It was a mighty day of reckoning in the chamber of the National Assembly building as the 4 member senate special select committee opened the public hearings for the probe into Social Security's finances. Led by Chairman Godwin Hulse, the morning session opened at 9:45 a.m. with a clear mission statement.
Senator Godwin Hulse,
"Let the process continue and if it is found that there is or has been any wrongdoing, the process will deal with those so found."
Senator Richard "Dickie" Bradley,
"We sought to get to the mischief, to the allegations, that we have actually found which we view and consider to be grave and serious irregularities. But we have tried to, as mandated by the resolution from the whole Senate, to ask ourselves that what we are unearthing, if we are to do our country a service, that this must never happen again."
All 6 witnesses called gave sworn testimony. Those called this morning included the board's secretary Maria Contreras and the secretary to the investment committee Rolando Zetina who discussed mostly the recording of board minutes. They were followed by the solicitor general Elson Kaseke and the governor of the Central Bank Sydney Campbell.
Both men were questioned extensively about the programme known as mortgage backed securitization. Under that programme, in April of 1999 the Social Security Board took a decision to buy over mortgages and sell them on international capital markets, under the guarantee that if the person or company, which was holding the mortgage couldn't pay, Social Security would. On at least two critical instances that meant buying mortgages from the St. James Building Society, a Glenn Godfrey affiliate, for projects that were bogus. When no payments came in from the projects, that left Social Security having to make his bank payments, as was first exposed by 7NEWS in June of this year. Discussing this type of securitization as venture capitalism, solicitor general Elson Kaseke said in his opinion, it is an area where developing countries are often taken advantage of.
Elson Kaseke, Solicitor General
"There is one school of thought which is of the view that there are, the banks in the developed world are making very excessive profits at the expense of third world countries in respect of business transactions of this nature. Because there is no legal expertise, there is no financial expertise in third world countries to deal with this type of transaction. So that if you look at the root of the documents, which you have referred me to, they were prepared somewhere by someone with a master's degree in this venture capitalization or who knows exactly the pitfalls which we are going to enter. And because I think third world countries need money, to be given a nice document and told to sign it, you are not fully apprised of the full legal consequences and you sign it to your detriment."
Senator Godwin Hulse,
"If there is a mortgage document covering a property but there is no development of the project on that property to afford a stream of income to enable repayment of principal and interest, and if the mortgagee being a financial institution that originally the mortgage was done with by the mortgager and if that financial institution then takes that mortgage and sells it to the DFC as part of the securitization project without there being the project developed to the extent that they would be the funds, should the Social Security or that institution in the first instance have advanced that mortgage as one if its so called good mortgages?"
Sydney Campbell, Central Bank Governor
"Well if what you have said is that the mortgage is for a project that is not actually on the ground as yet, is not actually performing, then it would extremely for you to rationalize how you can say it's a good mortgage. I basically have difficulty understanding if you say that you have a project that has not get off the ground then where is the stream of income coming from?"
And while Hulse spoke to Campbell in general terms, later on in the day it became clear that he was referring to two highly dubious mortgages that social security bought and guaranteed from St. James Building Society. As we first reported earlier this year, those mortgages totaling to $17.5 million were for Western Caribbean properties to build a medical school in San Pedro that still hasn't been built, and for Intelco to build high end apartments on the Cahal Pech, where now stands a disused Intelco tower.
Those were bundled off in a securitization programme that saw Social Security Board and the DFC team up to sell US$44.5 million in government backed mortgages to the North American market. That deal was examined in detail, particularly the structure of the companies that were used for the programme. Answering some tough questions in that regard was DFC CEO Troy Gabb.
Troy Gabb, DFC CEO
"It's the Belize Mortgage Company."
Senator Richard "Dickie" Bradley,
"Belize Mortgage Company is what kind of vehicle? I always thought there were SUVs and Nativas and I am learning new language here today. What kind of vehicle is that?"
Troy Gabb,
"Its referred to as a special purpose vehicle as far as..."
Senator Richard "Dickie" Bradley,
"Special purpose vehicle which was an offshore company?"
Troy Gabb,
"It was an offshore company owned by the DFC which was part of the requirement in order for the transaction to be conducted in the United States."
Senator Richard "Dickie" Bradley,
"This offshore company, this special vehicle, in Grand Cayman, who was driving this vehicle?"
Troy Gabb,
"The company had three directors, I can't recall the names of the directors right now but we can provide that information available in the file. But basically the company was a vehicle set up just for this transaction to..."
Senator Richard "Dickie" Bradley,
"DFC formed a company in Cayman for the purposes of that company selling the mortgages?"
Troy Gabb,
"Right right."
Senator Richard "Dickie" Bradley,
"Can you enlighten us as to why DFC could not itself sell the mortgages? The directors and owners of the company were Belizeans or foreigners?"
Troy Gabb,
"The directors would be Belizeans who would be the directors of the DFC."
Senator Richard "Dickie" Bradley,
"The directors of the DFC were the directors of company in Cayman and can you enlighten us as to who those directors were at the time?"
