

On No­vem­ber 24, in pi­lot­ing the Fi­nance Bill,Fi­nance Min­is­ter Win­ston Dook­er­an made two ex­tra­or­di­nary rev­e­la­tions on the

Cli­co pol­i­cy­hold­ers is­sue,which seemed to have been missed by this coun­try's nor­mal­ly vig­i­lant par­lia­men­tary re­porters and the rep­re­sen­ta­tives of the Cli­co pol­i­cy­hold­ers groups. Speak­ing about his ze­ro-coupon pro­pos­al in which he pro­pos­es that Cli­co pol­i­cy­hold­ers should re­ceive 20 or 21 an­nu­al notes rep­re­sent­ing five per cent of their prin­ci­pal in­vest­ments in Cli­co poli­cies, Mr Dook­er­an said that the pol­i­cy­hold­ers would re­ceive a 10 per cent dis­count with­in the first five years. "It was gen­er­al­ly agreed that with­in the first five years the dis­count rate will av­er­age 90 cents to the dol­lar," said Dook­er­an, as­sur­ing that he had "ver­bal and writ­ten con­fir­ma­tion from the bank­ing com­mu­ni­ty"of that dis­count.

This means that some­one with $1 mil­lion in a Cli­co EF­PA would re­ceive $225,000 in the first five years. (That's $1,000,000 di­vid­ed by 20 years = $50,000 a year, mul­ti­plied by 5 years = $250,000 with a dis­count of 10 per cent = $225,000). But,and this is ex­tra­or­di­nary state­ment num­ber one, Mr Dook­er­an added: "With re­spect to the sub­se­quent pe­ri­od of the next 15 years, we are still en­gaged in dis­cus­sions with the fi­nan­cial in­sti­tu­tions to see what kind of in­cen­tives they may wish to have to im­prove the dis­count rate."

Now, this last state­ment rais­es some very se­ri­ous ques­tions:

�2 Why is the Gov­ern­ment ne­go­ti­at­ing with fi­nan­cial in­sti­tu­tions to pro­vide them with in­cen­tives so that they can im­prove the dis­count rate of­fered to pol­i­cy­hold­ers for 15 years, that is, from year six to 20?

�2 Is Mr Dook­er­an sug­gest­ing that be­cause pol­i­cy­hold­ers would re­ceive an av­er­age of on­ly 65 cents on the dol­lar for their in­vest­ment for 15 years (years six through 20), that he is ne­go­ti­at­ing with the fi­nan­cial in­sti­tu­tions to pro­vide them with "in­cen­tives"to im­prove this "hair­cut?"

�2 Is it fair and eq­ui­table that fi­nan­cial in­sti­tu­tions should be pro­vid­ed with "in­cen­tives," (which would in ef­fect be a gov­ern­ment sub­sidy) to pro­tect them from in­ter­est rate volatil­i­ty–which is what they would be seek­ing– and which may end up cost­ing the T&T Gov­ern­ment bil­lions of dol­lars over 15-years?

�2 Is it fair and eq­ui­table that Mr Dook­er­an is pre­pared to hold dis­cus­sions with fi­nan­cial in­sti­tu­tions "to see what kind of in­cen­tives they may wish to have to im­prove the dis­count rate,"but re­fus­es to en­ter­tain any dis­cus­sions with the pol­i­cy­hold­ers about in­cen­tives to them?

�2 Won't pol­i­cy­hold­ers who opt to hold their ze­ro-coupon bonds for 20 years al­so be im­pact­ed by a volatile in­ter­est rate en­vi­ron­ment, the like­li­hood that high in­fla­tion would erode the val­ue of their sav­ings and that the TT dol­lar may be de­val­ued some time in the fu­ture?

�2 Does Mr Dook­er­an pro­pose to pro­tect the in­ter­est of tax­pay­ers by sub­si­dis­ing fi­nan­cial in­sti­tu­tions?

