I got a few calls from some members of the House of Representatives last week, most of them complaining that I have been too hard and critical of the lower chamber of the National Assembly in the recent past. I chuckled inwardly at this summation, wondering what their reaction would have been if I had been at my vintage best. But what the complainants did not understand is that my last couples of articles, especially the first part of this series, could have been a lot worse. Even I admit that I pulled my punches. However, unlike the House, my intention was not to cause conflagration in the financial system, as we have had enough of that. My goal was to assess the report of the House into the “near collapse of the capital market”, which I intend to continue this week:
Lest the ad hoc committee of the House of Representatives mandated to ascertain the causes of the crash of the stock market forgets, the Nigerian financial system in 2008 was reeling in crisis. Regulatory capture, resulting in lax regulation; the unprecedented creation of risk assets on banks’ balance sheets; manipulation of stock prices by stockbrokers and subsidiaries of banks, which at the time accounted for 65 percent of market capitalisation; mismanagement of some of the banks and insider lending, all combined to create an asset bubble in the stock market. These, and to a lesser extent the global financial meltdown, was what led to the stock market’s collapse.
By the first half of 2009, demarketing by banks and growing mistrust resulted in interest rates in the interbank market shooting through the roof. As the lender of last resort, the Central Bank of Nigeria, having undertaken its special examination of the banks by the second half of 2009, was left with two options: the first was to hand over the sick banks to the Nigeria Deposit Insurance Corporation for liquidation; the second was to provide financial accommodation to the banks, as provided by the Central Bank of Nigeria Act.
Of the two options, the first would have been the much easier route for the banking system regulator. The central bank could have withdrawn the licences of banks whose capital and liquidity had been impaired and directed the NDIC to commence the process of liquidation. However, the consequences of this option would have been dire for the financial system for two reasons. The first being millions of depositors would have lost their money; the second was that three of the eight banks in which the CBN had intervened were “too big to fail”.
At this point, it will be necessary to refer, not just the House of Representatives, but all members of the National Assembly to Andrew Ross Sorkin’s 2009 international bestseller, ‘Too Big to Fail: Inside the Battle to Save Wall Street’. The book, one of my favourites to date, is an excellent portrayal of the measures the US Treasury Department, the Federal Reserve Bank, Federal Reserve Bank of New York and Congress had to take to save the US financial system, and by extension the global financial system, from collapse following the sub-prime loan crisis and the fall of Wall Street investment bank, Lehman Brothers. Today, ‘Too Big to Fail’ serves as a reminder and occupies a pride of place in the office of the chairman of the US Federal Reserve Bank, Ben Bernanke.
Just like the US regulators had to act quickly to save banks deemed too big and critical to their financial system from collapse, the CBN had to take similar measures. As indicated earlier, three of the banks – Union Bank of Nigeria Plc, which still remains one of the largest banks in the country, and the defunct Intercontinental and Oceanic Banks – were too big to fail. The three banks combined accounted for a significant share of the banking system’s asset and deposit bases. Had they been liquidated, the impact would have been catastrophic not just for the financial system, but for the Nigerian economy at large.
This, unfortunately, was a major point that the ad hoc committee of the House of Representatives woefully missed before reaching its conclusions and recommendations. Like this column has stressed in the past, in situations of crisis in the banking system, the first priority of any central bank is to protect depositors, as shareholders are secondary in the scheme of things. In fact, it is the shareholders of the banks that were run aground by their management teams who should share the blame for not providing better oversight, rigourously scrutinising the financial accounts presented by the banks, and enforcing strict corporate governance rules.
But more importantly, even after the eight banks were rescued by the central bank and repeatedly directed by the regulator to recapitalise, in order to bring closure to the crisis in the banking system, three of the eight failed to meet the deadline. In this regard, the ad hoc committee of the House averred that the CBN, NDIC and Asset Management Corporation of Nigeria did not wait till September 30, 2011 given the eight banks to recapitalise, and in so doing, resorted to forgery and fraudulent misrepresentations by nationalising three banks – Spring Bank Plc, Bank PHB Plc and Afribank Plc.
Again, it will be necessary to enlighten the legislators on why CBN, NDIC and AMCON could not have waited till September 30. If the members of the ad hoc committee had asked the right questions or been more rigorous in their investigation, they would have discovered that between June and August 2011, the banks had become restive all over again. At the time, there were mounting concerns over the ability of three of the banks that had not entered into agreements with core investors to recapitalise their banks.
