Nigerian Bank Nigeria Bank PHB Plc – CBNs Assets Management Company Ending The Era Of The Ostriches

Source Daily Trustt: Sanusi Abubakar, 16th November 2009

Once upon a time, actually just some five months ago, the ostriches were in charge of the Nigerian banking and finance. The ostrich is said to hide its’ face when it sees danger.

Faced with an obvious crisis these “financial gurus” buried their heads, thinking that because they couldn’t see it, the crisis will soon go away. Some even thought they could simply deny it out of existence. True, some of these financial chaps were simple fraudsters who thought they could cover-up their incompetence, but many were, or pretended to be, ostriches. Thanks to the new, five months old, CBN management, the era of opening up and admitting mistakes and getting the banks out of their bad habits is finally here.

It is one thing to get the banks to change. But, what do we do with all the bad, non-performing debts, and other toxic assets they have accumulated over the years? We can’t continue to deny them, and they cannot be accommodated easily without jeopardising the survival of some of the banks. In economics, “the ostrich strategy” is more specifically used to refer to the rescheduling of bad debts in the wake of a bank’s rise of bad debt provision. That was what these banks were adopting, and it was not going to work forever. This is where the (Bad) Assets Management Company (AMC), Sanusi Lamido’s other restructuring strategy, comes in. Though he often returns my calls, he has been too busy to be pinned down for more than a couple of minutes, so I will just outline what I understand him to be doing from newspaper reports. Essentially, he intends to buy these bad loans and almost worthless share certificates being held by the banks, through cash or bond, at prices that will allow them to recover “some -but no all -- of the losses” to improve their liquidity and profitability. These plans, when approved by the National Assembly, will serve both the banks and the stock market, distributing the “losses” suffered by the banks and the investors. After buying these (bad) assets at a huge discount, the AMC will manage them (through professional investment managers) for about three to six years, sell them off subsequently and, hopefully, recover its’ money. This is what I understand CBN to be aiming at, in a nut shell.

As the CBN Governor knows only too well, one major headache will be the pricing of these junk assets. It is intended that the AMC’s focus would first be “margin loans” given by these banks which became problematic after the stock market crash because, according to him, “those are easier to value.” Other obvious candidates will follow, especially those related to petroleum product imports, as well as government contracts not paid for. But even aside the valuation issues we must consider others relating to equity, efficiency and official irresponsibility. First, on equity: why are the banks and the stock market gamblers the only ones to be bailed out? Why should people suffer because they have done contracts for governments and they are yet to be paid while interests accumulate and the banks keep pursuing them? Could these not be taken off the banks, their interests frozen while the CBN ensures, through the Federal Executive Council, that they get paid? These companies are major employers of labour after all. Secondly, efficiency: is it not time to start telling these banks that there is a limit to our tolerance? Right now they behave as if no matter what they do they are sure of being bailed out? They mess up, become bloated and blackmail the government into bailing them out. Surely, any system that cannot punish offenders will not survive, and in business the main deterrent must be failure. The management of these banks were culpable, true, but even the shareholders were negligent. The efficient and honest ones should be rewarded and the crooks punished.

Thirdly, how do we deal with outright theft; many stole to buy executive jets, build mansions and invested abroad or financed politicians. This is where I support EFCC involvement in recovery. Another issue is that of the so-called market makers who turned out to be fraudsters, with active connivance of the banks, the NSE and the Securities and Exchange Commission. Take the case of one “market maker” the banks were using to artificially hike up their shares, Peter Olulo. Apart from the N88.3 billion he is said to owe the five banks in serious trouble, he is said to owe another N51.45 billion to Bank PHB, Ecobank, GTBank, FCMB, First Bank, Stanbic Bank, Standard Chartered Bank, UBA and Zenith. (Actually he is a useful consultant to have if you are going a-borrowing!) What does one do with a chap like that and how do you price the “loans” he took? What’s so special about the guy that the banking sector was willing to lend him so much? Basically, he and other big brokerage firms were instruments of manipulating share prices. In summary, if a bank wanted to come out with an IPO they would give him billions to start buying the bank’s shares. Soon enough the market will notice the trend and everyone will get on board. The resulting rush will push the share 200%, 300% or more. They will then come out with their IPO at N3 or N4 less than the “market” price, which they had manipulated. Often they end up with over subscription, which SEC allows them to keep. Without knowing what to do with all that money, they go back to the same or similar fraudulent games, trying to show huge paper profits commensurate with the huge capital they were managing.

So the final question is how to get them back to being … well, banks, financial intermediates that take funds from depositors and lend them to those with viable projects, on affordable and realistic terms? This is why this reform dovetails into Sanusi Lamido’s other one of cleaning up the banks and reorienting them. This would help strengthen them hopefully to the nation’s advantage. NDIC’s recent preoccupation with downward review of the single obligator limit complements this policy and needs to be supported. Yet, all things considered, are we satisfied with the ownership of our banks? Can we afford to let just anybody to own a deposit taking institution without regards to character, competence or professionalism?

Like all other government policies, the concept of the AMC, the rationale behind it and its’ operations should be the subject of extensive public debate and scrutiny. Will fresh public funds be used to purchase these bad assets or are we converting the N420 billion already extended as bailout, as the seed money for it? Other options, including re-purchase agreements, packaging (by the banks) of these bad assets along with some good ones, and selling them off, recapitalizing via the stock exchange, private placements and even mergers and acquisitions, should not be ruled out. All cards should be on the table.

Despite all the paid negative advertorials, semi-lunatic conspiracy theories, and sundry invectives heaped on the CBN management, at least they are taking their work seriously, with determination and imagination. We cannot continue to copy the ostrich; we must face our problems and try to solve them. The AMC idea could work, and should be given a chance.

Nigerian Bank Nigeria Bank PHB Plc, CBN Central Bank Of Nigeria, Ecobank Nigeria Plc, FCMB First City Monument Bank Plc, First Bank of Nigeria Plc, GTB Guaranty Trust Bank Plc, Stanbic IBTC Bank Plc, Standard Chartered Bank, UBA United Bank for Africa, Zenith Bank Plc