To Bail out or not to…?

Apr 15, 2009 Editorial

Back in early March, President Bharrat Jagdeo assured CLICO’s local policyholders that none of them would lose their money. Even then, it was evident that CLICO was insolvent and such a guarantee would necessitate recourse to the national treasury at some time or the other. The opposition, playing to the gallery of populism as usual, quickly endorsed the bailout.
This was quite an unprecedented move not only for a country in such dire financial straits as ours but for any other country. The precedent that it set has very deep ramifications for the entire financial sector as a whole and in fact for the entire business premise. Over the last few months, as the fall of one financial behemoth after another almost every day in one country or another is announced, we have all learnt that business is all about taking risks.
For being willing to take those risks, the rest of society (well capitalist ones, at least) accept that they have a right to the profits that those businesses generate. But the question arises, “Why should society then be forced to absorb the losses when those businesses make bad decisions – or worse yet, if the management of those companies ruin the company through questionable practices?” And this quandary is precipitated when the Government and opposition seek to cover CLICO’s policyholders.
While we may have some sympathy for those policy holders – they had no part in the dénouement of CLICO – they are in an analogous to the owners of CLICO. They knowingly assumed a business risk when they took out their policy with CLICO and they reaped their rewards when the going was good. They should be prepared to bear their losses now: that’s just the way the business cookie is supposed to crumble.
If this is so, some may question, why did the US and UK and German governments etc. step in and tried to bail out several of their financial institutions? We should remember, however, that in the US for example, the first casualty, Lehman Brothers – a mega investment house – was allowed to go under. The government only stepped in when AIG was about to collapse, declaring that the latter was “too big to fail”, meaning that if AIG went under there was a good likelihood that it could bring down the whole financial house of cards because of the “counterparty risks” that tied them all together.
By its logic, the US government has been forced to step up to bat for all its crippled universal banks: the end is nowhere in sight.
But in Guyana, the government or the opposition cannot use the same argument. Even before the President’s commitment to the CLICO bailout – at the time when the government was just “watching closely” – he had pointed out that “CLICO (Guyana) makes up just three percent of the country’s total financial assets.” It would be quite a stretch to argue that three percent of impaired assets could cripple even our backwater financial system.
But Pandora’s box has been opened and it is not surprising that questions have been raised about why depositors in Globe Trust were not offered a safety net also. However, there are other questions, some that this newspaper also raised early in the day – before the governmental guarantee was issued.
There is the “moral hazard” issue, where other financial institutions will be encouraged to play fast and loose with the rules to make a buck – which they will pocket – fully expecting the government to bail them out.
Finally, should we not investigate whether CLICO’s officers, insiders, regulators and other interested parties violated their fiduciary and official duties and so as to attempt to return trust to our financial sector by prosecuting those found to be in violation?
Those in charge of our finances would know that it is on “trust” that the entire edifice stands: and if that is lost not even the new gleaming palaces being constructed will prevent its fall. Like Humpty Dumpty.

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