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FINSAC was a saviour to thousands of debtors - Hylton
Published: Friday | May 27, 2011
Patrick Hylton, former managing director of FINSAC Limited. - File
One key thing we must always remember is that FINSAC never originated any one of these loans.
They were acquired not because FINSAC wanted them, but because removing them from the intervened banks was a prerequisite to those banks' rehabilitation.
Our mandate was to extract value from those loans as would have been attempted by the legacy banks if they had retained them as a part of their own attempt at rehabilitation.
The important question which arises, then, is whether or not FINSAC established a sufficiently robust and fair process and framework for extracting value from these loans, and how well did FINSAC execute against this framework.
A consideration that is worth repeating is the nature and condition of the loans being managed.
The techniques and strategies used by FINSAC for problem loan resolution were not peculiar to FINSAC. They are the same techniques and strategies that were applied by other financial institutions in Jamaica and across the globe.
There seemed, however, to be an expectation based on a perception that FINSAC would naturally and automatically grant special discounts to delinquent borrowers.
It is interesting to note that the same perception did not exist among borrowers who remained in the performing or then substandard category of intervened financial institutions, as well as those that were not intervened.
It is my view that this dichotomy existed because of the general incorrect perception that FINSAC was a bailout agency.
If one listens to the debtors - fewer than 20 - who have complained in this enquiry, one may get the impression that every debtor's experience with FINSAC was a negative one.
This is absolutely not true, as in my own experience I have many times been greeted by former debtors, almost all unknown to me, who have expressed appreciation for helping them to sort out their debts and their lives.
The fact is that FINSAC had within its portfolio, at its peak, in excess of 20,000 debtors and those who now publicly complain can in no way be established as a representative group.
NON-PERFORMING LOAN SALE
The decision to sell the non-performing loan (NPL) portfolio was made after careful consideration of the challenges facing FINSAC in seeking to maximise value from these assets.
One major challenge was the extent to which the collection process was in danger of being compromised, based on the frequency of attempts by persons connected to both major political parties and other persons of influence to intervene in the collection process.
These attempts ranged from telephone calls to officers of FINSAC, through misrepresentation of facts, and false accusations against staff of the organisation in carrying out their duties.
Many of these assertions were directed to the management of FINSAC or our political bosses.
This created a great deal of distraction within the team. While the majority of these attempts to intervene may have been well-intentioned and out of genuine concerns for their constituents, they were often based on falsehoods communicated to these persons and could potentially delay or undermine our collection or restructuring strategy.
There was a genuine concern that as this was a public institution there was a real risk of interference being used as a strategy to undermine its activities.
This is not dissimilar to the fear which would have informed the desire and the need to quickly divest of intervened financial institutions and similar assets, to avoid their performance being constrained by public sector ownership.
We were also mindful of the experience of previous government-owned institutions in the lending business, such as the Jamaica Development Bank.
As I understand it, even though this institution started out with a portfolio of performing loans, many rapidly became non-performing.
Many attribute this to the fact that borrowers felt entitled to default and get relief as it was a government-owned institution. In our view, that risk was magnified when treating with a portfolio of government-owned NPLs.
It was clear to me that the Government did not belong in either the business of running financial institutions, or managing NPLs, and should get out as soon as practicable.
I was also mindful of the fact that shortly after taking over the loans, we had McKinsey and Company do an assessment of the likely amount we could recover from the NPLs.
Their assessment was a net present value of 10 cents in the dollar if we took urgent and aggressive action. This assessment was a closely guarded secret within our organisation.
It was necessary to keep it secret so that borrowers would not use it to develop expectations as to what they should pay or expect as a write-off, and so as not to compromise negotiations for the eventual sale of the NPL portfolio.
The analysis undertaken by our advisers on our NPLs for identifying an optimal resolution, which was quite detailed and extensive and which looked at a number of options, strongly recommended divestment of the portfolio as the best option open to us.
Also, if the portfolio was retained by FINSAC rather than sold, it would have unnecessarily prolonged the existence of FINSAC, with its attendant expenses.
It was also felt that sale to an organisation which specialised in that business and had the requisite expertise could result in significant benefits from FINSAC sharing in any upside in collections. Such sharing provided FINSAC with a hedge that allowed it to benefit if persons were better able to pay than anticipated at the time of sale.
Also, it enabled FINSAC to have an ongoing source of funding to make payment on the FINSAC notes, meet operational expenses and reduce the ultimate cost to taxpayers.
Among the benefits would be the removal or reduction of the risk of interference, removal of the attitude by several borrowers that now that government owned the portfolio they were entitled to massive write-offs.
FINSAC would no longer bear the significant administrative and legal costs and risks associated with that business. FINSAC would benefit from the expertise and experience of the collectors in that arrangement.