Troy Gabb,
"I can't recall. I know I made mention earlier that we would just double check that but I think it was...the actual names were Bob Bouhnara and again maybe I should just double check Mr. Chairman."
Senator Godwin Hulse,
"And your comment about Belize mortgage Company, which name incidentally came up from you, was in fact a DFC owned company registered in the Cayman Islands. And perhaps would it jolt your memory in terms of the directors if I would suggest that the directors were the same persons who were the directors of the DFC?"
Troy Gabb,
"Yeah. Yeah."
Senator Godwin Hulse,
"And at the time who was the chairman of the DFC?"
Troy Gabb,
"Glenn Godfrey."
Senator Godwin Hulse,
"And who was the other directors? The other principal directors involved in the securitization program?"
Troy Gabb,
"The deputy chairman was David Courtenay. The other directors were Bob Bouhnara, the ex-officios were Godwin Arzu...uh who else was there?"
Senator Godwin Hulse,
"That's okay. Would it be accurate to say that those were the same directors of the Belize Mortgage company?"
Troy Gabb,
"It is my recollection that it would similar."
Senator Godwin Hulse,
"I don't understand the statement that the DFC could have act as issuer, and eventhough you have referred to the DFC as issuer, our documentation states the DFC servicer but the Belize Mortgage Company as the issuer. So correct me in this process if I am wrong that indeed the bundle of mortgages, those from the SSB which were principally mortgages from St. James joined together with those originating in the DFC to form a pool of mortgages was then subsequentrly sold to the Belize Mortgage Company in the Cayman Island which was a wholly owned subsidiary offshore of the DFC."
Troy Gabb,
"That is correct."
Senator Godwin Hulse,
"So why would we have done that?"
Troy Gabb,
"Well my understanding is that that was a requirement as we were advised and so that is why that was done in that fashion."
Senator Godwin Hulse,
"But I will suggest to you it was not an SEC requirement. So would it be correct to say that the DFC onshore guaranteed payment to itself offshore?"
Troy Gabb,
"If...yeah yeah because the BMC is wholly owned by the DFC."
Senator Godwin Hulse,
"Would it be correct to say that the same people as directors of DFC, which you are already agreed are the same people as directors of the BMC, would be some of the same people involved in the St. James Building Society, to the best of your knowledge?"
Troy Gabb,
"Yeah."
Senator Godwin Hulse,
"So the same people signing on St. James whose mortgages go to SSB for transmittal to the DFC, the same people from St. James then would pick it up in the DFC, and the same people would take it to the Belize Mortgage Company and when it reaches the BMC, it would holding on to a sovereign guarantee. So in other words it was a secure loan all the way through? Is that correct?"
Troy Gabb,
"I would have to say yes the loan was secured all the way through."
Senator Godwin Hulse,
"In your professional judgment, would you consider that there might be anything wrong in facilitating that process where the original loan would have originated by the same promoters who would take it all the way through to an international bond?"
Troy Gabb,
"Well first off I need to say that I don't know who are all the players involved in St. James, in terms of who all the directors are, it is for my knowledge that at least one individual might have some dealings with St. James that might have been a director for DFC."
Senator Godwin Hulse,
"Perhaps we will have to ask you at another date to research and give us the information with respect to the usefulness, as I may say, or necessity of the BMC since we had a placement agent, we had cross collateral agent, we have a trustee, we have a principal bondholder, we have currency arrangement, we have a guarantor, we have all these structures in place which are normal for this type of complicated bond and the almost 2500 page document but it begs the question then why the DFC had to go from onshore with this arrangement. Would you say it begs the question?"
Troy Gabb,
"Well it is my understanding that that was the legal requirement."
Senator Richard "Dickie" Bradley,
"The $44.5 million for which all the mortgages were sold, did those monies come into the country of Belize?"
Troy Gabb,
"Yes it did...$44.5 million to be exact did not enter the country of Belize."
Senator Richard "Dickie" Bradley,
"That is my question. $44.5 million did not enter Belize? Not in the special vehicle and not in any vehicle?"
Troy Gabb,
"No."
Senator Richard "Dickie" Bradley,
"Okay so how much came into the country of Belize?"
Troy Gabb,
"Again offhand I can't say the exact figure but those figures are embedded in the files. The amount that came in would be net of the transaction cost."
Senator Richard "Dickie" Bradley,
"Don't you know how much was the transaction cost?"
Troy Gabb,
"Might have been US$5 or US6 million and pardon if I am off here or there because I am just clearly going from..."
Senator Richard "Dickie" Bradley,
"We will not pardon you because we sent a letter from last week so those figures should be clear. But to your knowledge the $44.5 was minus $5 or 6$ million transaction cost?"
Troy Gabb,
"Yes."
After Gabb's nearly two hour long testimony, former SSB executive chairman Eberto Mai testified. In a stormy cross examination, Mai had to face tough questions about the processes that the Social Security Board went through to approve coverage of the bogus St. James mortgages. Senator Dickie Bradley pointed out that for the $7.7 million Intelco mortgage, the un-developed property held as collateral by Social Security is probably worth about 2% of that. Under pressure from the senators, Mai later confessed that, "things could have been done differently, but it's now water under the bridge."