For most of the 1980s through the mid ’90s, Paul Chen-Young epitomised a new entrepreneurial spirit in Jamaica. As his Eagle Financial Network expanded, Chen-Young appeared to have the golden touch and the confidence of all. Then it all came crashing down with the collapse of Jamaica’s financial sector in the second half of the ’90s.

In his book, The Entrepreneurial Journey in Jamaica: When Policies Derail , Chen Young argues that it didn’t have to happen. He mostly blames bad economic and fiscal policies and government short-sightedness for the debacle which will hurt Jamaican taxpayers for a long time.

Excerpts:

THE FINSAC takeover of the Eagle Group amounted to the dismantling of a financial conglomerate irrespective of the viability of the component entities and without regard for the hundreds of employees at all levels who had worked tirelessly and with commitment and motivation to build and operate successful financial companies from scratch.

The takeover came as a shock to me.

Following various meetings with (FINSAC chairman Gladstone) Bonnick, some of which were attended by (Eagle director Daisy) Coke, we negotiated in good faith for the government to enter into a joint venture with Eagle and to take controlling interest in March 1997.

A meeting was scheduled at the Pegasus hotel with the understanding that the terms of the joint venture would be presented by Bonnick. Attending the meeting were directors Coke, (Oswald) Harding, (Derrick) Milling, (Geoff) Messado, and (Keith) Senior.

It is noted in the EMB minutes of March 4, 1997: “Directors were advised that the first meeting between Eagle and FINSAC was scheduled for this evening to be followed by negotiations tomorrow and it was expected that by the weekend there should be an agreement.”

When we went to the meeting in April 1997, we waited for nearly two hours after the scheduled time, when Bonnick, Financial Secretary Tyndall, and a host of lawyers arrived.

Bonnick announced to my utter amazement that the government would be taking over the Eagle companies. I asked whether they were going to close down Eagle entities that were the product of so many years of professional input. He replied yes.

I asked if there would be any compensation to the shareholders of Eagle, and before he could reply, Coke, who might have known of the decision because of her close friendship to Tyndall, said in colloquial Jamaican style, “After it no worth anything.”

I was amazed to hear such a remark, and felt that with those words the final nail was being driven in, and I retorted that she could speak for herself but not for the other shareholders of Eagle.

The implication of the takeover is much larger than the fate of the Eagle Group. From an economic policy viewpoint, the government not only closed and sold off Eagle entities, but it facilitated the wholesale transfer of the domestically owned banking and life insurance sectors to foreign entities almost overnight.

It is difficult to understand how this was allowed to happen under a political party with socialist orientation, given the educational background of Finance Minister (Omar) Davies at the University of the West Indies, where adherence to the concept of “commanding heights” was once quite fashionable.

That action raises serious doubts as to whether Davies and the government had any vision of the economic future of Jamaica and the role of the financial sector. Our national anthem has a line, “Grant us vision lest we perish,” and how pertinent that was to the dismantling of the domestic financial sector.

It is worthwhile to recall that the localization of the financial sector along with the industrialization drive started under the JLP government of the 1960s. The encouragement for the development of the sectors led to an outburst of the creative energies of Jamaican businesses and a growing tide of entrepreneurship.

This was most noticeable in the financial sector where the founders of these entities saw an opportunity to use their skills, experience, and whatever little capital they had accumulated to take the risk of being enterprising.

Today, the ranks of entrepreneurs in all sectors – finance, manufacturing, and agriculture – have been sharply depleted, and the local businesses that succeed have become more conservative, tending to shy away from risk-taking.

While there are merits in foreign ownership within the financial sector, the most important being to raise capital and loans overseas, I believe the joint venture approach of ownership should have been the preferred model, as is well-recognized in most countries.

What is important is to have sound companies operating in a prospering economy being able to satisfy international credit standards. We at Eagle and National Commercial Bank demonstrated that the international market could be accessed without overseas ownership.

Furthermore, once the financial sector is put in the hands of overseas ownership, it is virtually impossible to reverse that situation, and there is very little influence that government can exercise in directing the sector other than through the regulatory process.

There is no question that the deepened financial sector, with strong domestic participation and entrepreneurship, facilitated the movement of capital to the productive sector, and that it made an immense economic contribution to Jamaica in the 1980s and 1990s.

I believe there is validity in a banking model fashioned akin to those of Japan and Germany, especially in countries like Jamaica where the domestic financial sector made a good start in this direction but suffered a great setback. In fact, this thrust may never be revived, as foreign owners may not be likewise disposed.

I remember my friend, the late Tom Desulme, who came from Haiti and became an industrial in Jamaica, saying that it was easy to borrow money from overseas.

But what was important for nation-building was not just money, but a combination of money, management, and technology. Having cleaned up the balance sheets of the various financial entities that were sold, it would appear that the main criteria used in determining to whom the entities were to be sold was that purchasers should have “deep pockets” according to Minister Davies.

As it has turned out, the once-troubled companies were virtually guaranteed to make substantial profits as soon as they were taken over, and it is not clear whether any superior management and technology have been introduced that were available locally.

Also, the immediate short-term balance of payment benefit from sale proceeds will be lost as new owners quickly recoup their initial investments and should be able to pay off promissory notes from profits.

There will be long-term adverse effects on the capital account as profits accrue to non-nationals, notwithstanding the purchase of National Commercial Bank by the highly successful Michael Lee Chin, a Canadian resident of Jamaican parentage.

What we have left in terms of local participation in the sector are two major building societies, a few general insurance companies, and a host of stock-brokering and money management companies. Jamaica has lost the strong competition within the banking and life insurance industries, much to the disadvantage of the public.