In the final analysis, the issue became somewhat moot when the World Bank and Inter-American Development Bank (IDB) who were assisting the Government with funding its programme of converting FINSAC notes to local registered stock, included the divestment of the portfolio within an agreed timeframe among the requirements for their assistance.
The sale of the portfolio involved a very rigorous and transparent process.
As part of the process, detailed reports were prepared on all the larger loans to include financial information, new valuations of hundreds of properties and copies of security documents held. These were compressed and put on CDs and sold to interested parties after a period of advertising in major international fora and some roadshows to promote the sale of the portfolio.
I think at the end of the marketing and campaign phase, we received somewhere in the region of 20 expressions of interest, included among them, some from famous global financial institutions and local parties.
Two major international financial entities who did not initially enter the formal process also approached me directly - not wanting to go through the competitive framework, but I told them that was not negotiable.
Beal Bank was not our preferred bidder initially, but we did a deal with them after four other attempts at sale fell through.
Among the events causing deals to be scuttled was the violence in west Kingston, which resulted in more than 20 deaths in July 2001, and the terrorist events of September 11, 2001, in the United States.
We had a due-diligence exercise conducted on Dennis Joslin, who had originally commenced negotiations, and then also on Beal Bank, which became the primary owner of Jamaican Redevelopment Foundation Inc.
I cannot now recall who conducted the exercise on our behalf, but written reports were received on this and the other due-diligence exercises that had been arranged for FINSAC, and these should all be among FINSAC's records. I recall that the due diligence confirmed Beal Bank to be a licensed financial institution in the USA, subject to federal regulation there.
To the best of my recollection, the aggregate principal debts sold was in the region of US$380-390 million. The terms of sale included an initial payment of US$23 million, with a right for FINSAC to then share in collections on a scale that rose as the collections grew higher, eventually to sharing 50 per cent in all collections.
In all the circumstances, and particularly having regard to this ongoing interest in the collections, we also decided that it would be appropriate for FINSAC to have the right to have its own employee in the offices of JRF, as well as to have the right to audit JRF's activities in respect of the management of the NPL portfolio that had been sold.
Both these controls desired by FINSAC were agreed by JRF. Subsequent to the sale, FINSAC maintained that presence in JRF's offices.
Several persons have suggested that if FINSAC did a deal with Beal Bank to sell NPLs at some cents in the dollar, the same deal could have been offered to each debtor.
The fallacy in that argument is that it fails to recognise that the cents in the dollar referred to, reflects an assessment of the composite portfolio, from which there would be some loans on which there is almost full collection while in relation to others it would be zero.
In addition, it fails to take into account FINSAC's continued interest in future collections under the deal with Beal Bank, and the moral hazard problem in relation to write-offs of debts (to which I have earlier made reference).
CLOSING OBSERVATIONS
In closing, I would like to comment briefly on some of the statements and accusations of malice or ill-feeling by the principals of some of the failed institutions in the way in which they were dealt with by FINSAC.
I can say without hesitation, or fear of contradiction, that under my watch I neither harboured any such feelings, and would not have countenanced any such view as a basis for making a determination as to how to treat with an institution or individual.
I can also say that no one among the authorities ever approached me suggesting that malice, political bias or their personal agenda be a basis for influencing our treatment of any institution, assets or loans, whether negatively or positively. If anyone at the appropriate level had so insisted, it would have been my last day with FINSAC.
I saw my role as being to carry out an important mandate, unaffected by political bias.
I am not and have never been a member of a political party, and have deliberately kept my political views confidential. I, therefore, had no intention of being seen to be aligned with any of the parties.
Many of the owners, principals and senior officers of the various intervened entities were personally known to me and we had great personal relationships.
The fact is, however, that in many instances their institutions had not just failed, but were massively insolvent, experiencing a severe liquidity crisis; and our mandate was to protect depositors, policyholders and pension funds.
This protection imposed a direct cost on taxpayers and we had a responsibility to minimise that cost, both in terms of spending as well as by taking any value we could acquire in the process.
To have restored the institutions to the original owners would have meant a transfer to them from taxpayers of billions of dollars, and in any considered view, could never be justified.
I spent numerous hours in meetings and on the telephone explaining to these persons affected why we could not necessarily pursue and protect their institutions and their equity positions in them.
While in many instances one felt their pain, we had to do what the circumstances dictated was the right thing to do consistent with our mandate.
FINSAC's work was reviewed by the management team of the International Monetary Fund under an agreed monitoring programme with the Government, as well as by teams from the World Bank, IDB and Caribbean Development Bank as a prerequisite to their providing funding to assist with the conversion of FINSAC notes to local registered stock.
