The Bull in the China Shop - Proshare 220809

8/14/2019 The Bull in the China Shop - Proshare 220809

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A State of the Market ReportIssued on August 22, 2009

In association with

ISSN 1597 8842 Vol.1 No. 21

The Bull in the China Shop

The New Paradigm for Nigerian Financial Markets


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The Bull in the China Shop - The New Paradigm in Nigerian Financial Sector

www.proshareng.com 2

SEC and its Historical Revisionism of Facts

Contents

Executive Summary 03

The Market and Historical Revisionism of Facts 09

The CBN Governors Address, Debtors List & Others 23

Identifying the Unintended Consequences 34

Of Whistle blowers, Alarms and Regulatory Response 38

The SEC and its Corporate Governance Imperative 56

NSE and the Challenge of Self Regulation 68

Final Thoughts on the developments so far 83

ISSN 1597 8842 Vol.1 No. 21

TMThe Analyst


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Manipulate the truth long enough and eventually youre selling somethingthat doesn't exist."

EXECUTIVE S UMMARY

The long-awaited intervention in our financial services sector, starting with thebanking industry was unleashed on August 14, 2009 guided by a deliberate

shock and awe objective by the Sanusi Lamido led CBN.

In sacking the CEOs and Executive Directors of five banks - a generationalpractice and culture was designed to be consigned to history.

When the move came, it took more than a scalpel to remove the malignanttumour that had become a cancer to our collective conscience the resolutionof when we would move beyond the self-denial state of a conspiracy of

criminality to a state where basic norms and values that defined the practiceof financial intermediation was restored.

There is a growing conviction amongst market analysts that in the interest of full disclosure, transparency, equity and accountability (the underlying valuebase for the CBN and other regulators) demands that the list of debtors, statusof margin loans and its provisioning, status of underperforming & non-performing loans, and capital be disclosed for those banks cleared as well.

Even the critics acknowledge that not doing anything on this developmentwould not be a wise option. The bull has landed quite all right, but it has found

itself in a china shop where it is not so much of whether he would break thechina, but just how much damage will be left behind.

A critical insight into what the market should look towards has remainedunanswered or is unavailable. The Market must, in a sense, be able to gainsome measure of the following - strategic & tactical objectives, scope/coverageof the exercise, and clarity of the end game.

We believe this is where undue advantage is created in the market place i.e.competitive advantage is unknowingly granted to those closer to regulators.This is an incentive that lies at the heart of the problem we face.

There is a huge incentive to foster or promote the strategic development of cordial relationships and back door channels with regulators to feed theprivate sectors desire for an edge in business. This often leads to incestuousrelationships at all staff levels right to the very top. At this stage, regulatoryoversight capacity and efficiency is compromised and the outcome is the messwe always come back to.

The Theory of Reflexivity becomes manifest

The principle of reflexivity was perhaps first enunciated by the sociologistWilliam Thomas (1923, 1928) and known as the Thomas theorem: that 'thesituations that men define as true, become true for them .'


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Sociologist Robert K. Merton (1948, 1949) built on the Thomas principle todefine the notion of a self-fulfilling prophecy : that once a prediction orprophecy is made, actors may accommodate their behaviours and actions sothat a statement that would have been false becomes true or, conversely, astatement that would have been true becomes false - as a consequence of theprediction or prophecy being made. The prophecy has a constitutive impact onthe outcome or result, changing the outcome from what would otherwise havehappened.

An example of this is the interaction between beliefs and observations in amarketplace - if traders believe that prices will fall, they will sell - thus drivingdown prices, whereas if they believe prices will rise, they will buy - therebydriving prices up.

Thus, the trigger for results lies in the belief that guides action/conduct.

If our banking executives have learnt anything at all from the interplay of incestuous relationships and the crisis of previous banking failures, especiallythose of the yuppie banker or power-banker years; it certainly did not reflectin their conduct during the post consolidation years. They seemed to havesimply recalibrated the actions taken then and moved it to another level.

In this new enterprise, our stock exchange and securities commission appearedeither clueless or hamstrung by such relationships and an overbearingpolitical climate under the Obasanjo administration that was reportedlypunitive in response to dissent and intolerant to ethical challenges to decisions.

