Odious Comparisons

I just found this post that I wrote back in 2012 when the global economy was in tatters following the Great Recession and I was trying to make sense (to myself) of some of the why's and wherefore's as to why Bermuda was struggling while Cayman was booming. Why should I care? Well my company has offices in both locations so clearly from a business perspective it is absolutely essential to figure out where to use your precious and limited resources. Why do I do it this way? Well some people are able to talk about things. I am not one of those people. I have to write things out in full to make sense of things. This is what I did. Does it make sense today? Is it even relevant today? Well not entirely relevant as there have been 2 elections in Bermuda and at least one in Cayman so what was envisaged back then has actually happened/or not and other things have moved into prominence.

I read only today some 6 years after I drafted this post that 99.7% of all businesses in the US are small businesses and employ 90% of the total workforce. That means that what goes on at Apple or General Electric, say, is irrelevant to the greater population hard as it is to imagine that in all the hype that accompanies their every movement. Of much greater import is the small business. Where small business goes, so goes the national economy.

In a Bermuda/Cayman context it is difficult to see this is the same thing but I would think that a far larger than 50% amount of the local workforces work for smaller companies. Like ours. So despite the fact that small business is largely ignored by both media and decision makers in government, it really it us that still makes it all happen. As a small business owner we knew this and were perennially aggrieved that decision makers didn't really care about our needs despite our relative importance to the economy. Amazing as it is to hear, government actually said that the trickle down effect well known in economic theory does not apply.

I never posted this note as at the time I thought it was potentially inflammatory in the same way as my note on a Bermuda bank (that I prepared for my business' clients) was inflammatory. This bank had fallen foul big time of sub-prime mortgages in its investment book to the point that it was realistically insolvent (the CFO tried really hard to tell me it was all a question of timing... but it wasn't). I spent a lot of time reviewing this and talking openly to the CFO who very generously gave of his time and I just knew they'd need to get massive outside assistance (which did happen). However I was left with a very tough decision. Do I make public my findings and create the self fulfilling prophecy in which there very may well have been a run on the bank, or do I not do this and make a decision based on what was best for the public who had no idea this was the case (just read a 10k issued by a listed company and tell me if you undertsand any of it. I do because that was my job but it takes a heck of a lot of training and then work). The bank took the bail out and has survived with no depositor losing any money as opposed to the Greek and Italian banks whose depositors took a haircut when they had to seek support from their 'friends' in the EU and the IMF. So, happy ending there.

However time is a great healer and what was inflammatory back in 2012 is today merely history. And history as the name suggests is merely a story about what transpired at a certain time according to the person who followed it -- that's me. So please bear this in mind when/if you read the following. It is how I saw things at the time.

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25 years ago when I was working at the Bermuda Monetary Authority in my first Bermuda role as sole regulator -- essentially the only Banking Supervisor pre-these Basel I, II or III days, collator of Balance of Payments, Controller of the Currency and the then in situ Interest Rate controls as well as the supervisor of the Bermuda Stock Exchange -- I had a staff issue where I wanted to hire another person and needed both budget approval from the Ministry of Finance and permission from some obscure government department whose name I forget.  It couldn't happen until a Board agreed and the MofF signed off -- quite why is beyond me as the BMA was and remains a quango responsible for setting its own budget.  I was assigned a member of this department who would plead my case in front of the board -- I was not permitted to talk at all although I could observe.  I briefed this person in detail and agreed a strategy that he totally ignored starting his presentation with the immortal words: "I know comparisons are odious but..."

Our case was thrown out and ever since I've always tried to never, ever use that ridiculous statement in any way shape of form however with this post I simply cannot think of another way to head it.  My intent is to try to compare some key elements of Bermuda and Cayman, their politics, economy, etc. -- similarities there are but also differences, both cultural and economic.

I care because I have spent considerable time in both countries and my firm has an office in both jurisdictions. I simply don't want either to fail.

The first similarity is the airport.  Both are aging and in need of a spruce up for sure and both don't have those pod things that slide out at door level to allow passengers easy access straight into the arrivals area -- the old fashioned ways rule.  You climb up or down stairs and walk along the tarmac (see note at the end of this post for an update).

Another and probably more relevant comparison is the fact that both are offshore financial centers; Bermuda primarily insurance related while Cayman is big in banks and funds.