All these agencies were very complimentary of FINSAC's work.
business@gleanerjm.com
Published: Friday | May 27, 2011
Patrick Hylton, former managing director of FINSAC Limited. - File
- The final instalment of Patrick Hylton's statement to the FINSAC Commission of Enquiry
One key thing we must always remember is that FINSAC never originated any one of these loans.
They were acquired not because FINSAC wanted them, but because removing them from the intervened banks was a prerequisite to those banks' rehabilitation.
Our mandate was to extract value from those loans as would have been attempted by the legacy banks if they had retained them as a part of their own attempt at rehabilitation.
The important question which arises, then, is whether or not FINSAC established a sufficiently robust and fair process and framework for extracting value from these loans, and how well did FINSAC execute against this framework.
A consideration that is worth repeating is the nature and condition of the loans being managed.
The techniques and strategies used by FINSAC for problem loan resolution were not peculiar to FINSAC. They are the same techniques and strategies that were applied by other financial institutions in Jamaica and across the globe.
There seemed, however, to be an expectation based on a perception that FINSAC would naturally and automatically grant special discounts to delinquent borrowers.
It is interesting to note that the same perception did not exist among borrowers who remained in the performing or then substandard category of intervened financial institutions, as well as those that were not intervened.
It is my view that this dichotomy existed because of the general incorrect perception that FINSAC was a bailout agency.
If one listens to the debtors - fewer than 20 - who have complained in this enquiry, one may get the impression that every debtor's experience with FINSAC was a negative one.
This is absolutely not true, as in my own experience I have many times been greeted by former debtors, almost all unknown to me, who have expressed appreciation for helping them to sort out their debts and their lives.
The fact is that FINSAC had within its portfolio, at its peak, in excess of 20,000 debtors and those who now publicly complain can in no way be established as a representative group.
NON-PERFORMING LOAN SALE
The decision to sell the non-performing loan (NPL) portfolio was made after careful consideration of the challenges facing FINSAC in seeking to maximise value from these assets.
One major challenge was the extent to which the collection process was in danger of being compromised, based on the frequency of attempts by persons connected to both major political parties and other persons of influence to intervene in the collection process.
These attempts ranged from telephone calls to officers of FINSAC, through misrepresentation of facts, and false accusations against staff of the organisation in carrying out their duties.
Many of these assertions were directed to the management of FINSAC or our political bosses.
This created a great deal of distraction within the team. While the majority of these attempts to intervene may have been well-intentioned and out of genuine concerns for their constituents, they were often based on falsehoods communicated to these persons and could potentially delay or undermine our collection or restructuring strategy.
There was a genuine concern that as this was a public institution there was a real risk of interference being used as a strategy to undermine its activities.
This is not dissimilar to the fear which would have informed the desire and the need to quickly divest of intervened financial institutions and similar assets, to avoid their performance being constrained by public sector ownership.
We were also mindful of the experience of previous government-owned institutions in the lending business, such as the Jamaica Development Bank.
As I understand it, even though this institution started out with a portfolio of performing loans, many rapidly became non-performing.
Many attribute this to the fact that borrowers felt entitled to default and get relief as it was a government-owned institution. In our view, that risk was magnified when treating with a portfolio of government-owned NPLs.
It was clear to me that the Government did not belong in either the business of running financial institutions, or managing NPLs, and should get out as soon as practicable.
I was also mindful of the fact that shortly after taking over the loans, we had McKinsey and Company do an assessment of the likely amount we could recover from the NPLs.
Their assessment was a net present value of 10 cents in the dollar if we took urgent and aggressive action. This assessment was a closely guarded secret within our organisation.
It was necessary to keep it secret so that borrowers would not use it to develop expectations as to what they should pay or expect as a write-off, and so as not to compromise negotiations for the eventual sale of the NPL portfolio.
The analysis undertaken by our advisers on our NPLs for identifying an optimal resolution, which was quite detailed and extensive and which looked at a number of options, strongly recommended divestment of the portfolio as the best option open to us.
Also, if the portfolio was retained by FINSAC rather than sold, it would have unnecessarily prolonged the existence of FINSAC, with its attendant expenses.
It was also felt that sale to an organisation which specialised in that business and had the requisite expertise could result in significant benefits from FINSAC sharing in any upside in collections. Such sharing provided FINSAC with a hedge that allowed it to benefit if persons were better able to pay than anticipated at the time of sale.
Also, it enabled FINSAC to have an ongoing source of funding to make payment on the FINSAC notes, meet operational expenses and reduce the ultimate cost to taxpayers.
Among the benefits would be the removal or reduction of the risk of interference, removal of the attitude by several borrowers that now that government owned the portfolio they were entitled to massive write-offs.
FINSAC would no longer bear the significant administrative and legal costs and risks associated with that business. FINSAC would benefit from the expertise and experience of the collectors in that arrangement.
