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Remember Nick Leeson?

Sri Lanka will step into uncertain territory, both domestically and internationally, when the New Year dawns later this week. The emerging conflict between the Executive and the Judiciary over the petrol pricing issue, now on the back burner, cannot remain there forever. Once the court vacation is over on January 12 the opposition UNP is looking at raising a contempt matter on non-compliance of the pricing directive and where that will head is anybody’s guess. Lanka Indian Oil Corporation, after selling petrol at the court-ordered price of Rs. 100 per liter has reverted to the CPC price of Rs. 122 a liter saying that selling the last parcel it imported at the lower price will mean a loss of Rs. 32 million in the absence of a duty adjustment. Motorists, particularly trishaw drivers, would be grateful to LIOC for the small mercy of giving them the benefit of the court-ordered price for even a few days in the context of an obvious government hard line.

The petrol price and what the Supreme Court will do or not do is just one issue. The Golden Key Credit Card Company’s inability to meet its obligations, and the consequent instability of the entire financial sector, is another hot potato. Central Bank Governor Ajith Nivard Cabraal and key officials were in urgent conclave yesterday looking at possible options. Mr. Lalith Kotelawala, communicating with the Golden Key depositors via newspaper advertisements, on Saturday announced the decision ``to divest the investments’’ in Seylan Bank and ``honour the debts of the Golden Key Credit Card holders.’’ What that mean is unclear. Does Golden Key have a substantial shareholding of Seylan Bank and if so, would it be possible to dispose of such a holding at a fair price given current stock market conditions? If not, can other Ceylinco-Seylan Group companies, some of which are quoted on the Colombo Stock Exchange and have public shareholders, dispose of their interest in the Seylan Bank and take on obligations of Golden Key which has nothing to do with those companies? They, after all, only belong to the same group. Countless other questions arise with no clear answers to any of them.

Kotelawala deserves the credit for summoning a meeting of Golden Key’s debtors at the BMICH, facing them and assuming responsibility for the debts. He did not choose a coward’s path of running away as others have done before. Nothing less could have been expected from a nephew of Sir. John Kotelawala. But what Golden Key owes its depositors and what assets back those deposits has not been made public. What is fairly well known is that the Ceylinco Group, whose two strongest companies are Ceylinco Insurance and the Seylan Bank, is deeply into real estate and property development and are not without assets. Given today’s economic conditions, it will be hard to dispose of real estate at a realistic price. Distress sales inevitably yield anything but fair value and, in this case, the relationship between the seller and Golden Key will raise questions on the legitimacy of using Peter’s cash to meet Paul’s liabilities even though Peter and Paul belong to the same group with an interlinked management with Kotelawala at its head.

It is obvious that the whole financial services sector and not just the Ceylinco-Seylan Group will be at risk if depositors feel that their money is not safe in banks or finance companies. Given that the country was very much into the Christmas holidays, there was no serious run on the Seylan Bank on Friday. But that should not breed complacency. It is the responsibility of the Central Bank, described as the ``lender of last resort,’’ to maintain the stability of the financial system and the bank, obviously, is gathering the necessary information which must precede the mapping out of a strategy. It is obvious that there have been regulatory failures just as much there has been commonsense failures, often actuated by greed, that enabled a credit card company not licensed to take deposits to mobilize deposits in a big way on the basis that such funds merely secured credit card spending. High interest rates dangled before gullible depositors drew in the cash with a sad lack of commonsense by investors who did not seem to understand that aggressive deposit seeking and too-good-to-be-true interest rate offers too often means borrowing from Peter to pay Paul.

The Ceylinco-Seylan Group comprises of around 300 companies into all manner of businesses. Lalith Kotelawala has accused the Golden Key CEO of ``mismanagement’’ and accepted his resignation not only from the company he headed but also the Seylan Bank and The Finance Company plc, the country’s oldest finance company. While there are many who will insist that a single executive could not have created a situation incurring giant liabilities of the scale mentioned without culpability elsewhere up and down the line, let us not forget a derivatives trader on Singapore’s International Monetary Exchange called Nick Leeson who some years ago brought down Barings Bank. He first made big bucks for his employer earning pounds 10 million, which was 10% of Barings annual income. But his luck soon ran sour and he used a Baring’s error account (accounts used to correct mistakes in trading) to hide what was happening. The bubble eventually burst leaving mind boggling losses that brought down Barings.

The moral in this story is that when the going is good, the guys who are making the money are institutionally treated as ``golden boys.’’ There is no golden key left in their hands when the smelly stuff hits the fan. The public must be told how not just a camel but a whole coach and six had been driven through the regulatory needle. Is nobody watching when impossibly high interest rates are being publicly offered and finding out how this is possible? The immediate issue is to ensure that there is no crisis of confidence in the financial system. The Central Bank pumped billions of rupees of public funds when Mercantile Credit collapsed ensuring depositors lost nothing. Those who put their money in some other finance companies were less lucky. They Ceylinco Group has in the past itself rescued at least one failed finance company. Perhaps a strong bank like the state-owned Bank of Ceylon may now have to play a similar role. We will have to wait and see how events will unfold in the New Year but, as Mr. Chandra Jayaratne, a former Chairman of the Ceylon Chamber of Commerce has suggested, an apolitical think tank must work out a strategy that is in the national interest.

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