�2 Will Mr Dook­er­an pro­vide more de­tails to the pub­lic about these dis­cus­sions on the in­cen­tives the fi­nan­cial in­sti­tu­tions "may wish to have to im­prove the dis­count rate."

�2 Does he re­al­ly in­tend to serve the na­tion­al in­ter­est by trans­fer­ring the mon­ey saved and in­vest­ed by those "greedy" pol­i­cy­hold­ers to the poor, long-suf­fer­ing fi­nan­cial in­sti­tu­tions?

As not­ed pre­vi­ous­ly,with­out the "in­cen­tives" the pol­i­cy­hold­er with a $1 mil­lion EF­PA would re­ceive $487,500 for years six through 20. That's 65 per cent of $750,000. All told, there­fore, the EF­PA pol­i­cy­hold­er who wants all of his/her in­vest­ment on day 1 would re­ceive $225,000 for the first five years plus $487,500 for the last 15 years for a grand lump­sum of $712,500. Ac­cord­ing to my cal­cu­la­tions, this means that un­der the Dook­er­an Plan, the pol­i­cy­hold­er who opts to take the mon­ey up­front, in a lump sum, rather than run the risk of their in­vest­ment be­ing erod­ed by high in­fla­tion and neg­a­tive in­ter­est rates,would re­ceive about 72 per cent of their prin­ci­pal; a dis­count of 28 per cent.

Pol­i­cy­hold­ers who ac­cept this of­fer would be re­quired, no doubt, to sign away their rights to par­tic­i­pate in any prof­its from the sale of CL Fi­nan­cial as­sets. It's al­so im­por­tant to note that since this is a ze­ro-coupon arrange­ment, what the pol­i­cy­hold­ers would be agree­ing to is a cal­cu­lat­ed de­pre­ci­a­tion of their ini­tial prin­ci­pal in­vest­ment. Mr Dook­er­an al­so made this ex­tra­or­di­nary state­ment,which I quote at length to en­sure that I am not ac­cused of tak­ing his words out of con­text: "The ar­gu­ment for the 20-year bonds,let me make it clear, has noth­ing to do with the is­sue of the peo­ple.It has to do with smoothen­ing the debt curve of the coun­try to en­sure that we have a man­age­able debt sit­u­a­tion over 20 years. "The Gov­ern­ment is com­mit­ted to pay­ing $500 mil­lion a year for 20 years, to meet this com­mit­ment. If we had gone on a short­er term, we would have had to in­crease it. "If we had gone to 10 years,we would have had to com­mit our­selves to $1 bil­lion a year for 10 years."

The point the min­is­ter is mak­ing is that a com­mit­ment of $500 mil­lion a year over 20 years would be less oner­ous on the coun­try's an­nu­al bud­gets go­ing for­ward than a com­mit­ment of $1 bil­lion over ten years. But it means, ac­cord­ing to our Min­is­ter of Fi­nance, that the Gov­ern­ment pro­pos­es to make di­rect pay­ments of $500 mil­lion from the Trea­sury for 20 years to the Cli­co pol­i­cy­hold­ers in or­der to sat­is­fy the an­nu­al pay­ments on the ze­ro-coupon bonds. Now $500 mil­lion a year for 20 years is $10 bil­lion. But, if in­stead of the ze­ro-coupon arrange­ment, the Gov­ern­ment were to set­tle Cli­co's 25,000 short-term pol­i­cy and mu­tu­al fund hold­ers by is­su­ing them with a $9.6 bil­lion, 18-month Trea­sury bill at a dis­count rate of four per cent, what would be im­pact on the Trea­sury?

Four per cent of $9.6 bil­lion is $384 mil­lion, which means that at the end of 18 months, the Gov­ern­ment would be re­quired to find $10 bil­lion to re­deem the Trea­sury bill. If the $2.2 bil­lion that re­mains from the bonds worth $5 bil­lion that were is­sued to Cli­co in Feb­ru­ary this year is added to the $10 bil­lion,the $12 bil­lion owed to hold­ers of short­term Cli­co poli­cies and mu­tu­al funds would be com­plete­ly sat­is­fied.

