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Intervention an investment
published: Friday | January 11, 2008
Wilberne Persaud, Financial Gleaner Columnist
Persaud
Our Financial Services Commission has finally taken the decision to intervene in the fabled, almost magica investment scheme juggernaut.
One wonders what analysis and thinking precluded regulatory action until now.
Is it that the Commission was unaware of its responsibilities? Were their in-house and consultant legal hotshots unsure of their standing? Did they fear adverse rulings in the courts that would cause megabucks in damages? Were political implications of intervention viewed as too negative, in the short-term, to act? Many are the questions - these are but a few.
Yet, the questions to answer relative to a government-backed intervention seemingly easier, may actually be more difficult.
We inhabit a state that embraces free enterprise. The state is supposed to prepare the ground, keep it watered, roll the pitch and ensure even bounce, train, continuously vet and provide the umpires, secure the stands, players and spectators.
By this, in practice and on the ground, we understand that people are able to use their initiative to create and run an 'enterprise' for their own profit with as little government intervention as possible.
Belief
This is the belief, if not the reality. Ask any budding entrepreneur with little capital but big ideas and you'll be surprised at the answer.
What is a club? We do have 4-H clubs, badminton clubs, football clubs and, of course, go-go and night clubs, too. And, yes, there are investment clubs.
But, does a club consist of thousands of members who never come to the weekly or monthly gathering to discuss common interests and take decisions?
So, here we are with clubs consisting of thousands of members who have placed considerable financial assets, money, cash, at the disposal of an executive that promises at least 10 per cent per month return. For a relatively short period, this scheme delivers but must, in the end, falter.
Everyone loses, but latecomers, in particular, lose enormously.
What happens if the investments fail? Take an example of $100,000 placed in the club in January.
In 12 months, at 10 per cent each month, this sum grows to $285,311.67, if interest is added to the principal and compounded.
If interest is not added but taken monthly, the initial amount of $100,000 is recouped by November.
We take it now that with failure, everyone stands to lose. Imagine the assets available to the club are sufficient to pay back $0.25 in the dollar. How should this be distributed? Should everyone get the same ratio of available funds to the dollar amount held at the moment of closure?
The law, which can indeed be a shackle and, sometimes, a fool, suggests they should.
So, the person who left all his or her money in the scheme stands to lose considerably more than he who withdrew interest on a monthly basis.
Here is the thorny question of equity and fairness. But it doesn't stop there. If government is to provide relief - a bailout of 'depositors' - from whom are the bailout funds taken? All taxpayers. Could it be that some taxpayers did not invest in these schemes? Should they be forced, without a choice, to rescue folks who took risks, gained some reward initially, but in the end lost?
This is the problem of fairness at the individual level.
What of the economy and financial system? There is a thing called moral hazard in financial theory. It is a situation that renders decision makers in enterprises free from the consequences of their actions.
If you know that you literally have a godfather-government, who will clean up any mess you leave without censure and no loss, the pressure to be prudent is removed.
No bailout
So Government agreed, publicly, that there would be no bailout.
Yet, from reports in this newspaper, participation rates in the schemes were high, widespread and diverse, both spatially across the country and among income group categories.
People are alleged to have gone as far as to mortgage houses, homes, to join these schemes.
Is there going to be widespread suffering as a result of financial losses?
In the case of Northern Rock in the United Kingdom the government and central bank insisted they would provide no bailout, the Bank of England did, in the end, provide support to avoid system-wide crisis.
Northern Rock was no investment club. Rather its top decision makers made some questionable investments. There was no attempt to game the system.
Admittedly, this support would have to be repaid upon resolution of the crisis.
The economy, apparently, didn't miss a step.
How much, if any, damage has been done to the Jamaican financial system and economy? Who is responsible for this and what is to be done to stop it from happening again? All these issues have to be addressed.
