The meltdown of the financial sector in the late 1990s shook the foundations of the Jamaican economy and reversed the trend in which many black middle-class Jamaicans became major players in the sector.

That trend had promised social transformation but, instead, plunged the nation into unprecedented crisis when spiralling interest rates dug the guts out of the new investments and imperilled the deposits of large numbers of Jamaicans who were set to lose their life’s savings. With debate raging about who was responsible for the debacle, the then People’s National Party (PNP) Government, masterminded by Finance Minister Dr Omar Davies, crafted a vehicle to respond to the crisis – the Financial Sector Adjustment Company (FINSAC).

Ten years after the financial meltdown, with the anger still boiling over, the new Jamaica Labour Party (JLP) Government has announced a Commission of Enquiry into the operations of FINSAC which had acquired the failed entities and paid some depositors at least a proportion of their lost savings.

In anticipation of the Commission of Enquiry, Dr Paul Chen-Young, investment banker and economist and one of the main players at the time – through his group of entities, including the well-known Eagle Merchant Bank – has given deep thought to what should be the terms of reference of the FINSAC Commission, in order to derive the best results from the deliberations. Readers may wish to make their own comments on the suggestions of Dr Chen-Young:

The Terms of Reference will be vital to the work of the Commission of Enquiry on FINSAC. As such, it ought to allow for inputs from the public before being finalised, since its work is of great national significance.

Having been a major player in the collapsed domestic financial sector, I am setting out my thoughts on some of the issues to be included in the Terms of Reference. It is fundamental that the Commission must be given the resources to employ a team of competent, technically qualified persons to undertake research prior to any public hearing to minimise the sensationalism, and to allow the Commission to direct questions at persons testifying, based on the findings of its technical team. With advanced research, I believe that the work of the Commission would be greatly enhanced and more meaningful.

I suggest that two broad areas be considered.

Macro-economic and financial policies

1. Identify and analyse the macro-economic and financial policies in the 1990s and qualify the results on some of the key variables. Some of the relevant issues would be:

. What was the underlying economic model used by Dr Davies and his team in having his high interest and massive public sector debt accumulation while seemingly pursuing a policy of trying to hold the exchange rate. Its relevance is that economic problems of the 1990s adversely affected the domestic financial sector. Therefore it is of importance to determine what was the economic model behind Dr Davies’ policies. If there was no model and policies were made on an ad hoc basis, this information should be made public.

. Was there any consistency in the model(s) to achieve Dr Davies’ much stated strategy on holding the exchange rate or was it self-defeating? For example, was it a sound policy for the Bank of Jamaica to have been engaed in massive foreign exchange purchases, coupled with heavy government borrowing as tools to protect the exchange rate?

. Were the models – assuming that they existed – supportive of private sector investment, domestic production and exports to stimulate economic growth? If policy-makers made decisions without any formal economic models, it is necessary to construct an implicit model from key variables such as

consumption, government spending, investment, exports, imports. Such model(s) should then be used to determine whether significant economic growth could have been achieved, or whether there were serious inconsistencies so that there could be little or no growth.

. High interest rates and high inflation are two specific economic variables that would have been the off-shoot of the economic and financial policies. Analyses need to be done on the main contributing factors that led to high interest rates and inflation. An important variable to be addressed is the extent of public sector borrowing and excessive and frequent use by the Bank of Jamaica of reserve requirements for bank deposits.

The public sector share of total domestic credit should also be traced over time. This will assess the extent of “crowding out” of the private sector, which could have had an adverse impact on investment and growth.

. In the early 1990s, there were no public sector deficits, but deficits grew sharply by the end of the decade. There is need to identify the deficit up to the 1997/8 financial crisis and the pattern of government borrowing and expenditure that created the deficits, which impact on interest rates and inflation.

. What was the total amount paid out by FINSAC to financial institutions during the 1997/8 period before interest charges, and what was the estimated value of collateral and other assets from the failed institutions that it received? The shortfall between ACTUAL payment and assets turned over to FINSAC should be quantified to ascertain the budgetary impact. (The record needs to be set straight on the true impact of government’s intervention on the national debt).

