(Continued from this weekend’s Sunday edition, #2289 of Nov. 30, 2008)
SSB involvement in the Securitization Program
The SSB created the problem when it sold the Mortgage Loans to the RMB in the Eastern Caribbean Program and to the DFC in the North American Program, and represented that these Mortgage Loans, which it claimed to have purchased from St. James, were loans which it had made to the respective companies and that the sums were due and owing to it when, in fact, these companies or St. James owed nothing to the SSB at that point.
The SSB accomplished this by representing to the RMB and the DFC, respectively, through various warranties in the respective documents that the loans which SSB were offering for sale in the various programs were loans which SSB carried on its books as receivables.
In some cases SSB included the loans from St. James along with loans it had actually made to borrowers and for which there was actually an outstanding debt due to SSB. This occurred in the North American Program.
In other cases, SSB simply presented the loans from St. James as loans which they had on their books and for which there was an outstanding debt, a receivable due to them, when in fact this was not the case. This occurred in Tranches C and D in the Eastern Caribbean Program.
There was no financial benefit to the Fund; in fact there was a cost to the Fund to become involved in these transactions.
The Senate Committee does not concur with the reason given to it by the SSB personnel during testimony; that these transactions would create employment and therefore benefit the Fund by increased contributions.
As the Senate Committee understands it, the purpose of the securitization program was to bring into the country new money which would be used for further investment. The SSB knew that these sales were not to enhance their lending program since the funds were for the account of St. James.
However, as the documents show, St. James had already sold its portfolio to the Alliance Bank well before some of these transactions were concluded and St. James was therefore no longer in the business of dealing with investments and loans. The SSB had been advised of this well before it entered into the agreements with St. James.
The Senate Committee concludes that the SSB should have ascertained from an inspection before purchasing the loans from St. James whether the loans were properly documented and would have found out that the collateral being offered was in most cases grossly inadequate to secure the loans.
In most cases the transaction would not have advanced beyond this stage and the SSB would not have become involved in the transaction.
While the SSB’s personnel admit that the decision of the Board was to facilitate St. James to sell its mortgages in the Securitization Program, it appears to the Senate Committee that the persons responsible to effect these transactions took the approach to simply include the mortgages in the Assignment of Mortgage document between SSB and RMB and SSB and DFC without regard as to the accuracy of the statements contained therein and the effect these transactions would ultimately have on the SSB’s Fund.
In respect to the sale of the two Mortgage loans into the North American program through the SSB, one for a company called Western Caribbean Properties Limited (WCPL) and the other for a company called International Telecommunications Limited (ITL), the Senate Committee finds that there is conflicting information between representatives of the DFC, representatives of St. James and the SSB as to who initiated the process which resulted in the inclusion of these two Mortgage Loans on the list of loans sold to the DFC for inclusion in the North American Program.
However, the Senate Committee observed from information contained in a report from Deloitte & Touche, accountants engaged to scrutinize the Mortgage Loans being offered for sale on the North American Market and forming part of the private placement memorandum, that the accountants state that the documentation covering these mortgage loans were provided to them by the DFC. This was July 31/2001 and the accountants inspected these files on the 16/17 August 2001.
The following is an extract taken from that report. “We compared the following information relating to the mortgage loans and appearing in the PPM, to the corresponding information included on or derived from the Data File and found them to be in agreement.”
The information with respect to WCPL was as follows:
1. The Loan amount.
2. The number of equally amortized quarterly payments and the amounts of such payments.
3. The interest rate on such Mortgage loans.
4. The future value of the property.
The information with respect to ITL was as follows:
1. The Loan amount.
2. The number of equally amortized quarterly payments and the amounts of such payments.
3. The interest rate on such Mortgage Loans.
4. The projected value of the property.
The above information was determined during Deloitt & Touche examination of the files on August 16/17
2001.
This apparently was before the projects were completed; however, they were already listed on the DFC’s
list of potential projects to securitize.
The accountants write in their report, “The mortgage loan documents described above and other related documents were provided to us by the DFC and are collectively referred to herein after as the ‘Mortgage Loan Documents.’”
The DFC submitted this to the accountants DELOITTE&TOUCHE who inspected these between August 16/17 2001. An initial “cut-off” date of October 31 2001 and an Initial Closing Date of on or about February 2002 were set.
From this report of the accountants DELOITTE&TOUCHE, it is clear that the DFC submitted files on the two projects, WCPL and ITL, to them on July 31/2001.