In the final analysis, the issue became somewhat moot when the World Bank and Inter-American Development Bank (IDB) who were assisting the Government with funding its programme of converting FINSAC notes to local registered stock, included the divestment of the portfolio within an agreed timeframe among the requirements for their assistance.
The sale of the portfolio involved a very rigorous and transparent process.
As part of the process, detailed reports were prepared on all the larger loans to include financial information, new valuations of hundreds of properties and copies of security documents held. These were compressed and put on CDs and sold to interested parties after a period of advertising in major international fora and some roadshows to promote the sale of the portfolio.
I think at the end of the marketing and campaign phase, we received somewhere in the region of 20 expressions of interest, included among them, some from famous global financial institutions and local parties.
Two major international financial entities who did not initially enter the formal process also approached me directly - not wanting to go through the competitive framework, but I told them that was not negotiable.
Beal Bank was not our preferred bidder initially, but we did a deal with them after four other attempts at sale fell through.
Among the events causing deals to be scuttled was the violence in west Kingston, which resulted in more than 20 deaths in July 2001, and the terrorist events of September 11, 2001, in the United States.
We had a due-diligence exercise conducted on Dennis Joslin, who had originally commenced negotiations, and then also on Beal Bank, which became the primary owner of Jamaican Redevelopment Foundation Inc.
I cannot now recall who conducted the exercise on our behalf, but written reports were received on this and the other due-diligence exercises that had been arranged for FINSAC, and these should all be among FINSAC's records. I recall that the due diligence confirmed Beal Bank to be a licensed financial institution in the USA, subject to federal regulation there.
To the best of my recollection, the aggregate principal debts sold was in the region of US$380-390 million. The terms of sale included an initial payment of US$23 million, with a right for FINSAC to then share in collections on a scale that rose as the collections grew higher, eventually to sharing 50 per cent in all collections.
In all the circumstances, and particularly having regard to this ongoing interest in the collections, we also decided that it would be appropriate for FINSAC to have the right to have its own employee in the offices of JRF, as well as to have the right to audit JRF's activities in respect of the management of the NPL portfolio that had been sold.
Both these controls desired by FINSAC were agreed by JRF. Subsequent to the sale, FINSAC maintained that presence in JRF's offices.
Several persons have suggested that if FINSAC did a deal with Beal Bank to sell NPLs at some cents in the dollar, the same deal could have been offered to each debtor.
The fallacy in that argument is that it fails to recognise that the cents in the dollar referred to, reflects an assessment of the composite portfolio, from which there would be some loans on which there is almost full collection while in relation to others it would be zero.
In addition, it fails to take into account FINSAC's continued interest in future collections under the deal with Beal Bank, and the moral hazard problem in relation to write-offs of debts (to which I have earlier made reference).
CLOSING OBSERVATIONS
In closing, I would like to comment briefly on some of the statements and accusations of malice or ill-feeling by the principals of some of the failed institutions in the way in which they were dealt with by FINSAC.
I can say without hesitation, or fear of contradiction, that under my watch I neither harboured any such feelings, and would not have countenanced any such view as a basis for making a determination as to how to treat with an institution or individual.
I can also say that no one among the authorities ever approached me suggesting that malice, political bias or their personal agenda be a basis for influencing our treatment of any institution, assets or loans, whether negatively or positively. If anyone at the appropriate level had so insisted, it would have been my last day with FINSAC.
I saw my role as being to carry out an important mandate, unaffected by political bias.
I am not and have never been a member of a political party, and have deliberately kept my political views confidential. I, therefore, had no intention of being seen to be aligned with any of the parties.
Many of the owners, principals and senior officers of the various intervened entities were personally known to me and we had great personal relationships.
The fact is, however, that in many instances their institutions had not just failed, but were massively insolvent, experiencing a severe liquidity crisis; and our mandate was to protect depositors, policyholders and pension funds.
This protection imposed a direct cost on taxpayers and we had a responsibility to minimise that cost, both in terms of spending as well as by taking any value we could acquire in the process.
To have restored the institutions to the original owners would have meant a transfer to them from taxpayers of billions of dollars, and in any considered view, could never be justified.
I spent numerous hours in meetings and on the telephone explaining to these persons affected why we could not necessarily pursue and protect their institutions and their equity positions in them.
While in many instances one felt their pain, we had to do what the circumstances dictated was the right thing to do consistent with our mandate.
FINSAC's work was reviewed by the management team of the International Monetary Fund under an agreed monitoring programme with the Government, as well as by teams from the World Bank, IDB and Caribbean Development Bank as a prerequisite to their providing funding to assist with the conversion of FINSAC notes to local registered stock.
All these agencies were very complimentary of FINSAC's work.
business@gleanerjm.com
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