BY FRANCIS ATUCHE, former Managing Director, BankPHB

(Presentation to the House of Representatives Committee on Capital Market)

Introduction

The 2008 global financial crisis spared no nation. It impacted every country with ferocious intensity, spiraling into lukewarm confidence and untold economic misery for people across the globe.

Yet, for each country, depending on the potency of its unique counter prescription, the aftermath differed vastly. Some countries, either out of misguided intent or for lack of will to look beyond the frails of sentiments, called upon themselves the full wrath of the crisis.

Francis Atuche

Other countries waged war against it, reaching for every imaginable policy tool to confront the crisis. As expected, the latter countries averted the full fury of this global calamity.

The U.S Response

As the U.S. considered the survival of its capital market crucial, it tailored its counter policies to methodically extinguish, at every intersection, the threats posed to this sub-structure. With the capitulation of Lehman Brothers and its damning effects on other U.S. financial institutions as well as on the real sector, the U.S. Federal Reserve Bank rallied to the experience of its immediate history.

For a competent regulator, Lehman’s demise proved a scary glimpse of the catastrophe that lay ahead in the face of inaction or flawed prescription. Therefore, reacting like a savvy regulator that it is, the U.S. Federal Reserve Bank, in collaboration with the White House and the Congress as well as all their respective organs and committees, swung into action, invoking unbiased, evidence based, research driven economic therapies, including the bailout option, interest rate cut and various tax relief measures.

While on one hand, this collaboration facilitated the rescue of such mammoth financial institutions and other strategic companies as Citibank and American International Group (AIG) through bailout funds, on the other hand, it downsized quarterly rates to historical lows, but not to the neglect of such other sectors as automotive industry, which also received bailout funds. In consonance, these efforts and collective measures spared the U.S. economy of predicted disaster, as inflation hike was tamed and job gains accelerated by 3%.

Specifically, to restore liquidity to the financial markets and resuscitate confidence, team USA, including President Obama and the U.S Federal Reserve and other governmental agencies took the following actions:

Launched the Toxic Asset Purchase Programme (TARP), which was estimated at US$700 billion for lending to banks in exchange for dividend paying preferred stock; Approved an economic stimulus package worth US $168 billion in the form of tax rebate checks.

Following the outcome of stress test conducted by the Federal Reserve Bank, 10 of America’s 19 largest banks did not measure up and as such required US$75 billion within a period not exceeding 6 months. The US Federal Reserve, unlike the CBN took the following reflationary economic steps as follows: Mandated the struggling banks to orchestrate a rescue plan within 1 month and also within 6 months, execute the plans; Authorized ailing banks that required funds to raise new common equity either from existing shareholders or new investors, convert preferred shares held by private investors or the government into common equity or sell additional assets; Approved, upon application, bail-out funds to banks that required further funds after exhausting other capital raising avenues listed above.

It is mindful to note that much more important than these collective tactics, was a rather calm, confidence building atmosphere ushered in by Federal Reserve Bank. With terse, reserved and well intended pronouncements, Federal Reserve Bank deferred any decision to remove CEOs/MDs of wanting banks, to the affected banks’ shareholders whose fate are closely tied to the banks’ fortune, drawing on the simple analogy that those who stand to lose the most will go the extra mile to protect their stake.

Nigeria’s Response in comparison to U.S. Response

As was experienced in the U.S, some banks in Nigeria did not live up to the stress test threshold of the CBN. However, unlike in Nigeria, where the regulator pronounced the outcomes of the stress test 45 days ahead its completion date, the stress testing in the U.S was an objective scoring of the banks’ health with the overall motive of alleviating the burden of banks, re-injecting funds (if need be) into the banks and as such re-igniting banking lending again in order to spur the economy. In addition to pre-maturely instigating the outcomes of the stress test, the Nigerian Central Bank Governor faulted the memory capacity of the initial examiners because the outcome of their test did not qualify the banks for take-over.

The well thought out, coordinated responses of the U.S. Federal Reserve, which are reflective, albeit in different dosage, of confidence building policy measures enabled such countries as Canada, Brazil, Chile, South Africa, and the Euro-zone to weather the storm. Unfortunately, Nigeria did not make this list. So, one wonders what the stress test so executed in Nigeria has achieved.

Had the test been aimed at boosting confidence as was intended elsewhere in the globe, how come the outcome of our own therapy has been different? Rather than resuscitate confidence, our regulator’s strategy viciously attacked capitalism and destroyed value and confidence beyond redemption. From an initial value of N13 trillion in 2008, the Nigerian capital market fell to N6.3 trillion in the aftermath of the crisis, after which it rallied to N9.0 trillion on June 26, 2009.

Since then, despite additional listings of N 2.3 trillion by Dangote Group, amongst other sizeable listings, the market is stagnated at N 6.5 trillion. As such, it appears that the market may have lost at least N 5 trillion.

