Category Archives: AIG

Anatomy of Local Collapse

With Lehman, AIG, Bear Stearns, Merrill Lynch and other banks in the news, or in need of a rescue, it’s time to look how does this play out locally?

Kenya has experienced several collapses over the last few years – from listed companies (Uchumi supermarket), stockbrokers (Nyaga, Francis Thuo), insurance companies (Invesco), medical plans (Mediplus), Banks (Euro, Daima, Charterhouse), and numerous pyramid schemes.

What are the stages of collapse?

Before: First come the rumours, which can be whispers from clients facing frustrations, or sometimes well-meaning staff leak to their trusted clients that something is amiss. At any given time, a company could face this and currently, there are murmurs about a stockbroker, a transport company, and an insurance company – but none about banks.

During: Next the rumours gather steam and reach serious partners who deny the company access to cash that it needs to survive. The struggling company will by this time have stopped paying on time and will be known for inventing excuses for delays in payment. So suppliers will stop deliveries (bare shelves), customers withdraw cash and banks will refuse to lend to ailing to the company/bank.

An aside – in the current issue of the Financial Post, entrepreneur Dr. Manu Chandaria talks about the secrets of Asian company success including using supplier credit as the expansion capital – and he emphasizes that a growing company must have a perfect reputation with creditors to get the supplier financing to grow.

But eventually, word leaks out and depositors try and withdraw their cash from the bank or pyramid, a major creditor moves to seize assets, any of which may hasten the collapse of the company; Eventually the government or a bank may try and appoint a receiver, but often its too late.

After: If there is enough hue and cry or a serious precedent likely to have far-reaching effects, the government may step in and try and revive the company – the government has capitulated to the cries of shareholders, suppliers, farmers (sugar/coffee etc.) and politicians several times over the years and tried to revive numerous companies that have collapsed.

If it’s a bank, its depositors get paid up to 100,000 shillings ($1,400) from the deposit protection fund, if its an insurance or medical company it’s a total loss for subscribers who will have to source for new cover packages even if the company had enough assets left. The fate of shareholders is still been sorted out at Nyaga and Francis Thuo, while its a total loss for the thousands who ‘invested’ in unregistered pyramid schemes even though millions of shillings of their ‘profits’ remain unclaimed in bank accounts that have been frozen.

Employees of the companies quietly get new jobs and airbrush the unfortunate period from their CV’s

Lehman employees

Owners/Principals rarely face prosecutions, and having amassed enough to survive a few years of legal battles, may retire quietly or sometimes end up in parliament.

Locally: So far it appears that the successful AIG Kenya [worth ~$35 million] will be insulated from its parent problems. It will probably be absorbed by another local insurance company or CBA bank who are a major shareholder.