The stage was thus set for what we find today. We wish our financialprofessionals had read the book by George Soros on the subject matter - wewould not be where we are today!

It really is time that egos get checked at the door, and we start adopting ageneral understanding of what is real, and what are lies. This, according to thetheory of reflexivity holds true for both the CBN (and its new day alliedagencies) and the market.

In the treatise (which we reproduced in the section titled Identifying theUnintended Consequences, George Soros reflected the basis of the currentreality:

..Take, for instance, the banking industry in the United States. After thebreakdown of the banking system in the Great Depression, it became closelyregulated and very rigid; but when the restrictions were relaxed, the industryswung to the other extreme and entered a period of revolutionary change. Ican locate the transition point with great precision: it was on thatevening in 1973 when the management of First National City Bank heldan unprecedented meeting for securities analysts in order to promotethe stock as a growth stock . The pattern in the rise and fall of the Sovietsystem closely parallels the pattern in the fall and rise of the American bankingsystem.


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The conspiracy of criminality that ensued post-consolidation therefore wasnot intentionally engineered by Prof. Chukwumah Soludo, the ex-CBNGovernor. He simply presided over an initiative fraught with inherent executionrisks that could only have been mitigated by an equal, if not higher oversightcapacity and capability plan.

He, we believe, must therefore take responsibility for not doing enough in thisregard. History must however be fair to him and recognise that consolidationwas inevitable and it took a lot to carry it through. He, on his own part, mustaccept the professional responsibility for the collapse of the system.

The symptoms are what we now focus on bad loans, excessive creditexpansion, unreliable financials and drop in shareholder value and marketconfidence.

The CBN is yet to discuss this root cause in any detail.

The need to avoid overreaching beyond the goal

Following from the analysis above, it appears obvious that as we sought togrow our financial systems, we ignored the age-old wisdom that markets leftunregulated would get out of hand because people are either incapable of self regulating themselves or are all too aware and driven by the benefits of pursuing their own ends.

Much more is the sovereign objectives and its alignment with the pace of development.

Yesterday, we crowned the week of tumultuous exposes in our financialservices sector with the newswire that S&P has cut Nigeria's ratings deeperinto junk; though outlook appears stable at this point. Some may ask thequestion why we surrender our economic and financial objectives to the whimsand decisions of the international order but for the purposes of this report, werecognise the importance of such measures of risk as universally acceptabletools of engagement in our quest for integration and market leverage. Until weare able to muscle the necessary clout to take on the order, we appear not tohave much of an option. This is the consequence of our un-integrated approachto managing the state.

During the week just ended, the flurry of market activities on all sides can becaptured thus:

The CBN seized control of five banks close to insolvency with armedguards in tow (FT),threw out management (often big shareholders),demanded payment from debtors three (3) days after this ground shakingaction,named some of Nigerias leading lights in an advertised list the CBN lateradmitted to having errors,


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had SEC call for the DG of the Nigerian Stock Exchange to provide aresponse to a 7 day ultimatum, demand the removal from council of theErastus Akingbola,and learnt that two CBN Deputy Governors (Mrs. Juliet Madubueze andProf. Akpan Ekpo) allegedly opposed to the move, its timing and motivehave been dismissed.

This is a whole lot for our fragile market to absorb at a go. We have setourselves up for a big battle and it will come from all sides and even from theblind side.

We cannot embark on a journey - driving with a rear view mirror.

If the truth must be told, we have reversed many of the gains we made so far,as imperfect as they were; even as we further acknowledge that a few werebuilt more on perception than reality.

Yet, it is a historical fact of Taiwan and China, that it built its economy on theback of inferior products which defined its brand. This market, we makebold to say, does not need an ambush based mindset to reform.

We do not need surprises or uncertainty fed into the veins of our market,economy or national psyche we needed to build upon the gains of the pastand address the real and present dangers in the leadership gaps in ourfinancial services sector across board, in a manner that does not undermine orcreate unintended consequences.

Everyone accepts the need for action was imperative and Lamido Sanusiappears to be a man capable of enthroning such a culture. On the basis of theactions taken subsequently, we have to mitigate our enthusiasm for changewith a cautious optimism that the process will not be hijacked, distorted orcannibalised.

