Answering my critics (Pt 2)

Omar Davies, Guest Columnist

Despite my disagreements with the recent articles on FINSAC by Claude Clarke and Dr Paul Chen-Young on May 22, at least it is clear that they had some knowledge of what happened. In contrast, columnist Gordon Robinson writes with his usual freewheeling approach which is not necessarily supported by knowledge of the issue, logic or analysis. Nonetheless, I will seek to address the main points he raised in his May 22 article 'The blame's still on you'.

In his opening salvo, Mr Robinson says that, for the sake of the column, he is willing to accept the need for the use of high interest rates to curb inflation and stop rampant foreign exchange speculation. However, nowhere does he acknowledge that the policy worked in that it was the foundation for the present market-governed foreign-exchange system operating with the full confidence of all participants. Furthermore, the country experienced seven years of single-digit inflation which laid to rest the then widespread fear that we were headed for an era of hyperinflation, similar to the experience of several South American countries, e.g., Argentina. It is amazing how convenient are our memories!

Mr Robinson argues that his own view is that a tougher medicine, politically, would have been to close the fiscal deficit or to "fix the exchange rate". I am puzzled by what he means by "fixing the exchange rate". That pretence had to be abandoned when everyone realised that this "fixed rate" was only a figment of the imagination of officialdom. I am astounded that, given the benefit of time for reflection, he would still advance this as a resolution of the problem.

Next, Mr Robinson accuses me of regurgitating my "belief" that it was the mismanagement and even fraudulent practices of the operators of some local banks which resulted in these institutions failing. I am disappointed that Mr Robinson would characterise this fact as my "belief". This is simply a continuation of the attempt to personalise this issue. In this instance, showing what is "fact" and what is "belief" is not difficult. The commission of enquiry can simply summon the forensic auditors and the persons who worked in the regulatory institutions to testify. Their testimony will demonstrate the range of corrupt acts carried out by these owners/managers in order to project to the public images of successful institutions. These images were built totally on manipulations of their accounts and their loan portfolios.

ignorance of governance

Mr Robinson demonstrates his ignorance of governance and the manner in which policy changes are made when he speaks about the failure of the Government to "address the issue of our lax financial legislation before embarking on a high-interest rate policy". He then elaborates in terms of his idea of the "lax regulations". He poses questions such as "why were banks permitted by the BOJ to have external auditors who were also bad debtors?"; why was the persistent "evergreening of debts not prevented or alternatively detected promptly and punished"?; "how were banks able to transfer loans to connected parties between institutions and so avoid detection?" Some of these questions are akin to a precocious four-year-old asking his parents "How come there are criminals when there are policemen?"

It may be that Mr Robinson, despite his seemingly authoritative writing style, has no idea of the limits of bank inspections and audits. It is simply not possible for the Bank of Jamaica (BOJ), or any regulator, to monitor, continuously, every single operation within these institutions. In the same way that an external auditor cannot be expected to detect every single misdeed in a company, it was, and is, impossible for the BOJ, operating on the basis of an annual audit, to do the same within the financial institutions. This is not a uniquely Jamaican problem. I recall meeting, in London, with the head of the UK's Financial Services Authority (FSA) to discuss regulatory challenges. He indicated that each year the FSA was only able to inspect less than five per cent of the 26,000 institutions they supervised.

Jamaica's problem was further compounded by the emergence of groups of companies, of which the bank was just one member. This had for many years precluded the BOJ having a total knowledge of the state of affairs within a financial group. Is Mr Robinson aware that until the legislation was changed, the regulator for building societies was the Registrar of Births and Deaths? Does he know that until the legislation was changed, the BOJ had no supervisory oversight of these institutions? Does he know that the first total audit of a financial group of companies was carried out on the Eagle Group? Is he aware that there was resistance to increasing the regulatory authority of the BOJ to allow it access to the books of all member companies of the group, including those which did not fall under its regulatory ambit?

The reality, Mr Robinson, is that there is no country in the world which has yet developed the perfect regulatory system. Almost by definition, such regulatory frameworks remain "works in progress". I say this because whatever the legislative framework developed, there are always persons (usually guided by their lawyers) seeking to find ways to evade the authorities. Even as we speak, and even as Jamaica is now regarded as having the strongest regulatory system within CARICOM, there is need for improvements. I have already alluded to the fact that the legislation needs to provide the regulatory authorities with the powers to be proactive.

seeking liquidity assistance

So while Mr Robinson's questions are eminently sensible, they reflect an almost total ignorance of the process needed to effect legislative changes in the regulatory system. Such changes cannot be imposed without full discussions involving the stakeholders in the sector. I recall very clearly that the proposal - to make external auditors play a role in ensuring that regulations were adhered to - was fought vigorously by their professional body. Their position was that the Government was seeking to make them partly responsible for policing the system, when their first obligation was to their clients - the financial institutions. Although the legislative amendment was stoutly resisted, thankfully for the financial system and for the country, it was eventually passed.

Mr Robinson makes reference to the fact that his information, coming from sources within officialdom, is that a delegation came to me, as minister, some time before the Government took action, seeking help for their institutions. There is no need to be coy about this assertion; it is true. Why wasn't action taken earlier? The answer lies in the fact that while the owners/managers were seeking liquidity assistance, they were unable (or unwilling) to provide full responses to the questions posed by the regulators. Nor were they willing to inject additional capital into their institutions. That they needed liquidity assistance was accepted, but Cabinet decided that no such support would be provided until we had a clear understanding of the true state of affairs within the institutions.

Furthermore, over time it also became apparent that no such support could be provided while retaining intact the management and control which had brought the institutions into this problem.

If Mr Robinson's implicit point is that an earlier response could have avoided the crisis, he is wrong. A major reason why the sector has emerged in a stronger framework than before is that, almost to a man, the top management/ownership structure of the failed institutions was changed.

As I indicated last week, the debate will not end with this piece, but if a full exploration of the factors and a pursuit of the truth are the real objectives of the commission, we need to bring to the witness stand those persons who can give a fully objective analysis as to the factors which led to the collapse of the sector.

The obvious question is, why has this not been done? Perhaps the answer to that question is the same as the answer to: "Why was FINSAC not allowed to have legal representation for 18 months?"

Dr Omar Davies is opposition spokesman on transport and works. Email feedback to columns@gleanerjm.com.