. Even though difficult to calculate, it is important that some estimate of real costs to the economy of high interest rate and inflationary policies be made. For example, did domestic investments as a share of Gross Domestic Income decline in the 1990s? What would be crude estimates of loss of jobs, payroll and taxes from the closedown of businesses, including firms in the financial sector; what has been the foreign exchange impact of how FINSAC disposed of assets and companies taken over by FINSAC? (An illustrative measure would be the amount of foreign exchange received by FINSAC from sales, and what has been the outflow arising from profits earned by overseas interests. It would be particularly important to do a special calculation for the banks and life insurance companies that were sold and how much these entities have earned from profits that will impact unfavourably on the balance of payments. At least a 10-year forecast of profits using the most conservative assumptions would be illustrative of the balance of payment burden on the country).

. Is there any evidence that the regulatory authorities – Bank of Jamaica and Office of the Superintendent of Insurance -gave any early warnings to the minister of finance on the looming threat of systematic failure in the banking and insurance industries? If so when? And if not, why? Did the Bank of Jamaica and Ministry of Finance formulate a strategy on how to deal with the problem when it arose? Or was the issue dealt with on an ad hoc basis?

2. How did FINSAC deal with the financial meltdown?

This section should focus on how FINSAC dealt with the crisis. Among questions to be investigated would be the following:

. What was the rationale for FINSAC selling off bank debts and the ownership of domestic financial sector to overseas interests and, in doing so, did it fail in its duty to restructure the troubled domestic financial sector? To what extent did the minister of finance cause, or agree to sell or dispose of assets taken over by FINSAC? A listing of these transactions should be publicised.

. Was there any evidence that the domestic financial institutions had such incapable management and unsatisfactory information technology that ther had to be a wholesale sweep of many of the entrepreneurs and management? And to what extent have the new owners brought in management and technology superior to what existed?

. Did FINSAC undertake any financial forecasts for each entity to determine the basis on which viability could be established? And what happened to the forecast submitted by most of the domestic financial entities at the behest of the minister of finance and financial secretary?

Was there any discussion with the entities on these submissions? If not, why? In the case of life companies, to what extent did they resort to high cost commercial paper as premium incomes fell during the inflationary 1990s, and how could these debts be restructured to bring viability? What was the rationale for closing the 100-year-old Mutual Life Company? Was any exercise done on how it could be restructured to continue to operate?

. What was the advice of the group of overseas investment bankers who were brought in at the early stage when FINSAC was established? Did they recommend massive sell-off as that which took place? Or did they make any proposal for restoration of the entities through whatever means, such as joint ventures and rationalisation?

. What was the rationale for the discriminatory treatment of entities, and persons and shareholders in the various entities? Why were certain entities closed while others were supported and eventually sold as going concerns to the benefit of shareholders who suffered no losses and profited handsomely? Was any restructuring exercise done in an attempt to save these entities even if it meant consolidation via joint venture with overseas financial entities or government?

. Why were some owners singled out for legal action while others who also had failed entities were excluded? Was there compelling evidence for this selectivity? If so, the forensic auditors’ report should be released on EACH entity so that there can be transparency in assessing the rationale for such action.

. What was the cost of the forensic auditors and has FINSAC received financial benefits to offset such costs? Details of payments to the forensic auditors for each entity must be disclosed.

. What were the criteria used to decide which of the various FINSAC entities should be paid whether as settlememnt or for shares purchased? Where entities were sold as going concerns after bad debts were taken off their balance sheet, eg National Commercial Bank and Life of Jamaica, did the existing shareholders retain all of their shares and benefit from new ownership? Why were shareholders of other entities not compensated in some manner from an equity viewpoint? Details of these transactions should be made public.

. Using accepted ratio, such as bad debt provisions and capital to asset, what can be learnt from the findings of the forensic auditors, Bank of Jamaica and the Superintendent of Insurance, on each of the entities taken over by FINSAC?

. Summary of details of the sale of bank debt taken over by FINSAC and sold to Beal Bank of Texas should be made public. This should be compared with the final settlement at which such debts were ultimately settled. Where no settlement was possible by debtors, some estimate of properties taken away and businesses closed should be made to highlight the human suffering of those who lost their home and businesses. The issue of the wisdom of selling these debts should also be addressed. (Was it a good business decision to sell those debts at a huge discount instead of allowing existing banks to service these accounts on collection fee basis?)

. Other than the blanket sale to Beal Bank, which asset did FINSAC sell from financial entities taken over, to whom and what was the basis of such sale?

It was a sad economic chapter in the 1990s. These issues have to be laid on the table when the Terms of Reference are being drafted.