Amalgamation Day in Lagos, 1914

Amalgamation Day in Lagos, 1914

28 June, 2010

Finally - A crumb of honesty

When I started this blog, Nigeria's banks were estimated to be carrying $10 billion in so-called toxic assets on their balance sheets. In those early months, I probably devoted more posts to the toxic asset problem than any other single issue.

I am a critic of the Nigerian banking, financial services and equity/securities industries ... but not a fanatical critic. I am proud of the way our banks have expanded in West Africa, Central Africa and East Africa. This will prove an important stepping down in the economic development of the entire continent, but only if our banks drop their current modus operandi. The banks are emblematic of the federal republic; we do just enough to give ourselves genuine reason for hope, but do far too little to ever bring our hopes to fruition.

The banks created their own troubles, and the collapse in banking share prices intensified the broader collapse in the Nigerian Stock Exchange when the self-created bubble burst. In order to inflate their balance sheets, banks lent money to investors (and to the banks' executives) for the express and specific purpose of buying the banks' own shares, to artificially raise the banks' share price. The manipulation of share prices extended beyond the banking industry, and the Nigerian Stock Exchange became a giant bubble waiting to pop, a bubble that would have popped eventually with or without the wider global credit crunch. The bubble in the banking sector was the biggest of all, and the fall in bankits demise severely hit the capitalization of the NSE, which is now worth 60% less than it had been 3 years ago

Nevertheless, we cannot allow the toxic asset problem continue to depress the banking, financial services and equity/securities sectors. And I have repeatedly said on this blog that if the full extent of the problem really is $10 billion, the federal republic can and should deal with it expeditiously.

We are not a "wealthy" country; our federal and state budgets are firmly in deficit territory, and have exhausted the Excess Crude Account, but even so our budgetary expenditures remain insufficient to fund the public goods that underpin any social contract. We have also drawn down massively on our foreign reserves to defend the Naira.

Our needs are great, and our funds are comparatively scarce, yet I believe we should muster $10 billion to get our banking, financial services and equity industries back on firm ground.

True, baling out the banks with government funds, and without any endogenous reforms in the industyr, is a recipe for the continuation of the stupid things they were doing that created the problem in the first place. However, our banks operate in an environment that hadnsomely rewards bad behaviour and too frequently punishes (or at the very least discourages) good behaviour. To paraphrase a popular colloquialism, "it is condition that makes the crayfish bend", and until we fix the overall "condition" or circumstances, it will continue to "bend the crayfish" in directions that prove problematic for societal/economic growth and development.

There is quite the tangled web of interconnected, systemic and instiutionalized problems; the core nature of our polity, economy and society reinforces dysfunction. You can't even look to the National Assembly to attach sensible conditionalities to any federal bailout of Nigerian banks. If anything, the Assembly is far more likely to weaken any reform efforts; politicians rank very high on the list of groups that exploit the gaping loopholes in our banking system. Heck, the create and exploit loopholes in every system!

I am not a fanatic critic, and I credit Professor Charles Soludo, CBN governor from 2004 to 2009, with some good things, notably the bank consolidation exercise. On the other hand, he most definitely neglected the apex bank's watchdog and oversight roles. I criticize him for this, and he deserves the criticism, but he was just a cog in a much bigger systemic mess.

Soludo was the CBN supremo in the second term of the Obasanjo II administration, when a strong nexus of mutual interests bound the ruling PDP and (separately) the Obasanjo-led federal government to Big Business. Warm, personal ties linked Obasanjo, Soludo, Nuhu Ribadu, Ndi Okereke-Onyiuke and the post-consolidation titans of banking. The plutocrats funded Obasanjo's 1999 campaign, his 2003 reelection campaign, his campaign to amend the constitution to give himself a Third Term, and his imposition of the Yar'Adua/Jonathan ticket in 2007. Some plutocrats made Obasanjo a silent partner in business projects, and Obasanjo ensured federal government policy favoured those plutocrats who supported his political machine. The mutual back-scratching peaked with the founding of Transcorp, a federal-government-created Big Corporation uniting Big Politicians with Big Businessmen to buy public (i.e. government-owned) assets with commercial potential.