Indeed, as the reggae artiste says, it's "Not an easy road".
wilbe65@yahoo.com
published: Friday | January 11, 2008
Wilberne Persaud, Financial Gleaner Columnist
Persaud
Our Financial Services Commission has finally taken the decision to intervene in the fabled, almost magica investment scheme juggernaut.
One wonders what analysis and thinking precluded regulatory action until now.
Is it that the Commission was unaware of its responsibilities? Were their in-house and consultant legal hotshots unsure of their standing? Did they fear adverse rulings in the courts that would cause megabucks in damages? Were political implications of intervention viewed as too negative, in the short-term, to act? Many are the questions - these are but a few.
Yet, the questions to answer relative to a government-backed intervention seemingly easier, may actually be more difficult.
We inhabit a state that embraces free enterprise. The state is supposed to prepare the ground, keep it watered, roll the pitch and ensure even bounce, train, continuously vet and provide the umpires, secure the stands, players and spectators.
By this, in practice and on the ground, we understand that people are able to use their initiative to create and run an 'enterprise' for their own profit with as little government intervention as possible.
Belief
This is the belief, if not the reality. Ask any budding entrepreneur with little capital but big ideas and you'll be surprised at the answer.
What is a club? We do have 4-H clubs, badminton clubs, football clubs and, of course, go-go and night clubs, too. And, yes, there are investment clubs.
But, does a club consist of thousands of members who never come to the weekly or monthly gathering to discuss common interests and take decisions?
So, here we are with clubs consisting of thousands of members who have placed considerable financial assets, money, cash, at the disposal of an executive that promises at least 10 per cent per month return. For a relatively short period, this scheme delivers but must, in the end, falter.
Everyone loses, but latecomers, in particular, lose enormously.
What happens if the investments fail? Take an example of $100,000 placed in the club in January.
In 12 months, at 10 per cent each month, this sum grows to $285,311.67, if interest is added to the principal and compounded.
If interest is not added but taken monthly, the initial amount of $100,000 is recouped by November.
We take it now that with failure, everyone stands to lose. Imagine the assets available to the club are sufficient to pay back $0.25 in the dollar. How should this be distributed? Should everyone get the same ratio of available funds to the dollar amount held at the moment of closure?
The law, which can indeed be a shackle and, sometimes, a fool, suggests they should.
So, the person who left all his or her money in the scheme stands to lose considerably more than he who withdrew interest on a monthly basis.
Here is the thorny question of equity and fairness. But it doesn't stop there. If government is to provide relief - a bailout of 'depositors' - from whom are the bailout funds taken? All taxpayers. Could it be that some taxpayers did not invest in these schemes? Should they be forced, without a choice, to rescue folks who took risks, gained some reward initially, but in the end lost?
This is the problem of fairness at the individual level.
What of the economy and financial system? There is a thing called moral hazard in financial theory. It is a situation that renders decision makers in enterprises free from the consequences of their actions.
If you know that you literally have a godfather-government, who will clean up any mess you leave without censure and no loss, the pressure to be prudent is removed.
No bailout
So Government agreed, publicly, that there would be no bailout.
Yet, from reports in this newspaper, participation rates in the schemes were high, widespread and diverse, both spatially across the country and among income group categories.
People are alleged to have gone as far as to mortgage houses, homes, to join these schemes.
Is there going to be widespread suffering as a result of financial losses?
In the case of Northern Rock in the United Kingdom the government and central bank insisted they would provide no bailout, the Bank of England did, in the end, provide support to avoid system-wide crisis.
Northern Rock was no investment club. Rather its top decision makers made some questionable investments. There was no attempt to game the system.
Admittedly, this support would have to be repaid upon resolution of the crisis.
The economy, apparently, didn't miss a step.
How much, if any, damage has been done to the Jamaican financial system and economy? Who is responsible for this and what is to be done to stop it from happening again? All these issues have to be addressed.
Indeed, as the reggae artiste says, it's "Not an easy road".
wilbe65@yahoo.com