In this 1993 file photo then Dutch Ambassador to Jamaica, Nico Jan Jonker, (left) speaks with Jacques Bussieres, Governor of the Bank of Jamaica (centre) and Minister without Portfolio in the Ministry of Finance, Dr. Omar Davies. Three years later, Davies as Finance Minister would launch a rescue attempt of the island's financial institutions. Bussieres by then had indicated his concerns about two entities in particular.

This excerpt, the second of two, from Jamaica Meltdown, a new book by Wilberne Persaud chronicling the events of the financial sector crash of the 1990s and its aftermath, is pulled from Chapter 3, when the crisis had become evident. The first excerpt was published in the Financial Gleaner of October 6. Jamaica Meltdown is available for sale at the University of the West Indies Bookshop, Mona, Kingston.

The activities of mid-1996 included the Minister of Finance assuming 'temporary management' of Century National Bank, but more importantly, the insurance sector began to acknowledge, both to itself and to the Government, if not to the public at large, that it was in need of financial assistance.

As they saw it, theirs was a liquidity problem. Their investments in underperforming real estate and a weak stock market, coupled with inappropriate products - for the state of affairs of the economy - encouraged early encashment. Inevitably the outcome was pressure on their liquidity.

Encashment required compulsory sale of equities at precisely the time when heavy losses would be incurred.

While staving off the inevitable, their short-term borrowing at high interest rates not only made more certain the outcome; they also made that outcome appear and converge closer on the horizon.

From the perspective of an observer, researcher, or the general public, an interesting question is: When was the crisis diagnosed? If you had to find a date for the crash, what would that date be? When did we know? Minister Davies, whose task it was to oversee this period of difficulty, was asked the following question: "When did it become clear that the indigenous financial services sector was indeed in crisis?" His response:

"Very hard to answer that definitively. At various points it was apparent that some institutions had serious difficulties but that is not abnormal, for example ... former Governor Bussieres following the Blaise debacle and the Ministry of Finance assuming responsibility for regulating the building societies, up until that stage the establishment of a building society was easier than getting a driver's license! You simply got a form and filled it out; and there was nothing to prevent, in a sense the Registrar General who was called the Deputy Keeper of Records was obliged, you just paid for the form and you had a Building Society... Ministry of Finance established a law adjusting the Financial Institutions Act to prescribe Building Societies as one of the institutions which had to be duly licensed. The issue of the existing institutions came up and Bussieres, to give him full credit, indicated that he had doubts about Eagle and Century which had come from nowhere to be Nos. 3 and 4 - just out of nowhere in a couple of years because simply what they were doing was diverting, attracting deposits into the building society because there were no reserve requirements, etc, and he objected."

CRASH DATE

The Minister does not give a date. But he certainly has a particular timeline in mind. Governor Bussieres was uneasy with the situation. Obviously the Minister did not divulge all that the governor would have discussed with him. But the existence of concern is clear from his answer.

This gives us a clue - it was after the passage of the Financial Institutions Act of 1992. This places a limiting beginning date at December 1992, for this was the actual date of passage of the legislation.

We could argue that the 1994 closure of Blaise Trust and Merchant Bank signalled the crisis. Yet others may suggest the closure of Century National Bank on July 10, 1996, would be the best date to assign to the actual crash.

But a financial sector crash and a stock market crash, while they may share a similar set of behavioural and other determinants do have one significant difference - for the stock market there will be a day, perhaps even an hour, when everyone knows the market has plunged and crashed. For financial institutions or a financial services sector, conditions of collapse usually exist for some time before it becomes common knowledge such that a crash might be said to have occurred.

Usually it is the professionals in treasury management, accountants, and auditors who are first to perceive symptoms of an incipient crash. If their communications to management do not result in corrective action, the slide continues. Considering this issue for Jamaica, one would have to place the time of crash at around the early months of 1996, certainly at the time of closure at Century National Bank in mid-1996.

While the Minister's response does not provide the crash diagnosis date, it does indicate the inadequacy of the regulatory mechanism associated with the existing legislation.

It was demonstrably deficient in accomplishing the task. It also remained subject to regulatory arbitrage by institutions that were aligned, as these were, in the prevailing "group" structure.

The practice of ever-greening loans and associated shifting of loans and deposits across institutions was opaque to the regulatory system under the old regime.

