BY VICTOR OGIEMWONYI
In December 2012′ the Minister of Finance and the Coordinating Minister of the Economy Dr Ngozi Okonjo Iweala announced a package of measures designed to boost confidence in the Nigerian Capital Market and particularly to bring investors back to the Nigeria Stock Market. She stated some very salient points in her announcement, first that it has become necessary to clear the debt overhang in the economy particularly as it relates to the Stock Market.
Secondly, she said the forbearance would remove the heavy burden on Stock brokers and allow them to fully re enter and re invest in the market and make the market more vibrant. And thirdly, she said this was in furtherance of the AMCON’s clean up of the banking sector. She stated further that it was necessary to wipe off the debt overhangs in the capital market as this was dampening market activity. These reasons make it clear that there was public interest involved.
The N22 Billion forbearance for Stock brokers drew the most attention from the public. Some commentators were talking outrightly out of point because they had no real understanding; even till date many are yet to comprehend the proper context of what has transpired. It seem like Stock Brokers have been made to take what Americans call ‘a boom rap’ that is, answer for what you are not responsible for or as a friend of mine would say, taking Panadol (pain killers) for someone else’s headache.
Part of the misunderstanding came from the fact that the public thought the N22Billion was to be given to Stock brokers. Not many knew that this write off was inevitable. There was no way AMCON or the Banks will collect this balance between the loans AMCON bought from the Banks and the value of securities underlying them. It was also in the interest of AMCON that a closure wasbrought to this. Without a final closure to the matter many court cases was looming ahead.
For those who are not familiar with how margin accounts work, a margin account for a StockBroker, is a trading line with a bank that demands that the Broker make a margin contribution typically about 30 to 50% of the value of the facility. The terms usually call for the bank to take control of the traded account which will be marked to market daily and compared with the debt on the Brokers account. What this means is that you value the portfolio of stocks held in the account priced with the most current prices of stocks and compare with the balance on the loan account. Any short fall is immediately advised to the broker in what is called a “margin call”. The Broker has 24 hours to make up this shortfall or stocks will be sold to bring it in line.
The control to do this rest with the Banks from the first day of the contract. For all intends and purposes, the facility was a joint account and was meant to be self liquidating. The lack of understanding of what a margin account is, for many participants including banks, was the reason for the blunder. Many lenders including the banks confused margin lending with stock purchase loans. A stock purchase loan is where you approach a Bank to give you a loan to buy a specific stock or a portfolio of securities. this is a specific obligation that you will be required to pay
as contracted like any other loan.
The margin loan is a way for the market to have liquidity while giving the banks opportunity to benefit from the rapid trading velocity of the stock market. Interest is earned on the turnover without taking any risk. It is like the bank putting its money out through traders to make COT (cost of turnover) daily without really taking any risk. The 30% margin on the loan was the protection. It was the Bank’s business to make sure the Stockbroker does not trade over the line and expose the bank to risk. It was the failure in this regard, which should rightfully be blamed on the banks instead of Stockbrokers who are now made to bear the brunt of what
essentially was a system failure. This was also why at the National Assembly hearings on the AMCON law, Stockbrokers opposed the section that attempted to class all borrowers as bad debtors.
Stockbrokers argued that their positions were different. Banks either accept that they have made a mistake and write off the loans and take over the under lying securities or restructure the loan into a long term loan backed by these assets until they regain value.
Securities are long term instruments, they have a good chance of regaining their value in the long run. As has happened in the last two months, the market will always come back. The sensible intervention of the CBN, promising to bring out guidelines to distinguish margin account treatment specially, was the reason Stock brokers withdrew their opposition to the Bill.
The current forbearance while welcomed by Stock Brokers because it is actually the last piece of the puzzle that needed to fall in place to complete the reforms and clean up of the banking industry they also reject the attempt to present Stock Brokers as the irresponsible lot that had to be forgiven, this is at best laughable.
The truth was that AMCON’s work will not be complete if the resulting debt overhang in the system created as a result of the collapsed stock market was not taken out. The 3 key issues AMCON had to deal with was first finding a way to re inflate the economy through the Banking system that was illiquid because they where bogged down by bad loans.
By buying the loans in the books of the banks and giving them cash, created liquidity. In the case of loans with stock market assets as collateral, it also meant AMCON taking out a large chunk of the supply of securities, many of them fraudulently created by the banks in their various fund raising activities, which they later brought into the market, actually dumping the securities in the market.
AMCON,s intervention tightened the demand in the market.
There was then this last bit which was taking out the debt overhang that meant everyone owed somebody. Stockbrokers’ liquidity was severely constrained. They were unable to borrow and were unable write off the debt related to margin accounts. When the Regulator forced the issue, many Stock Brokers found themselves under capitalised.
This made the market even more illiquid, while investors stayed away. It was how to resolve this situation that was hampering the market that made Stock brokers to canvass strongly that the market will not go any where until this issue was dealt with. A group of Stock brokers pushed the Government hard and even making presentations to the Finance Minister to show how important it was to see this issue through.
It was after this that the Minister set up a committee to look into the matter. The committee should have looked into the details of the respective loans to find out those that were purely margin accounts and separate them from the others which were clearly the majority of the loans. Some of these had questionable origins as a loan. Many banks took advantage to throw in loans that where long disputed and have never really been proven.
Some where outrightly fraudulent. These were those loans given to customers to buy shares from the same banks that were selling them. This is clearly illegal.
As usual, thoroughness is not our strong suit. Besides there was the need to sweep some of the dirt under the carpet. The purpose of isolating the margin accounts would have been the right thing to do. It is a pity that Stockbrokers in their desperation to resolve the issue lost the plot. Some of us were hoping that one of the banks or AMCON will force the issue and go to court so we can have the courts decide once and for all who was at fault with the margin loan debacle and AMCON too would have found that they can not have additional rights the banks did not have, no matter what is written in their law. The loan contract precedes the AMCON law.
Victor Ogiemwonyi is the CEO of Partnership Investment Plc
