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Saturday, November 8, 2014

A fine mess: The Bank of The Bahamas.

Through a newly established government corporation, Bahamas Resolve Ltd., The Government of The Bahamas has stepped in to save a failing bank: The Bank of The Bahamas.

For all intents and purposes, the bank failed. A failed bank that needed to be saved by the government. A government that was a 65% shareholder in the bank, the largest shareholding, essentially making it a government institution. No matter how you try to make it sound as palatable and as diplomatic as you can, it really boils down to failure of the most epic kind.

Under any other circumstances other than the bank being a primarily government owned bank, the bank would have gone under and we would be having a very different discussion. A very different discussion, indeed.

But, before we begin to say: "I told you so! The government shouldn't be in the business of business!!" I wish to say that we really can't exercise that luxury in saying that, because it just isn't the issue that we are presented with now. Yes, people would have the moral high-ground to say that. But, this isn't what we are presented with, as terrible as it sounds to have to state the obvious.

Over the course of the last several months, the Central Bank of The Bahamas's Governor, Wendy Craig, expressed deep concerns over the non-performing loans at Bank of The Bahamas; particularly the non-performance in commercial loans.

The bank has a massive portfolio of underperforming commercial loans on it's books. A sum total of $100 million dollars in outstanding commercial loans is being transferred to Bahamas Resolve Ltd. in an attempt for the administrators of Bahamas Resolve Ltd. to chase down the borrowers, while simultaneously clearing the bank of these loans.

Reports have it that the loans borrowed are shared between no less than 13 borrowers, averaging about $7.6 million dollars, or thereabouts, which leaves us to question how many other smaller commercial loans at the bank could be on the books that, while small in nature to the 13 borrowers that amassed the $100 million, would be enough to make things much more interesting.

Bank failure in The Bahamas is nothing new. In the mid to late 1990's, Gulf Union Bank went belly up. A lot of persons have long since forgotten what had happened to the bank; why it failed; and what happened to the depositors that lost money as a result of the failure.

To cut a long story short, Gulf Union bank had found itself in too deep with some of the loans in its portfolio. With regard to one case in particular, a borrower secured a $3 million dollar plus loan through a supposed subsidiary of a parent company and with the assets of that parent company, but legally there was nothing binding between the companies other than a personal relationship between the owners.

These kinds of activities, among others, prompted Gulf Union Bank owner Sheikh Jabor bin Mohammed Al-Thani of Qatar, to sell Gulf Union and all of its assets to another Qatari businessman, Sheikh Abdul S. Qureishi.

Sheikh Qureishi then proceeded to heap more pressure on Gulf Union Bank Bahamas by ordering more than $5 million to be transferred out of the accounts in The Bahamas to the sister company in the Caymans, and essentially triggering the real downfall and subsequent liquidation of Gulf Union Bank Bahamas.

Gulf Union Bank and it's subsidiaries in the Caymans were ordered to be liquidated as well, and that ends that.

But, as we remember the failed Gulf Union Bank, enter in now The Bank of The Bahamas giving out very large loans, relatively speaking, at a time when the economy was bad world-wide. So bad to the extent that their balance sheet deteriorated to such a point that regulators noticed something fundamentally disturbing about their position and particularly its capitalization.

News Editor from The Nassau Guardian, Juan McCartney, on his Facebook page summed up the fine and undeniable mess that the bank had put itself in that prompted Governor Craig to raise the alarm:
"For those unclear, the Central Bank mandates provisions for capitalization at around 12 percent. Most banks in The Bahamas are provisioned around 30 percent. BOB (Bank of The Bahamas) was provisioned at less than four percent. Hopefully the BOB  (Bank of The Bahamas) bailout works..."
The Bank of The Bahamas doesn't speak on, or give information on, their lending activities. Your personal banking information is kept private, as per the law. Even though it is a government ran bank with tax payer's money, it still has covenants of a privately ran bank. So, we can only have- legitimately- a macro-look at what regulators see through their mega-data compilations.

So, the government attempted to save it. Some call it a bail out. Others have cautioned not to use the term bail out, as a bail out indicates that money was injected into the bank to prop it up. As we understand, money wasn't directly injected into the bank.

Rather, through Bahamas Resolve Ltd., the government has created another government corporation, pumped it with bonds in order to absorb the bad loans, and thus absolving the bank from it's bad loans temporarily via issuing a letter of comfort that states essentially that the government would stand by this institution, come hell or high water through these difficult times.
This is the best scenario out of all of the other options. The first, least desirable option was to let the bank fold. This would not have been doable, and not helpful in the very least.

The second least favourable scenario would be to inject hard-core cash into the bank from the public treasury in order to bulk up its reserves. The public would have been upset, and if done, would have indicated to the public that the government was prepared to throw bad money into a terribly ran bank, with the factors that caused this problem to remain in tact. In addition, the government probably would have found it difficult to do so under the terrible fiscal constraints it has found itself in.

The good part about this best-case scenario, all things considered, is that it will put Bank of The Bahamas back into shape with a clean bill of health, without causing a bank run, or wasting public funds in a bad environment.

However, with the management and board still in place, some of the personnel that caused the bank to spiral out of control, a clean bill of health is most likely a deceptive one. It looks ok, sounds ok, has performed ok so the recent books state, but it truly isn't ok.

One can only think that the board and management are left in place to assist in the unwinding and resolution of this tangled mess. Which would be the responsible thing to do, considering how different the bank is from other privately ran banks. One can also only assume that through Bahamas Resolve Ltd., more governmental oversight and scrutiny will be as a result of all of this and one can expect more moves to come in the near to medium term as the unwinding continues.

Also to be considered is that while $100 million in bad commercial loans is being placed into the care and management of Bahamas Resolve Ltd., the government is essentially taking a 100% stake in debt that really should only be a 65% stake when we consider that the bank is only 65% government owned. This is something that the tax payer should have the full confidence on that it will be handled properly and that we are not left on the hook with something that really should be a shared burden with the other shareholders.

Lastly, and most importantly, the administration of Bahamas Resolve is a very critical issue. The administrator, to be named, and the staff, must be people of inveterate probity. They, especially the administrator, should have the gravitas, courage and strength to dig into this issue and go after these bad loans. They must be respected. Respected and feared.

As said earlier, only 13 borrowers constitute this $100 million portfolio in bad loans. So, let us be honest with ourselves, the average person not of the elites of both the merchant and political class, did not get one of these loans. Loans that average out to $7.6 million, or thereabouts.

Without a doubt this is a very sensitive situation. We can only hope for the best and provide guidance as the informed and active public, while wishing the Bank of The Bahamas the very best as it tries to position itself back as a bank of soundness, and one that can re-enter international markets with a clean bill of health and steady stewardship.


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