The reasons are not far-fetched. Our regulator’s actions were to the contrary, and so were the broad outcomes. Rather than wage war against the looming crisis, it may have ignorantly paired with the storm, to tumble the economy.

Without doubts, as the stress tests revealed, some of the Nigerian banks had liquidity challenges amongst other problems, which resulted from a culmination of factors, including but not limited to the sudden global collapse in prices, including crude oil price, the mass exit of foreign investors who due to the global crisis, pulled out of Nigeria in order to cover their short-falls in their home countries and the simultaneous crystallization of cross country liabilities across the globe.

But given the disproportionately large size of the Nigerian banking industry, which stood at 60% of the market then, and the vast ramification of its demise on the broader Nigerian economy, the banking industry, ought to have been treated with utmost care. But the Nigerian CBN insisted on taking a rather expensive route.

For 50 years, no CBN Governor had issued far-reaching penalties on banks on the basis of a purported draft stress test report that was never discussed with the audited banks. Can this honorable house verify the reason(s) the CBN side stepped such crucial due process?

The CBN not only abandoned its most urgent mandate to restore confidence in such trying times, it also sent shivers to the Nigerian capital market, striking at the heart of market confidence as shareholders grappled with the possibility of a sudden loss of their stake.

For those resilient shareholders and daring investors who nevertheless held their stakes, their confidence was destabilized, and possibly eroded following frequent misguided pronouncements of the CBN Governor, who largely portrayed our financial system as hopeless. Such reckless utterances hit a crescendo when CBN Governor referred to our stock exchange market as a casino and opined that those who placed money there, and initially saw their stock price rise, have lost their money.

And as a testament to eroded confidence, despite the over N4 trillion so far disbursed to both recapitalize the rescued banks and also purchase bad loans of other banks, we are all witness to the painful aftermath: a battered economy and banking sector beleaguered in uncertainty, as the country bleeds away all the gains of good policies of the past.

Proposed Solutions

As a citizen of Nigeria, I owe it to my country to suggest measures that will ease us out of the current lock-jam in our capital market.

First and foremost, the nationalized banks must be returned to their original owners, who are the prime losers in this whole collapse and whose stakes are closely tied to the fortune of the banks. Such selective victimization on one hand and breach in due process on the other, casts doubt on our ability to regain the confidence of investors. Until the anxiety of investors that another wave of take-over will occur again is extinguished, these investors will not take further risks.

A case in point is Zimbabwe, where in a blind bid to economically empower black Zimbabweans, the government forcefully confiscated the land owned and farmed by white Zimbabweans with flagrant disregard for property rights. This act grossly backfired, leaving the country with hectares of bare arable land with no activity, as the black farmers were ill-prepared and unskilled to take over. Property rights stands at the heart and soul of confidence building and any action that suppresses it destroys confidence.

No wonder the Nigerian capital market has failed to show any signs of recovery as experienced in other countries where their Central Banks carefully orchestrated crisis easing safeguards. Without casting blames, the true losers in this whole debacle are the market and banks’ original stakeholders, especially the retail shareholders whose holdings have been mindlessly vanquished beyond redemption.

Secondly, while foreign participation is crucial for the take-off of our capital market, such participation can only happen in the presence of evidence of active local participation. Otherwise, foreign investors will not dare. Like in other emerging markets, foreign investors will only swim after the locals have ascertained its ocean’s depth. If Nigeria were to see such relentless wave of active foreign participation in its capital market, as was experienced in the boom years of early 2000s, we must re-ignite our local appetite via enhanced access liquidity for the locals and renewed sense of property rights. While it may be difficult to woo foreign investors back to the Nigerian Capital Market, or to stem the flow of negative news surrounding the sudden takeover of their stakes in the rescued banks, we must institute property right safeguards that will assuage their unique fears.

Specifically, such safeguards will serve to assure shareholders that never again will their shares be abruptly snatched from them in the most bizarre manner. But to strengthen their assurances; there must be a reversal, to the full glare of the public and international community, of some or all of the flawed policies of the CBN that worsened the situation of the Nigerian capital market. With all these in place, we could see a resumption of such interest that spurred the capital market in the first place.

In closing, in the words of Fernando Henrique Cardoso, the Brazil’s president, “you can neither have economic growth nor economic development, without having solid capital markets”. Thus without a strong, liquid capital market woven in well established property rights and formidable principles of rule of law, it may be impossible to trigger the type of capital market activities we so desire.

Without revamping confidence and as such recouping the staggering loss of N 5 trillion of our capital market, these investors will never return. Also, they will continue to communicate their bad experiences to whosoever cares to listen, and in the global media too, thus negating any chances of a bounce back by Nigeria.