ewart s williams : implications of the current financial crisis for trinidad and tobago address by mr ewart s williams, governor of the central bank of trinidad and tobago, at a ttma seminar “ crisis in global financial markets : implications for trinidad and tobago ”, port - of - spain, 26 september 2008. * * * thanks for the invitation. the sub - prime crisis first grabbed the headlines sometime around august 2007. who would have thought that after one year of high - priced casualties, not only is the end not in sight, the ongoing spillovers now threaten to destroy the workings of the international financial system as we know it. we are now seeing, among the industrialized countries a level of financial panic the likes of which we have not seen in our life time. president bush, in making the case for the us $ 700 billion rescue package warned that “ the entire us economy was now in danger ” : he cautioned that the current crisis could wipe out banks, empty retirement nest - eggs, send home - values into a free - fall and create millions of new jobless. warren buffet called the crisis “ a financial pearl harbor ”. the speakers before me have given their take on how the crisis will affect various sectors of our economy. i will try to avoid too much overlap by focusing on the impact of the crisis on the country ’ s external reserves and on our financial system as a whole. in the latter context, i would also like to suggest some lessons for financial sector regulation. i would end with a few brief comments on the macro - economic risks to the economy as a whole. last week, at least two commentators wondered why specific details on the impact of crisis on the country ’ s reserves were not forthcoming, surmising that the government or the central bank had something to hide. with the indulgence of my host, i would like to address this issue in some detail. let me say up front that, as far as the official reserves are concerned, we have not suffered any capital losses as a result of the financial turmoil on wall street. and this is so because we have stuck to our mandate which requires the central bank to adhere to conservative reserve management principles and to have in place as many risk mitigants as feasible. let me explain our reserve management system : very often central banks are criticized for being too conservative in investing the country ’ s reserves and not maximizing their income potential. it ’ s an unfortunate criticism since the conventional wisdom is that generating returns

, so far, the turmoil has been largely in the investment banks : bear stearns, lehman bros, and merrill lynch ; with some ripples in goldman sachs and morgan stanley. our us bond holdings have benefitted from the increase in prices consequent on the flight to quality, which has been the main reaction to the market meltdown. our limited exposure to fannie mae and freddie mac bonds ( some 6 per cent of our total reserves ) could have resulted in some losses. however, the us government take - over of these institutions has reduced, if not eliminated, the risk of this exposure. lehman bros, as one of our external managers managed about 6 per cent of the total portfolio. the bulk of these resources was invested in treasury securities of g7 countries, and as such faced very low risk. a very small amount ( us $ 85 million ) was invested in a mutual fund sponsored directly by lehman bros. we were able to liquidate this asset at no loss. the bulk of our asset - backed securities were issued by merrill lynch. the take - over of this institution by the bank of america eliminates or reduces the risk attached to this asset. but ladies and gentlemen, if we had any doubts, the current turmoil in international financial markets should remind us that no institution is totally immune from possible contagion, regardless of what the rating agencies may say. as you may know, not too long before bear stearns was declared insolvent it was rated bbb ; lehman bros was rated ( a + ) and merrill lynch ( a + ) : they were all considered investment grade. before selecting lehman bros as an external manager, we went through a rigorous selection process that not only included examination of past performance of funds managed and lehman ’ s ability to deliver superior returns, we also conducted a thorough examination of lehman ’ s financials. but as happened many years ago, with the dot - com crash, investor sentiment can change very quickly and sharp declines in stock prices can quickly erode the capital of even the strongest banks, producing the dire consequences that have attended three of the world ’ s five largest investment banks. since lehman ’ s and merrill lynch ’ s difficulties, the bank has carefully reexamined the financial status of all our counterparties as well as our investment managers to ensure that none of these are on any watch - list. we have also taken the decision to introduce two new elements to our investment strategy. first, until financial markets have been stabilized, mat