We categorically state that the means, approach, timing and relegationof the rule of law in achieving this important task remain a concern. Itdoes not appear as if the CBN is fully comprehended or is managing thecommunication of the extent of this developments. Its flip flop on issues as wego on will reveal as much.

This report therefore is our attempt to establish our support for the need forchange, bold action and sustainable implementation of the reversal of normsfor which we expect to last for up to two years (or more depending on thesubsequent actions taken by the Sanusi Lamido led CBN).

Nothing sums up our position better than these words from FT The marketremains relatively fragmented . ..More transparency and consolidation areneeded. But dramatic action risks undermining worthy ambitions, suchas attracting foreign capital . Nigerian authorities overhauled banks management in the 1990s, but oversight failed to keep pace with marketchange . The challenge now is how to finish the job.


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The Future Foretold

In our NCM 2009 report, we noted that this was not another turn of thebusiness cycle! We averred as follows:

1. That the problem was not so much of a market meltdown but theunaddressed leadership meltdown in the management of the economyand markets;

2. That the Nigerian Capital Market was not immune from globaldevelopments, its impact and politics on its economic and financialdecision-making;

3. That a paradigm shift has occurred and the very way business wasthought of, conducted and regulated in our financial markets mustchange;

4. That the customer, investor, fund manager, analyst, journalist, regulatorand quoted companies must now learn a new way to engage themarket;

5. That this process of rediscovery will prove most unsettling and maydetermine how well Nigeria, as an investment destination positionsitself;

6. That we should quickly move on from the self-denial stage and embracethe need to employ rigour in addressing the simplistic and routine unaccountability prevalent in our policy making;

7. That each section of the report was devoted to critical success factorsneeded to be considered and acted upon by those in charge of themarket;

8. That the subject of margin loans on one side and the quality of assetscarried by the banks required a stress test (this was further affirmed inour half year and individual bank report issued up to July 2009);

9. That the investor confidence question goes beyond the usualgrandstanding deployed through newspaper commentaries and loudsound bites at seminars. The regulators, this time, had to own up totheir failure to deliver the enabling level playing field and enforcementneeded to engender trust in the market; and

10.The choice of action needed to be taken must be one that recognises theintrinsic impact of our financial markets on the whole economy and theinternational support built over the years.

We deployed this to all members of the financial community in Nigeria, UnitedKingdom, United States of America, Canada, Ghana, and South Africa. Indeed,we took the unusual step of sending same to His Excellency, The President, hisVice President, Principal officers in the presidency, All Ministers, CBN, SEC,NDIC, NSE, BPE, NAICOM, Professional associations, Guild of Editors, allmembers of the federal and state Houses of Assembly, all State Governors andCommissioners, all Universities, publishers and business editors of mediahouses, analyst firms and national institutions.

The motive was clear - let us all move beyond the blame game and agreeon a consensus of what was needed to be done. Our recommendations werevery clear just as our opposition to the plans put forward was rightfullydebunked. We indeed predicted that no recovery will occur in our NCM until Q2


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"There are very few men and they are the exceptions who are able to thinkand feel beyond the present moment"

- Carl von Clausewitz, 1780-1831

THE MARKET & H ISTORICAL R EVISIONISM OF F ACTS

What is the price we have to pay for getting it right?

Today, a lower sovereign rating for Nigerian banks means that we are going tohave to pay much more money to foreign banks to borrow funds for ourgovernment whose revenue has been falling as a result of Niger Deltaproblems ( State Governors have no idea that from next year their monthly allocationsmay drop drastically and they may have to turn to the banks to lend them money ).

A similar fate awaits our businesses funding any project going forward. Wewould now have to either deplete our sovereign reserves or pay higher interestto foreign banks whose math we do not trust; considering all the argumentsthat followed our national debts to foreign financiers before they were paid off under Okonjo-Iweala as Finance Minister.

The unintended consequences from our otherwise market-reform goals arenow beginning to manifest and we must ask questions on what the CBN trulyseeks to achieve.

Some of the contributions by commentators and government functionaries sofar have been emotional, sometimes ill-informed and at odd times, out of context. Could it be a function of the communication approach, sequencing of action or the fabled mischief Nigerians are known to deploy at times like this the crab paradigm?

