analysisBy Festus Akanbi
As the euphoria that greeted the introduction of a N22.6 billion bailout plan for 84 stockbroking firms simmer, informed analysts have begun to wonder whether or not the intervention will deter stockbrokers from plunging their organisations into reckless risk- taking that caused the 2008 capital market, reports Festus Akanbi
Although the nation's capital market has continued to respond positively to the federal government's intervention through a bailout plan announced a fortnight ago, industry players last week said the current rescue effort would only be complete when it is sustained and expanded in terms of scale and frequency.
The Minister of Finance and Co-ordinating Minister of the Economy, Mrs. Ngozi Okonjo-Iweala, who unveiled the bailout measure, said the forbearance package put at N22.6 billion, where 84 stockbroking firms were being captured, was intended to restore confidence in the stock market. 84 stock broking firms are being targeted.
A Troubled Market
Since the global financial meltdown and the Nigerian capital market went bust, many brokers have remained insolvent and illiquid. Margin loans, excessive risk-taking and lax regulation left many stockbrokers with a debt overhang. Numerous proposals on how to revive the market have been bandied around especially the idea of a market bailout.
Although the names of the beneficiary stockbroking firms were not disclosed by the minister, independent research showed that some of the stockbroking firms likely to benefit from the debt relief would include Afrinvest West Africa, BGL Securities, Diamond Securities - a subsidiary of Diamond Bank- Intercontinental Securities - a subsidiary of the defunct Intercontinental Bank Plc- Nigerian Stockbrokers, Adamawa Securities, Alangrange Securities, Associated Asset Managers, Belfry Investments and Securities, Calyx Investment and Securities, Cardington Securities, Cashville Investment and Securities, Century Securities, Colvia Securities, Consolidated Investment, Cowry Asset Management, Dakal Services, DBSL Securities, De-lords Securities, Dependable Securities, Empire Securities and Enterprise Stockbrokers Plc among others.
Okonjo-Iweala had justified the intervention, saying the bailout was the first step in government's intervention and that the move was necessary in order to clear the debt overhang in the sector.
The minister said the government could no longer watch the sluggish recovery of the capital market, adding that the stock exchange was essential to the Federal Government's economic transformation agenda.
The nation's capital market was rocked by crisis in 2008 with investors losing majority of their investments as the prices of shares crashed in an unprecedented manner.
For instance, the All Share Index, which measures activities on the Nigerian Stock Exchange (NSE) plummeted from a peak of about 66,000 points in March 2008 to less than 22,000 points by January 2009, wiping out over N8tn (about 70 per cent) of the total capitalisation of the exchange within the same period.
A committee headed by the Deputy Governor, Financial Systems Stability, Central Bank of Nigeria, Dr. Kingsley Moghalu, recommended the bail-out as well as the elimination of stamp duties and Value Added Tax on stock market transaction fees.
And according to Okonjo-Iweala, "In furtherance of AMCON's clean-up of the banking sector, it is necessary to wipe off the debt overhang in the capital market, as this is dampening market activity."
End to Excessive Borrowing
She, however, warned that the forbearance would be accompanied with sanctions to discourage excessive borrowing behaviour by capital market operators in the future.
"Brokers benefiting from forbearance will not be allowed to provide any professional services to AMCON for a period not less than three years; firms will be required to reveal to the Securities and Exchange Commission (SEC) any dealings in any security valued at a minimum of N25m 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 per cent 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."
An Intervention Foretold
Market watchers who spoke with THISDAY on the development said the intervention did not come as a surprise given the seeming hopeless situation in the market since 2008.
This was the position of the London-based Head of Regional Research, Africa, Standard Chartered Bank, Razia.
Khan, who maintained that "There was always a feeling that something would have to be done about the overhang of margin loans weighing on the performance of the capital markets - so it is not very surprising from that perspective. There has long been talk about coming up with a solution along these lines. The authorities must be hoping that with the regulations put in place around this, they will manage to avoid a significant moral hazard."
She, however, foresees more challenges in the implementation of the bailout scheme, saying "In practice it is going to be difficult though. The monetisation of all oil windfalls that we typically see in Nigeria lends itself to destabilising boom-bust cycles, and that is the fundamental thing that needs to change in order to see more stability in other sectors - whether banking or stock broking."
She believes that "While the legislation establishing the Sovereign wealth fund is an important step in the direction of reducing these boom-bust episodes, it really does not go far enough on its own, to make a sweeping difference to the outlook."
But in its reaction to the current efforts being put in place by the federal government to resuscitate the capital market, the financial advisory firm, Financial Derivatives Company Limited, argued that targeting 84 out of about 200 stockbroking firms in the current bailout programme may amount to merely scratching the surface of a fundamental problem.
FDC, in its latest edition of a bi-monthly review of the economy, also noted that conditions attached to the forbearance were not clearly stated or stringent enough. "The term forbearance is being wrongly used to describe the current financial relief. The rationale behind this measure is simple: the government believes it is needed to increase liquidity in the market.
"While the initiative is good in theory, it does have negative implications in practice," the report stated.
It explained that forbearance is a postponement of loan payments, granted by a lender or creditor, for a temporary period of time. This is done to give the borrower time to make up for overdue payments. "If we take this as the definition of forbearance, then the recent measure by the FGN is debt relief rather than forbearance. According to the finance minister, "AMCON had purchased these margin loans from banks for about N42.6 billion, but the value of the underlying assets or collateral is worth only N19.96bn today." Effectively, the total bailout sum that has been handed to 84 stockbrokers could be in excess of N100 billion, given that AMCON purchased the debt at a significant discount given the fall in the value of underlying assets," FDC argued.
It raised the question of moral hazards, wondering if the alternative would be more expensive? Have lessons been learnt? And can the system proceed without the bailout?