Both too have UK common law systems but this is where things are a little different for Bermuda is self-governing whilst Cayman is still just a colony.  This means that Bermuda charts its own course even though it has a UK appointed Governor who has titular responsibility over the Police and certain government functions such as the office of the Auditor General.  Bermuda also has responsibility for its own budget.  Cayman's UK appointed Governor is still the head of government although there are elected officials as well, the leader of whom carries the unofficial title of 'Premier' is actually legally titled 'Head of Government Business'.  Cayman does not have responsibility for its own budget and must seek approval from the UK each year.

And herein lies the rub.  Bermuda has been able to finance its ongoing deficits with increasingly large amounts of borrowing that they drive whilst Cayman has been denied that privilege by the mandarins in Whitehall.  On the day I arrived in Cayman, the front page of a local newspaper carried a story in which the Premier was triumphantly announcing the final agreement of the 2013 expenditure budget with the UK in the amount of $575 million.

I'm not as close to Cayman's budget issues as I am to Bermuda's (I used to compile the BMA's own contribution to the Bermuda budget so retain a keen interest still) but this seems either an awful lot or an awful little... and I cannot figure out which it is.

The reason for my being in Cayman is business development which means visiting as many local businessmen as I can in my allotted time here.  In practice, you don't talk about the real thing that you want to talk about, you edge into it.  You chat.  My 30 or so meetings in 10 days therefore have taken me to talk to a number of highly placed business people who have opinions extending beyond their business and like me want to see their jurisdiction succeed.  Many have very strong opinions and some even have specific knowledge -- Cayman like Bermuda is small so people tend to know other people's business in far greater detail than they may in a larger jurisdiction.

Distilling it all down for Cayman is the over spend on 2 new schools for Caymanians.  In itself a laudable project of course for raising education levels across all classes is a vital way for a country to stay ahead of the competition.  It was the cost apparently that was the issue: I heard figures of $80 to $100 million for each of the schools from different people.  Now I haven't a clue what a true cost should be but know that the Berkley project in Bermuda a few years back was budgeted around $60 million and came in around $150 million so government overspend isn't that unlikely an outcome.  Its just the size that is the variable.  Again the same people suggested that these Caymanian schools could have been built at half the cost which suggests to me that government overspend on these projects could be around $100 million.

That's a lot of money for a population of 55,000.

But is it?  Well, it sure sounds it of course but when you consider that Cayman's population is just about the same as Bermuda's and its land mass is somewhere between 4 and 5 times larger but Bermuda's expenditure budget is around $1.2 billion -- doesn't that make Cayman sound fiscally prudent?  Or putting it another way, how on earth can Bermuda spend twice as much as Cayman?

It sure beats me but I suspect much of it comes down to economics.  Everything ultimately does.  I've just finished reading a great book entitled "The Lords of Finance" -- a book about the 4 leading central bank heads just after World War I faced with a world in recession, then depression, war debts of such enormity that even today look to be completely unrealistic (way worse than what the bankers have done to the world), reparations that the victorious nations imposed upon the losers and the inflexible, outdated gold standard.  Essentially this is a book that Ben Bernanke of the Fed must know inside and out for those 4 men (heads of the Bank of England, New York Fed, Banque de France, Central Bank of Germany) did everything that could be done to fix things but using solutions that were outmoded and not of a size able to dent the problems facing them, everything they did made things much, much worse.  But do read the book.  Just wonderful if you like that sort of thing.

The point I was coming round to was that the root cause of WWI was actually not the inherent distrust of the French for the Germans, or the desire for territorial gains but simply economic: Germany resented Great Britain's economic dominance of the world, the French were trying to get back the reparations they were forced to pay in the 1870/71 war with Germany that they cataclysmically lost, the Brits wanted to keep every foreigners hands off their foreign possessions and trade routes and the Russians ... well they were different and nobody really knew why they fought the war.  Every one of these countries was warned categorically by their advisors in the years leading up to the conflict that going to war with another great power was economic suicide.  That was why the French and Germans didn't go to war in 1911/12 -- both backed away as their advisors told them they couldn't afford it.  So sadly both nations went away and built up their gold reserves to the point where the rulers felt that they could ignore the accountants -- they were wrong!  Accountants are always right.

I don't believe that in either Cayman of Bermuda governments really comprehend the basic GDP equation: GDP = C + I + (X - M) + G.  By far the largest component of GDP is C -- which is we the consumer.  C is all the stuff we buy, eat, wear and generally consume.  Typically in advanced economies this is around 65-70% of the total.  I represents business investment, typically 15-20% depending on the business cycle. X is exports and M of course imports -- which offset one another typically. G is government, and in developed economies comes in at around 15%.