One thing that cannot be in doubt is the level to which we as a people sunk the accused and the cheering crowd.

The public rejoiced at the fall of the leaders of the five banks iconssynonymous with brand Nigeria. It was as if we had daily prayed for theirdestruction the scorn and glee with which we discussed them was personaland unfortunate. It was a case of rejoicing at the fall of the rich and powerful,akin to how we relate to politicians those whom we hold responsible forholding us down as a nation.

We recall that there was no indictment or guilty verdict yet on the table exceptCBNs professional assessment (not forensic) that they have acted in amanner detrimental to the interest of their depositors and creditors .Perhaps it was the self-indicting admission by Sanusi Lamido to a CNNcorrespondent that the Nigerian banking sector had been replete withengineering of their financial books over the years ..for which theongoing forensic audit by the CBN would determine the next line of action.

Yet, this exposes the danger in rushing to judge.


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The reaction of the public must therefore speak volumes of our collectivedisillusionment with the country; played out with this drama now unfolding. Italso goes to the very heart of the question To win an economic war, we mustprevail over the moral war that confronts us a people.

The consensus in all this though is the admission, through this crisis that thenear collapse of our societys fibre is directly linked to the diminished moralvalue we have defined, celebrated, honoured and positioned as a guide forsuccess in Nigeria. This invariably is the key to what has held us down.

We do not challenge this conclusion at all.

Yet, for those cheering the EFCC in its renewed spirit of relevance to actagainst those affected, we say to them BEWARE, lest they fall! No matterhow you look at it, this cannot be an acceptable behaviour and standard of conduct without ridiculing the respect for the rule of law. We must remain anation of laws which are clear, unambiguous and not selective as to allegation,crime, person or purpose.

Lets recall a bit of history here:

In the not-so-distant past, we have had issues related to self-lending, insiderabuse, overreaching by CEOs, ineffective board of directors, non-adherence tocredit rules, lack of enforcement, etc.

What makes this instance unique should perhaps be the positioning theseCEOs established as a moral icons for the society religion, professionalismand success role models.

Be that as it may, those that came before them equally positioned themselvesas such. The key ingredients of a wonder bank were always an attribute of thenew-age banking whether here or overseas.

You recall that in 1996, Nigeria reported 50 banks as distressed with overN65bn trapped in the melee. These banks had given out loans of about N50bnof which N40bn was classified as non-performing loans?

The Directors of the banks that were closed down and liquidated before now SGBN , Savannah Bank , Peak Merchant Bank and the wholesale liquidation of 24-33 banks between 1994 2006 that included Progress Bank, CommerceBank, Crystal Bank, Alpha Merchant Bank, Kapital Merchant Bank, All StatesTrust Bank, Trade Bank among others where never so ridiculed or treated withscorn. These banks went down, not just with depositors funds, investors funds, job losses and the attendant implications on the economy and thefinancial market.

There were distinguished Nigerians on the board of these banks, perhaps not ina CEO position as we now have it. What did the regulators do to avoid such asystemic dismissal of the rules of the game?


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Thus the issues before hand require a bold, direct and unambiguousintervention. This we equally cannot wish away as the debtors do have rightsthat must not be ignored by the CBN and its ancillary government agencies.

If a borrower defaults, banks have procedures and steps leading up to thedeployment of legal means of secure payment as Access Bank Plcdemonstrated by writing to its client African petroleum (AP) Plc first,explored many other time-tested options before heading to the court over adisagreement and as a result of court action, the story came into the publicdomain. The ironic twist in the delay for payment was the long awaitedinterpretation or clarification sought from the CBN for weeks. Once this came,AP Plc did the right thing and settled its obligations, made up with its bankersand even challenged them on another issue.

The system may be imperfect but it works. What is needed is the discipline tounderstand where the system needed to be adjusted to avoid the culture of perennial debt defaults by other less integrity inclined customers.

If banks dont have borrowers, they would not make money, create jobs,finance business or lend money to government when they need it and also paytaxes on profit.

The importance and relevance of credit in nations development and survival istoo crucial to reduce to a comic episode played out daily under media frenzy. Itis just too serious an issue.