The financial landscape has been altered dramatically as effective control has now been shifted to the boardrooms in Trinidad and Tobago, Barbados, Canada, and the United States that control about 90 percent of the banking and life insurance industries.

The potential impact of such a shift will be realized when the country is in an economic crunch, such as now when debt rescheduling would be most timely to avoid the dramatic cutbacks in social expenditures. It will also be felt in the future, as the new owners are probably less likely to become as actively involved in development projects.

The approach to the demise of the domestic financial sector cannot be described as rehabilitation. The authorities did not display any imagination or business acumen in reorganizing the sector, such as planned rationalization along with management and ownership changes where appropriate.

Once the government decided to sell the entities, after cleaning up their balance sheets (especially by absorbing the cost of bad debts along with high-cost funds), what was needed was some creativity to attract local and foreign investors to participate in a planned rehabilitation program that would have seen joint ventures developing and a restructuring of the industry, to include mergers.

Readers may recall that when then Minister of Finance Seaga launched his initiative to “Jamaicanize” the financial sector in the 1960s, the sector was almost totally controlled by foreign interests. With his policy, there was a surge of Jamaican entrepreneurial energy that eventually resulted in the sector being controlled by Jamaican investors.

The treatment of the troubled entities within the sector can be described as arbitrary. For example, shareholders of Island Victoria Bank were dealt with differently from those of National Commercial Bank. Both were insolvent, with NCB receiving J$19.5 billion (about US$550 million) FINSAC support at the end of 1997.

Both had building societies as large shareholders, the former Victoria Mutual and the latter Jamaica National. Island Victoria Commercial Bank was allowed to fold and the investments by shareholders were wiped out.

But NCB received the largest FINSAC support and its shareholders, the major one being Jamaica National, have reaped windfall profits after it was taken over by the Lee Chin Group.

Other examples are those of Dyoll and Manufacturers Merchant Bank. The former invested heavily in the St. Ann’s Bay resort project, Drax Hall, while the latter made substantial investments in the sugar industry. Both companies would have collapsed without special government support. In the case of Dyoll, low-cost financing was provided while, in Manufacturers’ case, government took over its investments in the sugar industry.

In the case of the LOJ, Dennis Lalor and other shareholders lost control of the company, but there were huge FINSAC cheap loans to the company, without which it would have been forced to close and they would have lost their investments.

As shareholders, they were allowed to retain minority interest and benefited handsomely from the takeover of LOJ. This was also the situation with Island Life, where Oliver Jones and other shareholders lost control of the company but, I believe, were able to sell their shares to the company that took over its business.

I am not sure what happened to Delroy Lindsay and his shareholding in Worker’s Bank. Nothing has been said about how the insolvency of entities such as the Horizon Group, headed by Elon Beckford, and Fidelity Merchant Bank, headed by Huntley Manhertz, has been addressed.

Nor has FINSAC released any of its findings from the forensic auditing of each enterprise, the combined cost of which must run into the tens of millions.

It would be most appropriate for the Minister of Finance to make a full statement to the country on the findings of FINSAC in regard to the failed domestic financial entities and to state specifically the net cost of the intervention at the time it was done, including how shareholders of the different entities were treated so that the probity of FINSAC and its dealings can be fully understood.

If there is no culpability by the various players, it should be clearly stated and, if there is, then Davies should say what legal action has or is to be taken so that the issue of arbitrariness and capriciousness can be addressed.

It is also very difficult to understand why the one hundred-year-old Mutual Life Assurance Company could not have been salvaged but was simply allowed to close.

Here was a company that was a part of Jamaica’s heritage, formed by a small group of patriots who had a vision that, collectively, Jamaicans could pool their savings and establish a mutually owned life insurance company, which was to become one of two giants in the life insurance industry in Jamaica (the other being the publicly traded Life of Jamaica).

All those years of building the first indigenous financial institution were summarily discarded with the abrupt closure of the company. No technical paper has ever been presented to the public to justify such action. One question that has to be asked is what other alternatives were considered and pursued before a decision was made to close this historic company.

In the case of Eagle, the shareholders lost control of the company as well as their investments. But that is par for the course as there was no obligation for government to protect shareholders.

So the treatment of Eagle cannot be described as any “bailing out” of shareholders as in other financial entities. FINSAC simply dismantled the Eagle Group that included strong and viable financial entities operating with good management, as attested to by Bonnick.

In a letter dated October 2003 to one of my attorneys he stated:

“I could truthfully attest to the fact that he (Paul Chen-Young) cooperated with FINSAC by facilitating the transfer of Eagle enterprises … Also, I told him that I could attest to the fact that the Bank of Nova Scotia during the first four months after the purchase/take-over gave the impression that it had found these institutions to be reasonably well run: the main criticism being that they were over-staffed for the amount of business they were doing at the time.”

The financial viability of Eagle entities is also supported by financial consultant John Jackson, who was called as an expert witness in the civil case against me.

Based on information given by the company’s auditors KPMG Peat Marwick in 1995, Jackson, a former director of Eagle Unit Trust, said, “about the financial strength of certain entities in the group … the Eagle Commercial Bank was one of the soundest in the island and it was ranked alongside Bank of Nova Scotia.

At no time was any impression given to me that would suggest that the Merchant Bank was not sound. This seems to be in conflict with the Avey report” (i.e. FINSAC Expert Report).

The discussions with Bonnick about possible government support for Eagle led me to believe, rather naively in retrospect, that a joint venture would have been formed, with government taking control of Eagle and with me stepping down as chairman and being removed from management if necessary.

This I was prepared to do, because my overwhelming concern was that depositors should be protected and that the Eagle companies should continue as going concerns, given their viability and capable management and staff. Again, that was not the case.

Chapter eight of Paul Chen-Young’s book, The Entrepreneurial Journey In Jamaica