The Tribune

Years of poor management, poor lending discipline and politically-related loans have led Bank of the Bahamas (BoB) to a loan book where 39 per cent ent of total credit was non-accrual (impaired) at June 30, 2014. No, that was not a typo, 39 per cent. For perspective, a non-accrual ratio of 3 per cent or less is considered healthy, and Commonwealth Bank had a respectable 4 per cent ratio at year-end.

It appears from media reports that the auditors at Ernst & Young refused to sign off on BoB’s financial statements until these loans were written down to their true value. This has been denied by management, but they knew the write downs would bring the bank below the Central Bank’s minimum capital requirements. The minimum capital requirements are there to provide a cushion against the possibility of bank failure.

Eventually, BoB’s management caved and the need to raise capital became a priority. The problem was that private investors were not willing to invest additional funds as minority shareholders in a badly run, government controlled bank, and the Government was unable to come up with the cash. So, in an unprecedented move, the Government decided to give BoB an ‘IOU’ worth $100 million to be paid back to the bank with interest. In exchange, the Government got a package of bad loans worth $45 million.

Now I’m no mathematician, but that doesn’t seem to add up. What about the other $55 million, you ask? That was booked as a credit to BOB’s retained earnings, resulting in a $55 million increase in the bank’s net worth. Now, if a company that was 100 per cent owned by the Government was given taxpayer funds to keep it afloat, that would be bad enough. But given the fact BoB is 35 per cent owned by private shareholders, taxpayers should be outraged. Imagine for a second if the Bahamian government had gifted millions of dollars to Scotiabank to keep it afloat. Would this be acceptable to the Bahamian public? Should there not have been an Act or Bill passed in Parliament to decide whether this was an acceptable use of taxpayer money?

What Should Have Happened

The first option should have been to issue additional shares on the stock exchange to recapitalise BoB. This would be dilutive to existing shareholders, but would be better than a total loss if the bank were to fail. This option would probably not have been successful since, as I mentioned before, who wants to be a minority shareholder in a floundering, government-controlled bank?

The second and most viable option would have been for the Government to get out of the banking business by selling its controlling equity stake to the highest bidder. Apparently, A.F. Holdings made a bid, but the Government declined. There are sure to be other interested parties if the price is right.

The final and least desirable option would have been to allow nature to take its course and the bank fail, but nobody wants to see that. A gift of taxpayer dollars to private BoB shareholders should have never been an option.

What should the Government do now?

What’s done is done. Preferably, these transactions would be reversed, but I think we all know this isn’t going to happen. What needs to happen now is to find a suitable buyer for the Government’s stake. This is an opportunity for the Government to sell and avoid future liability, because by the looks of things this is not the end of it. If the new majority shareholder values their money, they will undoubtedly put in place new management to turn the bank around. The current management and Board should last about as long as the last conch fritter at a backyard party.

For those who would draw parallels with America’s bank bailouts, let me point out the differences:

1) US banks were lent, not given, the funds, and the loans were paid back to the government in full.

2)) Any bad loans that were bought, were bought at market value. The US government did not, for example, pay the bank $100 million for $45 million worth of loans.

3) The banks selling assets to the US government had to issue equity warrants (a type of security that entitles its holder to purchase shares in the company for a specific price). This measure is designed to protect the government by giving the US Treasury the possibility of profiting if the bank recovers.

4) Congress had to pass the Emergency Economic Stabilisation Act before providing loans to the banks.

5) Many executives of the banks that failed, or came close to failing, were “relieved of their duties”.

I will also add that the US bailing out of the banks was not a welcomed remedy, and was the cause of widespread protests.

The US is still working on regulations to prevent that scenario from playing out again in the future. Let us hold our government to account as well.

Please write or call your representative and demand action.

Yours truly

Andrew Anansi