The effect of this was that, if a routine Bank of Jamaica inspection found problems in the commercial or merchant bank of a group on one day, those same problems could be wiped off the next by what were de facto internal book entries. It was simply achieved by transference of the offending accounts and relationships to sister institutions not subject to inspection - regulatory arbitrage.

As it then turned out, Bank of Jamaica recommended that building societies should all be licensed in order to bring them under the purview of the new regulatory system.

With this recommendation, however, a huge problem loomed. How could the Bank of Jamaica, even if a particular building society in one of the "stables" appeared to be in difficulties, refuse to grant a license to an institution that previously enjoyed the confidence of Jamaica's saving public? Such refusal might itself be cause for panic and crisis.

This type of problem highlights the unique difficulties of regulating any financial system. The word 'credit' derives from the Latin 'credere' Ñ to believe.

Truth be told, the system rests upon a foundation of belief. Once the general population of account holders and clients of financial institutions believe their funds are safe, the system functions smoothly. Indeed, one writer likened financial systems to that of the plumbing in a skyscraper - operating properly, no one notices it; let it malfunction however and life becomes unbearable.

The decision was therefore taken to license all the existing building societies, but to work with them to straighten out their difficulties.

The problem, however, was much wider and deeper than merely those of the building societies. Attempts to merge the indigenous financial entities mentioned earlier, contrary to popular opinion expressed in the Jamaican media ,was not the idea of the Finance Minister.

FINSAC: GENESIS AND MISSION

Upon the insurance companies' approach to the Ministry of Finance to deal with their "liquidity problem occasioned by a mismatch of assets and liabilities" in April/May of 1996 and the formation of a task force to look into the problem, it was determined, as [Gladstone] Bonnick recounts, that the issue was "insolvency - potential, borderline and in some cases substantial".

With hindsight always 20/20, Bonnick's was an understatement.

All the insurance companies were linked within a "group", or as in the case of Island Life Insurance Company and Victoria Mutual Building Society, tied to each other in a financial venture partnership.

Jamaica Mutual Life Assurance Society was actually part owner of National Commercial Bank. Life of Jamaica owned Citizens Bank. Crown Eagle Life Insurance Company was associated with Eagle Commercial Bank and Eagle Merchant Bank, owned or participated in ownership of hotels and considerable real estate holdings, and owned and managed two unit trusts (mutual funds).

Workers Bank had its beginnings during the period of democratic socialism in the mid-1970s as an independent entity geared toward meeting the needs of working people. Shortly after it was privatised, a group structure was created, making the bank part of a holding company - Corporate Group.

The group's activities then expanded to include the hospitality business, real estate, insurance, and retail trade. Each of the entities in these groups maintained borrowing relationships within the group. Although not evident at the time of the crisis, the Horizon Group, spawned from its beginnings as Horizon Merchant Bank, was similarly structured and also deeply troubled.

Throughout the year 1996, the financial sector's condition and performance was in and out of the news headlines, on and off popular radio talk and TV shows.

"Financial Analysts" (I use quotes here because it appeared that this qualification was created, conferred, or assumed by personal assertion or declaration of the one so described) appeared on talk shows indicating their "inside knowledge" of the perilous state of the insurance and banking institutions.

It improves the status of the commentator to be privy to secret information. This leads to more requests to appear on shows. Some of them, apart from offering financial advice and investment services for gain, worked in the financial services sector itself.

While the former state of affairs presented remarkably clear conflict of interest, it remained quite a cheap - indeed without charge - and very effective form of advertising and public relations for those purporting to be financial analysts and advisors.

Rumours of collapse proliferated immediately prior to 'temporary management' of Century National Bank.

Jamaica's political rivalry adverted to before did not help. The opposition (Jamaica Labour Party at the time) leader had to field allegations that he had ceased servicing a debt to Century National Bank, while the People's National Party would have to respond to charges that it had negotiated an electoral campaign loan with Century National Bank when, simultaneously, the Government's Ministry of Finance was in official though confidential discussions with the bank - one that could candidly only be described as "in distress."

In these circumstances it was no surprise that there was a run on one of the banks - Citizens Bank - in October of 1996; another occurred in 1997.

In face of the reality of a deteriorating situation and the fact that the multilaterals would not provide immediate financial support for resolution of the problem, government acted. Toward the end of 1996, it became evident that the crisis could no longer be managed by ad hoc measures.