Mr. Macmillan of BIMCO sent two emails in August and September of 2001 containing information from St. James about the ITL and WCPL loans to the DFC and other parties. These were not copied to the SSB. It is clear from the evidence given by Mr. Macmillan that the reason they were not copied to the SSB is that at this time the ITL and WCPL mortgage Loans were not loans that the SSB had approved, or put forward, for inclusion in the North American Securitization Package.
Mr. Macmillan testified as follows. (6th Public Hearing )
Senator Hulse: Yeah. You said in the e-mail of August 30th I will provide, after saying, there has been a recent and significant change with respect to certain loans and their corresponding funded balances currently being targeted for inclusion under the Pre-Funding Account. Specifically, I refer to two (2) commercial loans coming out of SSB with approximate balances of US$8M. Due to project dynamics (time-lines) these loans have now been disbursed.
Mr. McMillan: Yes.
Senator Hulse: I will provide more specific details during the course of the day for incorporation by the relevant parties within their respective documents. And that was followed upon on September 4, this was August 31 by saying, I refer to my email of Friday, August 31st with respect to two (2) commercial loans out of SSB and currently within the pre-funding group. These loans have now been fully disbursed. They are as follows: Western Caribbean: US$4,900,000; ITL: US$3,850,000. Total: US$8,750,000
This brings the total to be ascribed to the pre-funding account to approximately US$5,000,000. Because you have reduced the pre-funding account balance this is what you are saying.
Mr. McMillan: Yes, yes.
Senator Hulse: These were copied to all and sundry. But I noted in the correspondence that they were never copied to the Social Security. Why was that?
Mr. McMillan: In terms… you have to understand the dynamics of how the team up the transaction team which referred to as “the team” was operating. Notice who that was addressed to, our counsel, our structure advisors, the rating agencies, the placement agent, DFC, and, I believe, as well as copied to Mr. Contreras.
Senator Hulse: And the Central Bank.
Mr. McMillan: And the Central Bank, and whatever was happening there. SSB, to be fair, at that time was not intimately involved in structural details as what this would have been. This is more structural detail. Now for, to give you a little more flavor on that, right, this is as I said, us receiving information. To allow us to reconsider how we have classified these two loans. The under normal circumstances going back to what happened with the RMB transactions all details referring to the acquisition or utilization of that conduit mechanism that St. James had with SSB. That was… that conversation took place between St. James and SSB.
My only query to that process was, is everything finished now. So that we can actually use what you want us to use within the transactional pool. And so at that point, at that point there would have been the assumption that St. James is talking to SSB about incorporation within the transactional pool.
Now, if you have a moment, I think this brings up, because I am going back on my email log, something maybe of interest to this Committee regarding this particular time line. Early September going up to October, I was able to because it was asked of me when was SSB aware that there was a desire on the part of St. James to again tap into this or utilize this conduit mechanism, and the best that I can patch together is that this occurred, the awareness occurred around October 2001 and I say that because I was able to dig up a email suggesting, saying to SSB are you ready? All the stuff ready. As I would normally do, X, Y and Z, you know, need documents to be in order. And the response was, we really don’t know about those two mortgages in particular and at that point I said, oh, there has been a breakdown here, now in communication, right. As looking at myself now as the transaction manager to have at least queried with SSB whether, you know that you are aware of everything that is happening.
And not assuming that that usual conversation between St. James and SSB had occurred.
Senator Hulse: Okay. You are saying that is around October.
Mr. McMillan: October of 2001.
Senator Hulse:The question then is, why would your email suggest, not suggest but say out of SSB and this was the August and September emails which said, I refer, specifically, to two commercial loans coming out of SSB with approximate balances. You are saying at that time the SSB was not aware, you assumed that they were aware?
Mr. McMillan: I assume that is why I made a statement like that.
Senator Hulse: But they were not aware.
Mr. McMillan: Until October email where I am saying oh, the information coming back from SSB that we are not aware so that be very consistence for me to say coming out of SSB in this September email.
Senator Hulse: But you didn’t copy to SSB that would have made them aware?
Mr. McMillan: No, no. Given the nature of what we are dealing with, that type of detail we are dealing with at the time.
Senator Hulse: Had not been copied. In early testimony you suggested that there was a different understanding between the conflict of interest issue and what it really it was, I think, you said, in my definition of conflict of interest I have… I hear other definitions being banded about, but my definition of conflict of interest which includes objectivity in judgement. There would have been a conflict of interest issue and, certainly, there would have been conflict of interest issues being raised by prospective investors. I think you remember the rest of that. But you said, it was decided in a conversation between yourself and Mr. Godfrey that these projects would go through Social Security. That would be the conduit to eliminate any hair-raising questions about conflict of interest.
(To be continued in next Sunday’s edition of the Amandala, December 7, 2008, issue #2291)