Oth­er op­tions avail­able

The chal­lenge for the Gov­ern­ment, then, would be for the Gov­ern­ment raise the $15 bil­lion it has used to bail out Cli­co

from the dis­pos­al of CL Fi­nan­cial as­sets in 18 months to en­sure that tax­pay­ers are not placed at a dis­ad­van­tage. Is­su­ing an in­ter­est-pay­ing Trea­sury bill would have the ad­van­tage of:

�2 Elim­i­nat­ing the risk of the State pro­vid­ing a sub­sidy to fi­nan­cial in­sti­tu­tions, which could to­tal mil­lions of dol­lars a year;

�2 Cost­ing the State $380 mil­lion in in­ter­est pay­ments,for a to­tal,pre­dictable cost of $10 bil­lion in 18 months, in­stead of the $500 mil­lion a year cost over 20 years that has down­side risk of the pro­posed in­ter­est rate sub­sidy to fi­nan­cial in­sti­tu­tions;

�2 Com­plete­ly set­tling Cli­co's in­debt­ed­ness to its pol­i­cy­hold­ers and hold­ers of mu­tu­al funds. This would elim­i­nate the threat of a law­suit that would tie up the sale of CL Fi­nan­cial as­sets for up to sev­en years and could lead to the seizure of MHTL by its Ger­man fi­nanciers;

�2 Giv­ing the State a de­fined pe­ri­od of 18 months from Jan­u­ary 2011 to June 2012 in which to liq­ui­date as­sets held by CL Fi­nan­cial and Cli­co,as per the June 12,2009 Share­hold­ers'Agree­ment be­tween the Gov­ern­ment and CL Fi­nan­cial. In that 18-month pe­ri­od, the Gov­ern­ment would be able to:

�2 Seg­re­gate Cli­co's $6 bil­lion tra­di­tion­al port­fo­lio of life in­sur­ance, health in­sur­ance and group poli­cies in­to a stand-alone en­ti­ty,which could be sold for at least $6 bil­lion. This sum would go straight in­to the Trea­sury to com­pen­sate for monies used to bailout Cli­co;

�2 Squeeze at least $9 bil­lion out of the sale of CL Fi­nan­cial and Cli­co as­sets in or­der to re­cov­er the State funds used to bail out Cli­co, whose stake in Re­pub­lic Bank alone

would be worth about $4 bil­lion.This would go straight in­to the Trea­sury to com­pen­sate for monies used to bailout Cli­co;

�2 Boost in­vestor and con­sumer con­fi­dence in T&T by re­turn­ing the $12 bil­lion in­vest­ed in Cli­co poli­cies to its own­ers, who

would then have the funds to in­vest in MHTL and Re­pub­lic Bank,which would be di­vest­ed on the lo­cal mar­ket.

Would the Gov­ern­ment go for what seems to be a win-win pro­pos­al?

It seems to me that the on­ly way the na­tion­al in­ter­est can be served in this is­sue is if the Cli­co pol­i­cy­hold­er rep­re­sen­ta­tives en­ter in­to ne­go­ti­a­tions with the Min­istry of Fi­nance and the Cen­tral Bank,which con­trols Cli­co. Both sides must be pre­pared to make com­pro­mis­es.

Giv­en the risks and cost of lit­i­ga­tion, it would be reck­less for the Gov­ern­ment to main­tain its "take it or leave it" ap­proach or its be­lief that to ful­ly com­pen­sate the Cli­co pol­i­cy­hold­ers would ncour­age moral haz­ard– as seems to be the case from the state­ment made by Mr Dook­er­an on No­vem­ber 24: "A hair­cut is,in fact,part of the scheme, but 'you can­not have no hair­cut' in this sit­u­a­tion. But it is a small hair­cut, be­cause we have pro­tect­ed,in this mea­sure,the prin­ci­pal. In many coun­tries, Mr Speak­er, the prin­ci­pals have not been pro­tect­ed." Why does a hair­cut have to be part of the so­lu­tion?