By Victor Ogiemwonyi
September 01 2011
In the wake of the recent Stock Market meltdown and the Banking crisis that followed it, many experts advocated for the creation of a “Bad Bank” to act as a resolution vehicle that will take over assets and liabilities while managing all the arising issues of the various entities involved. The CBN saw the importance of this, and pushed for the creation of the ASSET MANAGEMENT COMPANY OF NIGERIA (AMCON).
The takeoff was hailed by many Analysts as heading in the right direction. First, it hired the best management that could possibly run it, and then the management outlined its challenges and how they plan to implement them. They made the rounds of stakeholders to explain their purpose. They tackled the first major issues buying up bad loans from the Books of the Banks to enable them clean out their Balance Sheets and give them room to start lending again to be able to make profits and meet its obligations.
This was a right way to handling the liquidity issue in its mandate. Without the liquidity to oil the economy, the problems of the Banks would have been worse. This was also a way to make them attractive for new investors to put in new capital. They concluded that with the issuance and listing of the accompanying AMCON BONDS.
After this brilliant start, AMCON seems to have abandoned its other key mandates, resolving the debt overhang in the Economy, and getting the Stock Market to work again. No matter the level of reforms at the Stock Exchange, the current problem of lack of confidence in the Market is why massive liquidity infusion will be the only way to rally the Market. There is a need to immediately focus on the Stock Market to make it bring back some of the lost value since the beginning of the crisis.
AMCON will need to dimension the extent of the problem, particularly the value of margin lending in the Stock Market, take out all the underlying Securities Portfolios at a discount and cancel all the equivalent debt and forever close the chapter. An intervention to take out Securities massively was always in the cards, but doing it only at the banking end will not be sufficient to stabilise the Market. We now know that the twin problem of over valuation of the Stock Market (we are not the first to do this) and the corrupted issuance process for Securities ,that resulted in creating several billion shares of Banks that in themselves were not worth anything given the fact that most of their money also went to buy their shares to push it up to the unsustainable levels it reached, were the immediate causes of the Stock Market crash that collapsed asset values and the resulting massive devaluation of the Naira in the last two years.
The resulting meltdown, managed to create the 3 main components of the financial crisis for which AMCON was created, there was the issue of (1) illiquidity, (2) excessive supply of Securities without any strong demand, (dumping of Securities by investors) and (3) the debt overhang where everybody owes everybody as a result of the massive erosion of values in the Stock Market. Apart from the illiquidity as it relates to the Banks, none of the other issues have been resolved.
In my opinion all the efforts put into resolving the financial crisis will come to zero if the problem of the Stock Market is not solved. The crisis in the Financial Sector started with the crash of the Stock Market resulting in significant value erosion. Any solution will logically start from the Stock Market. Any solution that is not targeted to tackle the problem from the root will be cosmetic in my opinion. If AMCON had initiated a swift clean up of the Margin Account defaults and other Capital Market related debt problems as in Real Estate developers who collaterised their Bank exposures with Stock Market investments, the value gain in the Market would have saved the very Banks they are nationalising today.
It is not too late to do what will bring about the desired result, the understanding must be there that what happened was no fault of anyone, we were all part of the debacle, no one can absorb themselves from the blame of what happened. We all were part of it, inexperienced Regulators, irresponsible Stockbrokers and their casino Bankers as well as, and of course, greedy investors, together created this problem and we must all agree that an all encompassing solution must be found to save the Stock Market. Those who insist on getting it’s pound of flesh, on account of the argument that, bailing out the Stock Market, will create a moral hazard, should see what action other countries took in similar situations.
The massive bail out of Banks here was necessary, just as massively intervening into the Stock Market to stabilise it; is necessary now. Delay has been too long and has delayed the recovery of the Market. It is ironic that I first called for the CBN to intervene into this Market in my first article at the beginning of this crisis, 3 years ago in 2008 when things were still relatively fine. I had warned then that unless we did something quick, we will all pay for it whether we invest in the Stock Market or not, 3 years later we are all paying for it. I was told then that the CBN was not the right vehicle to intervene. AMCON was created specifically as the right vehicle, it should act decisively now.
WHAT MRS. OKONJO-IWEALA LEFT OUT IN HER MAIDEN SPEECH
Our new Economy Minister, the closet we can get to a Prime Minister, Mrs Okonjo-Iweala outlined her agenda last week, the clarity of her message made it obvious she had very good understanding of what the problems were and what Nigerians expected of her. The priority of what she said she and her team will do made it abundantly clear she was the right person for the job. One major aspect was missing from her speech; she did not say a word about the Stock Market. That was a very big oversight. Her assurances would have boosted the Market and restored some credibility to the Market and confidence to investors. Let us hope she will devote some time to looking at the problems of the Stock Market and how it can be brought back to play its role in the economy, because there is no way we can have a vibrant economy with out the Stock Market recovering and able to play it’s role in raising and allocating capital. The development agenda she hopes to push will not materialise without a working Stock Market that will create the exit for the many investors who want to participate, especially foreign investors who will like to know, that they can efficiently exit the Nigerian Market when the time is right.
Victor Ogiemwonyi is the MD/CEO of Partnership Investment Plc, Ikoyi Lagos