With the crisis now raging in our country, if we leave bank managers in thehands of EFCC for lending money to business people; how do we expect other

free bankers to make long term lending decisions to your manufacturers andbusiness people?

This cannot be the risk management the CBN Governor desires. It is more likethe end of risk taking by financiers. Which bank would now step forward andundertake that long term funding necessary to provide infrastructure underPPP or IPP or any other combination?

CBN Source of Injected Funds

One would expect commentators to ask the responsible question Did the CBNand the Presidency approached the Senate or the House of Representatives todebate the N400bn and to secure the approval of both legislative houses tolegitimize their decision to invest this said N400bn in the weak five (5) banks?

Given the adoption of global best practices, it stands to reason that goodintentions count for little, respect for process, sovereign corporate governanceand the focus on institutions (not the decency of the Governor which weacknowledge) is the way forward as we seek to restore the much neededdiscipline and professionalism to our financial markets.


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This was the same procedure that was adopted in Europe and North Americawhen President Obama/Gordon Brown did exactly the same cash injectionwhich Nigeria is copying very badly, albeit with the benefit of hindsight.

The National Assembly, along with other government arms who reacted to thenews have supported the move by the CBN that government is injectingN400bn into the banking sector to stem distress. The Presidency endorsed themove to save our banks from the reckless credit exposures undertaken bythese five banks. No one has however bothered to explain to the market whois paying for this borrowed lunch considering that it was not budgeted for?

The CBN has a right to intervene in the market when it considers it necessary,but we need to move towards institution building as part of the larger goals of the reforms embarked upon. So, is it the Presidency or the GovernmentTreasury making the N400bn investment on behalf of the people of Nigeriaconsidering that the CBN Act specifically prohibits the CBN from investing orholding any interest in the same banks it is regulating?

Which agency of government is investing this N400bn? What if we nowdiscover at the end of the audit of the remaining 11 banks that we need farmore than the preliminary funds so far injected?

CBN Expediency vs. Thoroughness

From the comments of fund managers, rating agencies and international mediapersonalities; the CBN may appear to have weakened itself by making anauthoritative pronouncement on the health of Nigerias banking sector, evenbefore it has completed audit of all the 24 banks.

This is apparent on four fronts:1. The new management the CBN installed in the five banks have issued

claims and counter claims to debtors announced by CBN. Are they truly incharge or being tele-guided by unseen hands at the CBN?

2. The CBN itself had to issue a public apology for typographical errors in thedebtors list it issued and publicised with a threat to businesses to pay up orgo to jail. This threat of jail and EFCC harassment is being made withoutrecourse to the private contract between the bank and the client, even thepublication of the list without a court order; appears to be in violation of thesacred contractual privacy which underpins a banks contract with its client.Could the exigency of the moment have made this practice an expendableissue?

3. The very basis for the believability of the communications from the CBN hasbeen undermined by the perception created that the figures relied upon inarriving at a decision could possibly have been inaccurate, incomplete oroutright misleading. The list that purports to show names of Directors/MajorShareholders appeared selective or at best inconclusive as so many firmsdid not have individual names published. The list should have beencomplete thus eliminating any possibility of inferences such as madeabove.


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4. The dry up of credits in the system local and overseas; with attendantrisks heightened and reflected in ratings and regard for instruments cannotbe ignored.

The above can only be part of the unintended consequences of such a boldmove fraught with risks. The specific consequences are discussed further insection 4 of this report.

CBN The Banks and Associated Companies

The Lamido Sanusi action was based on a special examination, albeit notforensic exercise but sufficient enough for the CBN Governor to arrive at a risk-based opinion.

While this decision model will be tested at the law courts by aggrieved persons,the closure of the EDW (set without a time frame or a framework for using it toidentify and serve as a model for sustained weakness) by the CBN acceleratedthe consequence seen in the audit results.

The more important point is the unclarified status of the associated companiesand subsidiaries of banks cleared and those sanctioned.

First Bank Plc, in its latest financials indicated that First Trustees had N26bnwritten off from their books. Is the CBN evaluating a group report or abank report?

This information is necessary to enable us eliminate the possibility of disguised toxic assets in the books of the group as well as ensuring that all such blurred relations, arising from the universal banking template adopted by thebanks are nipped in the bud.

