Toxic Asset Management

While the quality, quantity and credibility of information released to the public continues to be an issue, it is already clear that many of the things we thought we knew about the Soludo era at the Central Bank were at the very least exaggerated if not entirely false. A better understanding of the Soludo era is necessary if we are to have any kind of basis for analyzing whether the Sanusi-led Central Bank's fixes are appropriate in the effort to reform, resuscitate and restore the banking and financial services industry. At this point, 50 years into restored self-government, I have to say that we will probably only know the facts about the Sanusi Lamido Sanusi era after he leaves too.

I believe Sanusi's appointment was President Yar'Adua's best decision, but there needs to be some sort of credible and independent source of raw data and analysis. We don't really get that from the polemical media, nor do our universities really produce any "new" knowledge. The media is a prime source of much bad analysis (media commentators have got much of Nigeria believing Nuhu Ribadu was fighting corruption, when he really wasn't), and any paper produced by one of our business or economics faculties will probably be dependent on data from the CBN (or the IMF or World Bank) rather than produce independent data we can use to guage the accuracy of what appear to be guesstimates used by the CBN, IMF, World Bank and other agencies.

One tires of reading/hearing/seeing facts and figures that don't seem to reflect reality. I mean, seriously, where do they get the HIV/AIDS incidence rates they report for different African countries? Most of the countries have no accurate census, no accurate records of births and deaths, no data on the informal economic sector, no information of most things of substantive value .... but somehow they deduce a blunt percentage and present it as the HIV/AIDS incidence rate? Haba.

Sanusi is certainly spending A LOT OF MONEY, pouring more than =N=620 billion (about $4.13 billion) into the Nigerian banking industry, and setting up a =N=500 billion (about $3.33 billion) investment facility for electricity-related projects.

I hope someone (or more properly some agency or academic institution) is keeping track of what is being spent, making sure each Naira is going where it is meant to go, and then checking on the outcomes so we can accurately decide whether the programmes were cost-effective or even just effective. The electricity investment facility, for example, is going to be managed by the Nigerian government-backed Bank of Industry, who are supposed to lend the funds to the commercial banking sector in support of electricity projects; someone had better be tracking each Nigeria.

I do like the idea that the electricity funding is going to specific industrial clusters that are engines for growth. On the other hand, I get very nervous about issues of budget and debt, particularly about debt. Our "grand projects" are usually touted as being capable of generating enough funds to pay off the debts incurred in their creation, but they rarely do; we end up squeezing the already-too-small-for-a-country-with-our-population fiscal budget and reserve savings to pay off the debts of projects launched with much fanfare.

It looks like CBN Governor Sanusi Lamido Sanusi will get his proposed Asset Management Company (AMC). The AMC will be co-owned by the Central Bank and the Federal Ministry of Finance, and is supposed to buy up about =N=1.2 trillion (about US$8 billion) in "toxic assets" from the eight ailing banks that received a =N=600 billion (about US$4 billion) in bailout funds from the Central Bank. The AMC will also be able to buy equity in distressed banks to assist them in recapitalizing. As reported here by NEXT, Mr Sanusi told CNBC Africa he expects the AMC to have bought up these toxic assets by the end of the second quarter of 2010, which would then allow the eight banks to repay the bailout funds to the Central Bank by the end of the same quarter. Sanusi's ultimate goal is to make these banks attractive to investors, who could either buy up the banks as individual units (this would be by foreign and/or local interests) or consolidate the banks into the other 17 sound banks (this would be by one or more of the sound banks).

As I understand it, the plan boils down to the Asset Management Company paying US$8 billion to the banks in exchange for toxic assets .... and the banks immediately handing back US$4 billion (half of the AMC payment) to the Central Bank as repayment for the bailout funds they received.

This is an unnecessary magic trick.

What the Central Bank and Ministry of Finance are effectively doing is writing-off the US$4 billion they gave the 8 banks and then paying out an additional US$4 billion to take ownership of toxic assets worth US$8 billion on paper.

I rather wish they were direct about this, and told the people openly what they were doing.

I don't have time right now to go back and provide links to every last post I made on this subject (maybe I will do so later by means of future edits), but back when I started this blog, this was the issue I talked about the most frequently. At the time, the magnitude of the toxic asset problem was estimated at US$10 billion.

I criticized the banks and the Charles Soludo-led Central Bank for their complicity in the problem. I criticized "investors" (more like "speculators") for their role. In fact I was critical of everyone involved, large and small.

But when I was done criticizing, I said we had to fix this problem. It was (and is) vitally important that we do so. And I said that instead of piecemeal maneuvres, we should just come out and concretely squash the problem once and for all.