The institutions constitutionally mandated to guard against conflict of interest were uninterested. There was a similar lack of interest from the Central Bank and the Securities and Exchange Commission even as the banks and the NSE build up frighteninggly large bubbles. Nothing practical was done to promote the chances of a soft-landing; I am not even sure a soft-landing was possible beyond a watershed date that no one paid attention to.

You see, there is a way things work (or don't work) in my homeland, a game being played. The game has rules and boundaries that all of us Nigerian citizens understand.

It is why we don't react when elections are rigged or when politicians are assassinated, or when communal violence results in dozens or hundreds of deaths, or when coups-de-tat overthrow governments -- these things are the normal, day-to-day workings of the system.

It is why we just dutifully pay the illegal =N=20 bribes demanded by the police at illegal checkpoints that exist to harass law-abiding citizens while kidnappers, robbers and murderers roam free (it is also why some police officers feel no compunction in shooting us if we don't pay the illegal levy; they have no sense that it is wrong, because in the Nigerian context, it is right).

In fact, it is why no one is bothered by the fact that our current President was caught trying to steal $13.5 million (=N=2,025,000,000.00) from the Bayelsa State treasury. No one cared that such a person became PDP vice-presidential candidate (or that Nuhu Ribadu abruptly stopped prosecuting him the moment it became clear Obasanjo was going to use him in Plan B of the Third Term bid -- the imposition of the Yar'Adua/Jonathan ticket). No one wants to know if Jonathan took more than the $13.5 million that was seized from him. Within the Nigerian context, nothing strange or abnormal happened; there would have been more shock and surprise if he had been honest.

It is why Soludo, the CBN and the SEC did not do their job. Actually, they did do their jobs, except their jobs were to do nothing. Sharles Soludo was never meant to hold the titans of the industry to proper standards. He was supposed to look the other way, to be a good friend of the people who were setting up the collapse of the stock market.

Like the famous former Iraqi Information Minister, Soludo kept insisting there was nothing wrong with the stock market or the banking sector, even as the bubble inevitably burst and the NSE All Share Index dropped. Even after the Eurasia Group estimated Nigerian banks were carrying $10 billion in toxic assets, Soludo insisted the number was $5.3 billion . Then he began spending our foreign reserves to defend the Naira, a process which has continued into the Sanusi Lamido Sanusi era, and which has probably consumed over $23 billion so far.

I supported former President Yar'Adua's appointment of Sanusi Lamido Sanusi, who was then Managing Director of First Bank, to replace Professor Soludo. I've read many commentaries and essay written by Lamido Sanusi over the years, and whether I agreed or disagreed with his conclusions, his writings conveyed the sort of politics of ideas that I've long wished would replace the determinedly vacuous politics we've practiced seemingly forever. In a country where the political and economic power-structure are very thin-skinned and prone to take offence at perceived slights and disrespect, Lamido Sanusi also impressed me by taking positions in his essays that had me wondering at times if he was not concerned that First Bank would sack him rather than risk political consequences from his literary utterances. Last November, Sanusi, true to form, took a contrarian position at a conference designed to celebrate and reiterate the conventional falsehoods underpinning our dysfunctional system.

With that said, Lamido Sanusi is a man of the banking industry, even more so than Soludo. Such a person could either be a reformer who uses his inside information to better target reform, or such a person, after years steeped in the practices of the industry, could potentially see nothing wrong with business-as-usual and move instead to protect his fellow bankers from reform ... or sanction.

As it turns out, Sanusi hit the ground running, shaking up the industry with a number of hard-hitting measures -- the media termed his early months in office the "Sanusi Tsunami". There has been much debate over his actions (search for "Sanusi" on this blog for posts with links to articles, or do a general web search if you prefer), and I don't think we will have a final verdict until enough time has passed for us to see the output of his input.

