Sep 2009 Financial News

First Global able to meet the needs of its depositors-Orane

Sep 04, 2009

GraceKennedy Group Chairman and CEO Douglas Orane told Caribbean Business Report yesterday that the irregularities at First Global Bank disclosed by the company earlier this week had been contained.

This event at First Global Bank is an isolated incident, said Orane, adding that as a result GraceKennedy had substantially strengthened internal controls to make them so robust that activities of this type cannot happen in the future.

In a press statement issued Monday, GraceKennedy revealed that as a result of "irregularities" involving the activities of an employee, First Global "could suffer bond trading losses estimated at approximately US$19 million".

"GraceKennedy and its subsidiaries stand firmly behind the bank, along with the bank's other shareholder, the International Finance Corporation," said Orane. The International Finance Corporation is a member of the World Bank Group, which invested in First Global by way of preferred shares in February of this year.

Orane noted that the "losses that have taken place are all realised losses so that the cash effect had already taken place at the bank". He added, meanwhile, that "First Global Bank is able to meet all the needs of its depositors and that the group overall has a strong cash position."

Orane said GraceKennedy had discovered the foul-up more than a week ago. The company proceeded to call on its internal audit department, stop all trading in the instruments, and close all open positions. The vice-president of treasury was dismissed last Friday, before the company announced the loss on Monday afternoon.

Orane revealed that as part of its normal operations, First Global Bank invests in US treasury bonds, which are AAA-rated and therefore considered risk-free from a credit perspective.

According to Orane, the losses were due to a series of unauthorised trades in US treasury bonds which were undisclosed. When losses were made, subsequent trades were made to recover the loss. The additional losses made were then hidden.

Orane acknowledged the bond trades were made with international brokers on a "leveraged basis". Clearly, the combination of the high leverage available on these instruments, combined with the recent volatility in the international markets, accounts for the huge losses. The losses all occurred in 2009, and had been going on "for some time", he said.

Orane added that he is "personally very upset about this as chairman and CEO of GraceKennedy, and I take the ultimate responsibility for this happening".

A quick look at the parent company's balance sheet as of June 30 reveals that Grace is highly liquid, with cash and deposits of J$10.7 billion, or about J$8.8 billion net of overdrafts, etc.

According to the release issued earlier this week, a recent internal review of the treasury operations of First Global Bank had revealed the irregular transactions. GraceKennedy stated that it notified the Bank of Jamaica, and that its internal auditors commenced a full review of the matter.

The release added, "We are satisfied that the risks surrounding possible similar losses have been eliminated and we have put in place additional measures necessary to ensure that there is no recurrence."

Finally, Grace advised, "The bank's capitalisation remains sound and we assure our customers that these losses will not impact on the Bank's ability to meet its obligations."

As of June 30, First Global Bank reported just over $4 billion in capital, which compared with its approximately $33 billion in assets as of the same date, gave it a simple capital to assets ratio of just over 12 per cent. The losses experienced would therefore reduce the bank's capital only slightly below the regulatory minimum of eight per cent.

Source: Jamaica Observer
http://www.jamaicaobserver.com/magazines/Business/html/20090903T170000-0500_158904_OBS_FIRST_GLOBAL_ABLE_TO_MEET_THE_NEEDS_OF_ITS_DEPOSITORS_ORANE.asp
Date Published: Friday, September 04, 2009