I said that as much as it was unjust, unfair, unethical and unfortunate .... at the end of the day we (the Federal Republic of Nigeria) could afford to pay US$10 billion in citizens' funds to end the problem and restore strength to the banking sector. In simpler language, if fixing the toxic asset problem meant having the federal government pay out US$10 billion to clear the toxic assets off the banks' balance sheets, then I would recommend we do so.

Now, if we ignore the magic trick the CBN and Ministry of Finance feel obliged to do, what they are really doing is paying US$8 billion to clear toxic assets off the banks' balance sheets, the first US$4 billion as "bailout" funds, the second US$4 billion through the Asset Management Company's purchase of toxic assets that are worth US$8 billion on paper.

We are paying US$8 billion to clear the toxic assets from the banks' balance sheets. This is US$2 billion less than the original estimate.

And I say we can afford to do this, and should do this .... NOT because the federal republic is rich, but because it is necessary that we do this.

The CBN and the Ministry of Finance should say this openly!

The operating theory is that the Asset Management Company will exist for ten years, and will make every effort to "protect, enhance and realize value" from the assets it acquires. It will sell those assets it can, and seize and liquidate collateral pledged for the non-performing loans.

The Asset Management Company will use government bond to buy the assets. The CBN and the Ministry of Finance will jointly provide the =N=10 billion (about US$67 million) to start the AMC operations.

Whichever way you look at it, the Central Bank of Nigeria and the Federal Government (represented by the Ministry of Finance) will lose money on these transactions. Forget profit, if there was any likelihood of simply earning back our US$8 billion investment on these assets, the assets would not have been designated "toxic" in the first place and the banks would not be so willing to sell them.

We are going to lose money on this, and someone in the Central Bank and/or the Ministry of Finance needs to be upfront with the citizens about this ... and upfront with us about why it is vitally necessary that we do this, even if we lose money.

I don't know why governmental and quasi-governmental institutions prefer being as opaque, vague and uninformative as possible. Indeed, the private sector is no better than the public sector in this regard, as the banking industry has shown. Nigerians would have been so much more sympathetic toward the Yar'Adua family if the President's kitchen cabinet had not spent so much time trying to misdirect everyone. And Sanusi Lamido Sanusi, who is coming under increasing criticism (some of which has to do with bank employees being sacked, and some of which is motivated by ridiculous ethnic/religious/regional accusations) would benefit from being honest with the citizens about why we have to fix the mess he inherited at the end of the Charles Soludo tenure. The weird thing is a lot of Nigerians are blaming Sanusi (and Yar'Adua) for the rot in the banking sector, while lavishing praise on architects of the problem like ex-President Obasanjo, Professor Soludo, Nuhu Ribadu and others. I really want someone to define what exactly is an "Economic and Financial Crime", because there was a lot of that going on at the Nigerian Stock Exchange and in the Nigerian banking and financial services industry. And seriously, when I read people blame Sanusi because banks are sacking staff, I wonder if they understand how businesses work. The banks are facing financial problems that were created ... by the banks! They are sacking workers because they are not in a financial position to keep them on! If the Asset Management Company plan works as well as it is intended to, it will put the banks in a better financial position ... and they might hire back some staff!

Haba! Not everything must be interpreted as an ethnic plot ... and people need to take off the rose-tinted glasses with which they gaze lovingly on people who caused the problems in the first place.

With that said, if the people of Nigeria are going to pay US$8 billion (about =N=1.2 trillion) to save the banks from a crisis the banks themselves created, then we must demand serious changes to way banks are run. We must demand that regulators do their jobs and regulate!

Sanusi has forced changes to the upper management structure of some of the banks, but (thanks to the qualitatively and quantitatively weak information available to the public) I am in no position to judge whether his moves were appropriate or inappropriate. Indeed, we will not know how well the CBN has handled affairs under Sanusi until he leaves.

Much is also expected of Mrs Arumma Oteh, the Chairperson of the Securities and Exchange Commission, from Mrs Farida Waziri at the Economic and Financial Crimes Commission, and from whoever replaces Ndi Okereke-Onyiuke as boss at the Nigerian Stock Exchange.

Okereke-Onyiuke is a holdover from the Obasanjo years; frankly she should have resigned or been forced out before now. Nigerian officials never take responsibility and resign.

Interestingly, the courts have voided the election of dollar billionaire Aliko Dangote to the office of President of the Nigerian Stock Exchange. This is good news; Dangote and his rival, billionaire Femi Otedola, should NEVER be allowed to occupy any office of responsibility at the Nigerian Stock Exchange. If you don't know why, then you've got a lot of reading to do!

Above all, we the people demand better, more honest, more credible information so we can keep track of what is going on. It seems Sanusi is keen on forcing them to do just that.

That is only the start of a process of necessary reforms.

EDIT 07-04-10: The Central Bank of Nigeria and the Securities and Exchange Commission announce plans to "fine-tune" the regulations governing margin loans.