What's the difference between HCU and CLICO bailout?

With news that CLICO has already received $1 billion in government assistance and that it might be well over $16 billion in the red, the questions that are coming up are why didn't government see it coming and how is it different from the Hindu Credit Union (HCU) case?

Finance Minister Karen Nunez-Tesheira offered Government's take on the matter in the House of Representatives Friday.

She said Government did not intervene in the same way it did with CL Financial because although the credit union insisted it was suffering a short-term cash flow problem, it was actually going broke.

But isn't that what happened with CLICO? According to the Governor of the Central Bank the decline started in 2006 when the conglomerate was in a healthy financial situation and within two years "a flawed business plan" sent it in a downward spiral.

Today it is facing a shortfall of $10 million, has to pay $40 million and is operating with only $15 billion and "a sizable bank overdraft" according the Central Bank governor. Williams also said in the CL case the shares of some of its subsidiaries are nearly worthless.

With all that in the equation the minister told the House:

"The auditors' assessment was that the Hindu Credit Union was facing not a liquidity problem, but an insolvency problem, and that all of Hindu Credit Union's assets were overestimated in value, and encumbered."

So what does INSOLVENCY really mean? First and foremost it means "the inability to pay one's debt". That is what happened at the HCU and that is what is happening now at CLICO.

Insolvency is defined in two different ways:

• Cash flow insolvency is defined as in inability to pay debts as they fall due. An indicator of this is when the balance sheet shows liabilities exceeding assets
• Conversely, a business can have negative net assets showing on their balance sheet but still be cash flow solvent if ongoing revenue is able to meet debt obligations, and thus avoid default, instance, if it holds long term debt.

Insolvency is not a synonym for bankruptcy.

Here is how the minister sought to explain why the Government had helped out CL Financial's cash-strapped subsidiaries CLICO, British American and the now dissolved CLICO Investment Bank and not HCU:

"In the case of CLICO, there was tangible cooperation by the CLICO authorities as evidenced by the signing of a Memorandum of Understanding and a reconstitution of the board of directors and the restructuring of the company's senior management. All of this accomplished without resistance to date."

But there's some ting wrong here.

Didn't the HUC try to get the Government to negotiate? Didn't the government promise to disucss the matter with the HCU and then turn its back on the body? The records show that is what happened. The HCU president even accused the minister of finance of "betrayal".

"If this were any other credit union they would not have done this. We maintain that the credit union is not insolvent. It is not a failure,” Harry Harnarine told reporters last October when the Commissioner of Credit Unions declared the HCU insolvent.

Nunez-Tesheira offered her explanation of why the government did not rescue the HCU.

She said according to external auditors Ernst & Young, HCU "failed to comply with its own internal controls, policies and procedures, and loans receivable from Hindu Credit Union's subsidiaries totalling $133.7 million were all loss-making entities and or did not have any sufficient realisable assets which could liquidate the loans or any part of the loans made to them by" the credit union.

"Other receivables were from the Hindu Credit Union subsidiaries, amounting to a sum of $53.9 million, were not likely to be recovered," Nunez-Tesheira said.

Nunez-Tesheira noted that HCU originally agreed to allow Ernst & Young to conduct an independent audit of its assets after it informed the Finance Ministry that it was experiencing a liquidity problem on April 11, 2008, and was seeking financial assistance through a line of credit in the sum of $71 million which would be collateralized by its real estate assets.

Nunez-Tesheira said HCU eventually locked Ernst & Young out of its head office on July 17, 2008, and then closed it doors for business the following day.