Selective Breeding and Moral Hazard
The report maintained that "the selection of 84 stockbrokers to be anointed as debt-free, throws out the question of selective breeding and more importantly: moral hazard. Moral hazard played a central role in the events that led to the capital market crisis, and we need to appreciate this role to adequately design future reforms and to prevent disasters down the line.
"By issuing the "go and sin no more" mandate to 84 stockbrokers, the finance ministry has set a precedence that excessive risk will not be punished or in other words, issued the stockbrokers with subsidised risk-taking. This fosters moral hazard where a party feels that if it can take risks that another party has to bear, then it may as well take them. If a party has to bear the consequences of its own risky actions, it will act more responsibly. The finance ministry has now pardoned the excessive risks taken by the stockbrokers and thereby increases the chance of moral hazard coming into the equation.
"Another important issue of moral hazard thrown up by the forbearance is that there is no reward for the stockbrokers that have stayed away from excessive leverage or refinanced their debt. Stockbrokers that paid off the majority of their debt by selling off their assets are now at a disadvantage to the 84 that received the "clean bill of health". Not only will these stockbrokers feel disgruntled but they will also feel excessive risk-taking is incentivised by the regulators," it further argued.
It, however, acknowledged the fact that Nigeria is not the first country to bailout part of its financial system. And there are reasons to think the bailout is important to the economy as a whole as stated by the finance minister.
The cleanup of the banking sector was completed in 2011 and the government and regulators deemed it only right for the capital market to also get a soft landing to push it back up again. However, Rencap explained these arguments will only hold if the capital market is representative of the economy or if the failure to bailout the 84 stockbrokers would have caused a systemic failure of the capital market.
In the United States, the government bailed out various companies (both financial and non-financial) that posed systemic risks to the economy. Amongst those bailed out were the biggest insurer (AIG), one of the largest financial institutions in the world (Citi Bank), and the automobile manufacturer General Motors (GM). 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. 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.
Rencap reports maintained that the Nigerian banking sector has now fully recovered with no depositors' funds lost, saying 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. A market gain of over 26% this year further shows that with debt overhang on the 84 stockbrokers the capital market can recover provided steps are taken to boost investors' confidence.
"With the forbearance completed for the 84 stockbrokers, other sectors of the economy will question why the bailout has not been extended to them. Indeed, there are moribund companies around the country that might benefit from a bailout and also go a long way to solving the unemployment problem (Notore Chemical is an example of how government intervention could be used to positively impact on companies).
"While the FGN might have the right intentions in handing forbearance to the stockbrokers, the value is lost in the moral hazard it throws up. As they say: the road to hell is paved with good intentions.
The main message here is to take moral hazards seriously. Measures that rein in moral hazard are to be welcomed and will help to reduce excessive risk-taking; measures that create or exacerbate moral hazard (such as forbearance) will lead to even more excessive risk-taking and should be avoided. The bottom line: If someone takes a risk, someone has to bear it. If any stockbroker takes a risk, then we should ensure that they and not the taxpayers are made to bear it. As the late great Milton Fried-man might have put it: "there ain't no such thing as a free risk," Rencap said.
Another capital market analyst, Olutoyin Ayoade, noted that the reaction from the stockbroker community to the supposed N22 billion bailout by the Federal Government may not be said to be as jubilant as expected.
This, according to him, is because the measure is regarded as too little and too late, as with most government policy decisions, adding that the measure, at best, will treat the symptoms of the problem rather than the root cause(s) and will predictably not lead to the desired result(s).
He maintained that the capital market in any nation is the barometer of the economy, which indicates the direction of the economy since economic agents base investment (divestment) decisions on economic data and government's specified plans and programmes.
He said the federal government's intervention of N22 billion in a market with capitalisation of N8 trillion, while FGN/CBN/AMCON intervention in the banks runs into trillions of naira, may be described as too little; and coming in December of 2012, three years after the intervention in the banking sector, may be too late as well.
It was noted that companies which had planned expansions based on capital raisings through public offerings of their shares or debt issuance have not been able to do so. Many planned projects have not been financed as a result of this slowdown. The effect on unemployment, growth and the economic wellbeing of Nigerians is better imagined than evaluated.
Market Intervention not for Operators
Ayoade therefore explained that a market intervention is not for the benefit of the operators but needs to be targeted towards stability, growth and economic development.
"A more holistic approach, based on the bigger picture of tackling unemployment, growth and development, should be adopted in resolving the downturn in the capital market. It should be repositioned to be an effective catalyst for capital formation and development for the benefit of the Nigerian economy.
Expectedly, it was a season of commendation to the federal government by officials of the umbrella body for stockbrokers. According to the President of Chartered Institute of Stockbrokers (CIS), Mr. Ariyo Olushekun, this is something the stockbroking community had been asking for; The Federal Government must be commended for acceding to the request, which has demonstrated the government's commitment to the development and growth of the market.
Olushekun noted that while there were other things needed for the market to attain full recovery, the forbearance was a good move that would sustain the recovery.
"The stockbroking community is grateful to the Federal Government, members of the committee that made this forbearance possible," he said.
A market operator who is also the Managing Director and Chief Executive Officer, Cowry Asset Management Limited, Mr. Johnson Chukwu, said the forbearance would no doubt significantly relieve the operators of the huge debt burden which most of them had been subjected to since the capital market crash of 2008.
"Although the forbearance will not necessarily lead to an immediate restoration of their liquidity, it offers the stockbrokers a fresh lease of life to either recapitalise or merge their operations so as to be economically viable.
"The restrictions/sanctions imposed on the beneficiaries of this forbearance further make it imperative for the affected operators to consolidate into bigger and financially stronger companies" Chukwu said.