With that said, Sanusi's Tsunami weakened to a drizzle following the incapacitation of the late President Umaru Yar'Adua. The Central Bank of Nigeria should be an independent institution, and I am perturbed by the fact that CBN Governor are dependent on the political favour of Aso Rock (the Presidential Villa) to be effective at their jobs. Charles Soludo was one of the most powerful men in Africa when his patron Olusegun Obasanjo was President; as soon as Obasanjo left, Soludo became a lame duck. Likewise Sanusi acted almost as though he was a law unto himself when Umaru Yar'Adua was alive. I remain uneasy about Sanusi's tactic of publishing the names of the banks' politically-connected delinquent debtors (powerful individuals and corporations owned by powerful individuals). In a practical sense, trying to do things "normally" in an "abnormal" environment makes failure more likely, but if you respond to this dillemma by becoming very good at "abnormality" yourself, then you become just another person promoting and sustaining our "abnormal" way of doing things. It is a chicken-and-egg scenario -- someone, somewhere, somehow must become the first person to stand up and do things "normally", and succeed (and keep doing it until he or she makes "normal" the new "normal").

Even after President Yar'Adua's death (RIP), Sanusi continued pushing for the National Assembly to pass a bill creating an Asset Management Corporation. The AMC, which has been was passed by both the Senate and the Representatives, will be the vehicle through which the federal government purchases toxic assets from Nigerian banks.

The company, when established, will have a life span of 10 years and will be owned equally by the bank and the Federal Ministry of Finance, which will both provide the =N=10 billion capital base.


It will issue government bonds and other government-backed debt instruments to buy =N=1.2 trillion ($10 billion) in "non-performing" (a.k.a. "toxic") assets from Nigerian banks. According to Sanusi:

"We do expect that some of those loans will be sold off, some ... will be restructured, and some ... will be fully provisioned on the books of banks," he said.

"But we think on the outside 1-1.2 trillion (naira) is what the AMC will have to lay out to purchase and to clean up the system and the bad loans, and we should recover about half of that over the life of the AMC," he said.


I am glad we are finally moving in the direction of cleaning up the banks' balance sheets, and remain generally supportive of the CBN governor.

But I am perturbed by the lack of honesty about what we are really doing.

I do not think we are going to recover anything of statistical importance from this bank bailout. The AMC is going to give the banks $10 billion to clean up their books, and will eventually have to write-off nearly the entire sum at the end of its decade-long life-span.

Except the AMC will be using government-backed debt instruments (as opposed to "cash") to buy the toxic assets so "write-off" really means the government will have to pay up the $10 billion plus interest the AMC will owe bond-holders and other creditors.

Essentially this is a convoluted process, designed to disguise the fact that the federal government is going to give the banks $10 billion in free money, in exchange for nothing, a gift, a subsidy, a bailout with no strings attached.

Don't misunderstand me. I support the bailout, well, everything except the no-strings-attached part. It is a lot of money, but we have to do it. It is unfortunate that in the absence of broader institutional reform we might find ourselves back in this mess sooner or later, but we can't let the "perfect" be the enemy of the "necessary". In order to be in a position to talk about how to reform, restructure and transform the banking industry (and the overall economy) we need to have a healthy banking system in the first place.

What I don't understand is why our officials seem rooted to the belief that we will not let them do the things they want to do if we really knew what they were doing. So they tell us whatever they think they need to tell us to get us to acquiesce to whatever they want to do. They think it is a successful strategy because our response to their actions is apathetic, but they don't realize that they are the reason that nobody in Nigeria trusts anything the government (or any of its agencies or leaders) says. If Nigerian citizens' lack of trust in public institutions could be boiled down to one word, the word would be "Census". We do not trust even the most basic statistics released by our government, the basic statistics on which the federal and state budgets are putatively based.

I would rather someone had the courage to explain what we were doing with regard to the bailout, rather than pretend that we are somehow going to make some of this money back.

