Is the CL Financial Group too big to fail?

Last week I had indicated that it was the stated conviction of the Trinidad and Tobago Government and its Central Bank Governor that the CL Financial Group was “too big to fail.” This belief accounts for the far-reaching bailout and rescue package afforded to the firm. In this week’s column I shall review the notion of ‘too big to fail.’

I shall begin with some broad theoretical observations, as the notion of ‘too big to fail’ has acquired considerable reknown. It is now practised in several economies worldwide.

How capitalism works

In all profit-oriented, market-driven capitalist economies, two major forces are at work. One is the competitive drive. Individuals, firms, enterprises, and other suppliers of goods and services compete with each other for sales in those markets for goods and services, in which they are located. This competition produces profits for the winners and losses for those who do not succeed. As a rule, it is expected that those suppliers failing to make profit would be forced out of the market. Those who are profitable will remain.

In this competitive process, the dynamism, innovation, and growth potential of market capitalism are best exemplified. Those firms that lose and have to leave the market do so as part of the process of creative destruction. Their demise ensures that only the best and most efficient firms survive.

As this competitive process rules, paradoxically there are forces at work to undermine the competitive drive that sustains it. One of these is that successful firms tend to grow bigger and supply a larger share of the market. They become as a result, more concentrated. They seek to exploit the cost advantages of economies of large scale in production, distribution, and marketing. Additionally, ownership among suppliers becomes centralized in fewer and fewer hands.

As Marx pointed out centuries ago as this concentration and centralization occur, suppliers seek to exploit the profit potential, not of competition, but from their ability to exercise monopoly power in the market place. Monopoly power is the deliberate restriction of competition.

This contradiction reaches its epitome with the recent arrival in market-driven economies of firms, which are considered too big to fail. By this is meant that, if these firms fail, there would be systemic economic catastrophe. This in turn, would threaten the foundations of the market-driven capitalist system.

In this age of intense globalisation, several of these firms considered too big to fail, are integral elements of the global economy because of their transnational reach. If they failed, the entire global market-driven capitalist economy would be put at risk.

We may fairly ask: If firms become too big to fail, what happens to the process of creative destruction, which lies at the heart of the capitalist model of growth and development? There is no good answer to this contradiction. It does however reveal that, when all is said and done, in capitalist systems, capitalists dominate economic choices and outcomes.

How does the CL Financial
Group compare?

The CL Financial Group is by no means a major global player. However, in the context of Trinidad and Tobago, and indeed Caricom, its collapse threatens to bring unprecedented harm, not only in the area of finance but in the real sectors: employment, government revenue, and so forth. The assets of the CL Financial Group in Trinidad and Tobago have been estimated at about one-quarter of that country’s GDP. The CL Financial Group is easily the largest trans-Caricom financial enterprise. It has hundreds of thousands of policy-holders, depositors, investors, creditors, suppliers and employees across the region.

The Government of Trinidad and Tobago in collaboration with the country’s Central Bank have been forced to put together an enormous rescue package or bailout for the group. However, the final cost of the bailout cannot be accurately assessed at this stage. The financial state of the group is too murky to arrive at sound measurement. Estimates indicate that this could be somewhere between 15-20 per cent of that country’s budget.

In general we may say that the Trinidad and Tobago Government and Central Bank have treated the CL Financial Group as too big to fail, because they feel there are good reasons for this. The problems reach into the entire Caricom as troubles exist in every jurisdiction in which it is located. In The Bahamas, the CLICO operation is in the process of liquidation. In Belize and Guyana the operations are under judicial management. In Barbados the government has put in place a stand-by arrangement in event there is a run on the company which threatens its breakdown. The OECS states are in the process of putting together a stand-by arrangement also for the CLICO affiliate: British and American Insurance Company.

Is CLICO (Guyana) ‘too big to fail’?

CLICO (Guyana) is not nearly as important to the Guyana economy as the CL Financial Group is to Trinidad and Tobago’s. Indeed the government has repeatedly stated that at the end of 2008, CLICO deposit liabilities represented only three per cent of those held by the country’s financial sector. The government has given the assurance to those that CLICO (Guyana) owes that it will meet the liabilities of the company. Its intervention did not stem from the notion of being too big to fail. Other concerns clearly played a leading role in this instance, not least the political, social, and psychological damage that the unravelling of the company was doing to the Guyanese community.

Such non-economic considerations apply too, even when the dominant firm motive for a rescue package/bailout is because the firm is considered too big to fail. Indeed we might go further and say that the bigger the firm, the greater is its likely political, social, and psychological (cultural) hold on the life of the community. This hold cannot be discounted by governments when considering whether or not to put together a bailout/rescue package to contain the direct and indirect consequences of a financial firm’s failure.