When times are tough, governments step in with 'stimulus' raising G in the equation.  By far the most important part is the consumer and then businesses.  Business will not invest in uncertainty and consumers won't spend if they don't have a job or are concerned that they may not.  But when G is already more than 30% (as it is in Bermuda, I don't know about Cayman) how on earth do things turn around?

Cayman is lucky in that there is the Dart family willing and able to throw billions of dollars into infrastructure -- Camana Bay is the highest profile example of the ultimate "Field of Dreams".  This is a billion dollar new city built on swamp to a very high standard where it is almost impossible to consider that there will be a return on capital any time soon.  Stunning place, simply wonderful.  Other projects including re-siting the dump and building another near billion dollar new resort on Seven Mile Beach including the redirection of the by-pass roads, which under Dart supervision is nearly complete already.  I wish there was someone like him willing to take that sort of chance in Bermuda!

That is the I part of the GDP equation and thanks to the Dart family, Cayman's GDP is somewhat bolstered during a tough time for both the banking and fund business, their financial services staple.

Obviously there is a quid pro quo for a couple of billion dollars of speculative investment and the Cayman government has made significant concessions (tax and work permit) apparently in the greater good.  I wish it would be so in Bermuda where government seems resistant at almost every opportunity to make concessions other than the most minor kind.  For example, waiving the 60/40 rule only for Bermuda listed entities means that only 4 or 5 of the larger companies will seek this waiver and while it is nice to think that foreign capital would flow in via this source, the question has to be: into what?  More likely the waiver is being sought to provide greater liquidity to the individual company's shares as chances are step 2 will be a listing on NASDAQ, TSX or FTSE.  Why not make it a blanket 60/40 waiver for all companies?  There's far greater chance that new capital (or I) will come into Bermuda if you actually enable it.

Both Bermuda and Cayman face impending elections at some point in the next 6 months so politicking is growing and the hot air of rhetoric is blowing from all corners.  Bermuda has constituencies and a 1 man, 1 vote system based on the UK's first past the post system so pretty straight forward ignoring the perennial boundary changes every government does seemingly all the time.

Cayman's system to the outsider (well this outsider at least) is unfathomable.  There are constituencies but for some reason they are grouped so in West Bay, for example, there are 4 seats. In Georgetown 6 and in Bodden Town 4 more.  The East End and North Side have 1 each and the outlying islands a further 2.  If you live in Georgetown, you get 6 votes and so on, so technically speaking someone from Georgetown could be seen to have 6 times as much political say as someone from the East End (actually not so as you cannot vote for the same person 6 times).  Cayman's 1 man, 1 vote referendum to change to the individual constituency vote system was defeated earlier this year not necessarily because it wasn't wanted (it was) but because neither of the parties gave official and vocal sanction to it so the turnout was of a level whereby the required majority simply couldn't be achieved.  I can't say I understand why this would be so for as someone explained to me the opposition party strongholds are in Georgetown and Bodden Town so the possibility for them to lose the vote at the next election is actually very high.

Both countries have party politics, Cayman's being the more recent.  Personally speaking I am an opposer of party politics as all that does is generate a divide between the parties making consensus for the good of the country being impossible on occasion.  The US is a prime example of this at the moment.  The entire world (well certainly my financial services world) is watching and hoping like hell that the politicos climb down off their high horses (actually there are pretty low in my estimation) and agree on something, anything really that moves the country away from falling over their fiscal cliff. Not doing so is irresponsible.  Doing what's right in this day and age though seems to be going out of fashion.

Party politics also stifles debate.  There's no debate really any more as on the one side, you have one opinion and one party line and on the other, there's the other one.  The ruling party wins because everyone votes the party line for to not do so means the potential end of their comfortable sinecures, which is the lot of today's professional politician.  The 'good of the country' therefore becomes whatever the ruling party says it is.  How is that democratic?  History has shown us that governments get it wrong all the time.  Human nature doesn't change.  But because we say so, it is so.  No wonder politicians the world over are increasingly detested by the voters.

And finally back to the present day (2018) for the moment. The following comment is truly timeless...

And then there's the beaches and OK here I am truly biased.  Bermuda's pink coral sand beaches are the most beautiful beaches I have ever seen anywhere.  Grand Cayman has Seven Mile Beach which while lovely white sand and mainly very calm water simply cannot compete.

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Note: Since writing this in 2012, Bermuda has committed to building a new airport as has Cayman but utilising very different means. Cayman has also stated that they have the intention of growing their population to 100,000. Bermuda has not made any announcement of any sort related to this. Infrastructure building in Cayman is still massively ongoing. Go visit both places and enjoy them for what they are.