I like Sanusi. I will freely admit it has more to do with his essays on political, social and cultural issues than any opinion formed of his time as MD of First Bank.

With that said, Sanusi Lamido Sanusi needs to study his predecessors, all of them, and ask himself what made them effective and what made them ineffective.

Professor Charles Soludo had a brilliant academic career before becoming boss of Nigeria's Central Bank. And as I have said earlier, there are things he did as CBN supremo that I am glad for, the bank consolidtion principal among them. But I stopped taking Soludo seriously when I heard his comments on the West African Monetary Zone plan for Nigeria, Ghana, Sierra Leone, Libera and Gambia to adopt a single currency in three years.

From the beginning, the WAMZ plan was unrealistic. It was so unrealistic, I couldn't believe it. In the year 2000, they declare that all five countries would adopt the single currency in 2003 ... just three years later! If you do not understand why that was an almost cartoonically silly thing to declare, then I don't know what to say, because a web-blog is no place for the long detailed expatiation of why their plan made no sense from the start.

Unsurprisingly in 2003, no such single currency emerged. The WAMZ countries merely announced that the new currency would begin in 2005, still an unrealistic target. In 2005 they pushed it to 2009. And in 2009, they pushed it to 2015, where it stands today.

Soludo was not CBN boss when this plan started. However, once he became CBN head, he never (not to my knowledge anyway) publicly pointed out that the plan didn't make sense. He never (to my knowledge) pushed for the plan to be made more realistic. If anything, all of his public statements that I am aware of were supportive of the plan; much as he would later insist there was nothing wrong with the Nigerian Stock Exchange, he insisted the WAMZ project would meet its declared deadlines, even as any sensible person knew (or should have known) that those deadlines would never be met.

I know that Soludo is a brilliant economist, and so I know that Soludo knew the WAMZ wouldn't happen. I also that he knew that the Nigerian Stock Exchange was not okay. For political reasons, he watched as the NSE bubble grew, and endorsed the "pan-African" ideal of a currency plan based on unrealistic targets and expectations.

But that is not my criticism right now. My criticism is of a CBN Governor looking me in the face (metaphorically speaking) and insisting something is true when I know it is not.

Once that line is crossed ....

Which is why I am glad someone is finally displaying a crumb of honesty. Abraham Nwankwo, Director-General of the Debt Management Office (DMO) has admitted, albeit none-too-loudly that Nigerian tax-payers will bear the brunt of bailing out the banks (I suppose "tax-payers" is his euphemism for the proceed from crude oil sales).

Where Sanusi said the Asset Management Company could recover as much as half of the value of the toxic assets, Nwankwo has adjusted this downward, albeit cleverly offering an estimated range of 35%-45% recovery. This means it will likely be closer to 35% ... close from below 35%).

Abraham Nwankwo is an interesting man, who as recently as March 2009 declared Nigeria to be "under-borrowed", which is what multilateral lending agencies tell countries when they want to saddle those countries with unnecessary debt.

But I thank him for his honesty ... or his approach towards honesty anyway.

Even if the money for the bailout comes from oil revenues, we the people will be giving up use of those revenues for infrastructure, healthcare, education, electricity and other strategically vital needs. Directly or indirectly, we are paying the price.

I support the bailout, but ideally, there would have been a national debate BEFORE the National Assembly approved the Asset Management Company. Ideally, the debate would boil down to a "compromise" where the people grumble but accept the Asset Management Company, the National Assembly passes a raft of laws that constitute top-down reform of the industry, and the banking industry sanitizes itself by sloughing off the detritus of decades of uneconomic thinking.

But this is Nigeria ... which means most Nigerians are probably blissfully unaware that we are about to bailout a banking industry that created problems for itself and for the rest of the economy. How can you build up pressure to change, pressure to reform, to restructure, to transform, when people don't even understand the full extent of the problems that were create by the persistence of abnormal ways of doing things?

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