The so-called healthy banks were also conscious of the fact that the CBN guarantee on interbank deposits was going to expire on September 30 and had become circumspect about lending to the three banks. With short-term liquidity in short supply to these banks, this meant that their ability to meet their obligations to depositors and other creditors was in jeopardy. This, coupled with the fact that there was going to be a run on the three banks by depositors – all too aware of the recapitalisation deadline – forced the CBN, NDIC and AMCON to act on August 5, before the September deadline. That the ad hoc committee failed to grasp the crisis that loomed large in the financial system for the second time in three years is stupefying to say the least.
But even if were to ignore the reasons for the nationalisation of the three banks and had to the review the process, which the House concluded was fraught with forgery and fraud, it is again obvious that had the committee sought to ask the right questions, they would have been adequately addressed by the key actors in the nationalisation saga. For instance, the ad hoc committee observed that some faceless persons – Messrs Innocent Obi, Barnabas Olowoselu, Gideon Agbedo and Benson Igbanoi – had held the authorised share capital of 100,000 units each of N1 per share in the three banks in the course of registration at the Corporate Affairs Commission. According to the committee, shell companies with names such as 'SHOKO CHUKIN LIMITED' were used to register the banks, which were later changed to Mainstreet Bank Limited, Enterprise Bank Limited and Keystone Bank Limited. This, the committee concluded, meant that the process of the banks’ bridging and takeover by AMCON did not follow due process, was contrived and fraudulent.
This assessment was anything but correct. The so-called faceless persons whose names appeared in the incorporation/registration documents of the banks were all nominees of the NDIC. In fact, three of the persons are staff of the corporation, while Gideon Agbedo, a legal practitioner, was the lawyer used by NDIC to register the new banks at the CAC. Also, the initial shell companies or names used by NDIC were used as a diversionary tactic to forestall panic in the banking sector. But lastly and more significantly, once the bridged banks were taken over by AMCON, an additional 24,999,900,000 shares were created to comply with the CBN minimum regulatory capital requirement for banks. As such, with AMCON’s acquisition of the banks, it effectively bought up the new shares that were created and that of the NDIC nominees who only served as temporary directors of the shell companies for the purpose of registration. Naturally, other directors in CAC’s Form 07 whose names supplanted the nominees of NDIC were AMCON’s appointees to the banks’ board.
Besides, by stating that CBN, NDIC and AMCON acted fraudulently, the House is in effect stating that the federal government, of which the House of Representatives is a part and parcel, acted fraudulently. After all, the CBN, NDIC and AMCON are all wholly owned by the Federal Government of Nigeria and the relevant legislations which gave backing to the bridging and nationalisation of the banks are all acts of parliaments. Add to this the judgement by a court of competent jurisdiction which has already ruled that the CBN, NDIC and AMCON acted in accordance with the law.
Like I wrote last week, several aspects of the House report on the remote and immediate causes of the stock market’s crash was fraught with quite a few misrepresentations of the actions of the regulators and AMCON when they acted in concert to cleanse the financial system. But whereas the CBN, pre-June 2009, should take the rap for not providing better oversight and keeping the banks in check, it must be acknowledged that with the support of NDIC and AMCON, the CBN has since August 2009 been quite fastidious at restoring sanity to the banking system. Indeed, the steps taken by the CBN, NDIC and AMCON have been acknowledged by other jurisdictions worldwide and are being replicated by countries in Western Europe where the banks are still distressed.
Last, but not the least, it was erroneous for the ad hoc committee to describe AMCON as a time bomb waiting to explode or to blame it and the current management of Union Bank for the disastrous N8 billion rights issue of the bank in 2007. Again, the committee must be reminded that AMCON was not in existence in 2007, while the current management of Union Bank only took over the bank in August 2009. Moreover, had AMCON not bought up the non-performing loans and other risk assets on the balance sheets of the banks, they would still be declaring losses from the write downs that they would have to undertake. This will naturally affect the valuation of their shares and inevitably the stock market.
In addition, the pricing model for arriving at the valuation of the qualifying assets that it acquired from the banks was announced several times by AMCON as stipulated under its guidelines and Act, both of which are public documents. The bonds that were issued by AMCON to acquire the assets are all guaranteed by the federal government, which should give investors who might be interested in trading in the bonds the necessary confidence. So the last thing the House of Representatives, as an integral part of the federal government, should engage in is scaring away investors.