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Forbearance for stockbrokers: A tool for recklessness?

WITH the announcement by the Ministry of Finance two weeks ago of N22.6 billion bailout package for 84 stockbrokers that got involved in margin trading, some stakeholders who clamoured for the injection of funds into the capital market are already rolling out their drums to celebrate. However, some believe that the bailout may have been misapplied, and may not actually provide the reprieve as anticipated in some quarters, NKIRUKA NNOROM writes.

IN the last four years since the Nigerian capital market witnessed a terrible crash in its history following involvement of ambitious stockbrokers in margin trading and risk taking, the singular demand by those enmeshed in the imbroglio has been for the government to find a way of ameliorating the huge losses they suffered.

The recklessness that ensued in the market within that period was believed to be fueled by lax regulatory function of the Securities and Exchange Commission, SEC, and the Nigerian Stock Exchange, NSE, The debt, which at the last count was put at over N1.3 trillion, left the equity market starved of liquidity, while so many stockbrokers remained insolvent.

At the height of it was the closure of some stockbroking houses and downsizing of workforce by those that managed to remain in business. The call for bailout heightened when the incumbent Governor of Central Bank of Nigeria, Mallam Sanusi Lamido Sanusi, created a bad bank, the Asset Management Corporation of Nigeria, AMCON, to take off the toxic assets in the books of commercial lenders also involved in margin trading alongside stockbrokers.

Dealing member firms

Stockbrokers had argued that having extended such gesture to the deposit money banks, the same should be done for them. Shareholders’ activists, who shared the same thought with stockbrokers, believed that granting Dealing Member firms of the NSE bailout will eliminate the glut in the market.

The clamour came to an end with the announcement of N22.6 billion debt relief for 84 stockbrokers believed to have been heavily involved in the margin loan debacle. While some people are already rejoicing over what they see as reprieve for the capital market, another set of analysts insist that the action has some moral hazards, saying that it would encourage recklessness among stockbrokers in future. Those in this category said that the move is counter-productive with the capacity of inducing another crash by the time the bailout fund is released to the market.

Reasons for the relief package, conditions attached

While making the announcement, Dr. Ngozi Okonjo-Iweala, the Finance Minister, said her ministry decided to relieve stockbrokers of the debt overhang following a research by the International Monetary Fund, IMF, and the World Bank, which confirmed that solid economic growth in any country is tied to joint development of the banking sector and the capital market. She explained that while the banking sector has already been cleaned-up, after the meltdown, the capital market was yet to get an intervention.

Finance Minister, Ngozi-Okonjo-Iweala
Finance Minister, Ngozi-Okonjo-Iweala

“Many of you are aware that activity on the Nigerian Capital Market, particularly the stock exchange, has been very slow in the aftermath of the global financial meltdown and the Nigerian banking crisis. We saw the Nigerian Stock Exchange (NSE) All Share Index (ASI) plummet from a peak of about 66,000 points in March 2008 to less than 22,000 points by January 2009, wiping out over N8 trillion or 70 percent of the total capitalisation of the stock exchange within this period.

Since then, activity on the stock market has remained sluggish even though there are some signs of recovery, with the index now at about 26,494 points,” she said. She informed that AMCON had purchased the margin loans of the 84 stockbrokers involved from banks for about N42.6 billion, adding, ‘but the underlying assets or collateral is worth only N19.96 billion today.’

As part of conditions to benefit from the package, Okonjo-Iweala said the affected brokers would not be allowed to provide any professional services to AMCON for a period not less than three years, adding that they would be required to reveal to SEC any dealings in any security valued at a minimum of N25 million executed in a single deal or multiple deals on the same day on behalf of their clients.

“As part of their net capital requirement, no broker that has received forbearance shall permit his aggregate indebtedness to exceed 100 percent of his net capital, details of the firms will be forwarded to the Credit Bureau Agency. A strict requirement that imposes separation of assets and control for brokerage services and/or future margin facilities through the use of custodians; and finally, the brokers will be prohibited from taking proprietary positions or trade on their own account for one year,” she stated.

Analysts’ reservation: Though the desire of stockbrokers seems to have been met by the announcement by Finance Minister, it has as well thrown up mixed reactions from different quarters with some commending it as tonic for market revival, while others are of the opinion that the move has negative implications for the market.

Countering the Finance Minister’s stance on the role of the capital market in the economy, the Managing Director/CEO, Financial Derivatives Company, Mr. Bismarck Rewane, said market gain of over 26 percent this year shows that with debt overhang on the 84 stockbrokers the capital market can recover provided steps are taken to boost investors’ confidence.

Arguing that failure to bailout the capital market does not have any systemic risk, Rewane remarked that in the United States, for instance, the government bailed out various companies, both financial and non-financial, that posed systemic risks to the economy, citing AIG, General Motors and Citi Bank as examples. “The bailout at the time saved jobs and prevented a total collapse of the economy.

Similar actions were taken in Europe with the bailout of Northern Rock and RBS in the UK, and the Swiss government bailing out UBS while Credit Suisse raised emergency capital from outside investors including the Qatar Investment Authority. Those institutions were seen as the bedrock of those economies hence the reason for their bailout,” he maintained.

“The Nigeria banking sector is also perceived as the bedrock of the economy and the regulators were commended for the bailout of the sector that commenced in 2009. The Nigerian banking sector has now fully recovered with no depositors’ funds lost. The capital market on the other hand cannot be viewed in the same light as the banking sector. Many companies still rely on the banking sector rather than the capital market for financing.

In addition, the 84 stockbrokers handed forbearance are not inherent to the economy or the capital market itself,’ he added. Besides, he said that the move has set precedence that excessive risk-taking would not be punished or in otherwords, issued the stockbrokers with subsidised risk-taking.

Subsidized risk taking

On his part, the Managing Director/CEO Cowry Asset Management Limited, Mr. Johnson Chukwu, told Vanguard shortly before the bailout package was announced that the action is capable of inducing another burble in the capital market by the time the money is released to the market.

He noted that whenever this kind of burble builds up, it exposes the market to danger of massive fall, adding that failure to realise such build up prior to 2008 crash was the reason for the huge losses recorded by investors within the period.

According to him, once there is a bailout fund to intervene in the equity market and government is holding large chunk of equity to prop up the price, discerning investors will shy away from the market, “simple reason is that because they know that if they buy the stock and government decides to exit, there won’t be any price again. The market will be flooded then you find out that you are carrying a worthless certificate or share.

“I don’t believe in bailout when it involves intervention in the equity market because when you have bailout in the securities market, you create an artificial price level and when you create an artificial price level, you create instability in that asset class such that when that bailout fund is fulfilled, the market will crash back. So it is better that the market is encouraged to find its level than an intervention fund to come in and prop up prices to an artificial level.”


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