An unintended consequences of our adoption of a universal banking principlehas been the non-upgrading of the compliance, supervision of enforcementfunctions of regulators to ensure that this grey areas are effectively dealtwith. It was one of such opportunities that emboldened those who tookadvantage of the regulators laxity to bring us to this point.

CBN The Debt Collector Paradigm

As the market already knows, it's awfully hard for government to regulate justone thing. Citizens alter their behaviour to dodge the rule, and soon officialsface a choice of either extending the regulation or giving up on the originalidea. The history of the crusade against debt in our banks exemplifies thispoint.

The CBN is not a debt collection agency. If it were empowered to do that, ithad both the means and motive, giving the current situation, to collect suchdebts as owed the banks from BPE (NITEL), IPP based projects/contracts,


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debts owed Finbank by The Ministry of Finance & Economic Planning N250.1m and The Judiciary, Bauchi State N351.8m to mention a few.

This must be because it knows that there is no legal status to invoke the rightof set-off in the loan agreement that recognises such an action.

If it is unable to collect such obvious debts, how does it propose to use theresort to threat of legal action (EFCC has been the only organ mentioned hereand not the law courts) to achieve the current moves?

The role of Government organs such as the CBN, SEC, NDIC, NSE and theEFCC are clear - Debt collection is not one of them. Critics of this position havehowever said that for a country like Nigeria where most of these "iconic bigboys" believe and act as if they are above the law, collecting debts by thebanks is impossible.

To illustrate their point, they cite the case of Mr. Jimoh Ibrahim who quicklypaid N3.1bn when he found out that the CBN and EFCC were serious. They alsouse as evidence the case of Alhaji Aliko Dangote who quickly paid a sum of N3bn. All this, they concluded, makes the use of jungle justice justifiable.

We disagree entirely with the notion that a subversion of the law or an induceduse of force is a fit and proper role of Government. The issues are clear, theprocesses for recovery are also clear. CBN only needs to apply the assets of allmembers of the Board and management of the banks to liquidate their non-performing loans and ask the banks to exercise the terms of the facilities bytaking over the securities pledged by these people where payment is notforthcoming.

The resort to power flexing is not only a dangerous precedent but anunsustainable one lest we descend to anarchy.

What if we have a government that its motives were not so convincing or inthe interest of the nation? We would not be able to talk. If we are to be arespectable nation, we must not find any justification to go outside the rules of engagement we set for ourselves.

The debtors have as much right to be protected by the CBN who should usethe opportunity of having the goodwill of the Nigerian people on its side to takesuch steps as we know Sanusi Lamido would have wished.

Arresting, harassing and hounding people without a charge, petition or formalcase reported is not a perception that should be associated with the CBN.

We have a choice. We can present ourselves as a people of laws or as onemanaged under a banana republic unless of course, there are excruciatingcircumstances that inform this not yet made public.

The threat of publication of names has come and gone and we are not sure ithas done much to promote civility in conduct by this country. If at all, it


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revealed that for the CBN to resort to such desperate measures, the truth hasnot been told about how bad the case of the banks really are.

Such actions are only taken where the going concern of an organisation hasbeen so imperilled that the only feasible option is to call in the debts, packagethe companies for resale and hopefully mitigate the systemic impact of such amove on the industry/sector. Under this scenario, the need to wait for theconclusion of the examination of other banks was, in terms of priority, notuppermost. If action was not taken, the whole system would get worse.

Recognising this therefore. The question must be asked Why is CBN notguaranteeing the depositors funds in the banks.

There are instances where such an approach was undertaken in other nationsbut then a special purposes provision was made to deal with it as such.

The deterrent factor has been eliminated, the media has flogged the subjectand we would all move on to the next breaking news from the cesspit of scandals that defines this sector in need of a revival.

The tactical advantage that would have been envisaged from the strategicplan, assuming one was in place, has been sacrificed to the need for expedientaction. We are not sure the message has sunk. If anything, the message isthat the CBN has taken on a huge problem that will take on an expanded life of its own if due care is not taken. In the meantime, what happens to the creditmarket?

CBN The Unexplored FIRS Angle

Financial market regulators often boast of a "growing partnership betweenthem and the law enforcement agencies." While it is the opinion of the authorsof the report that the law enforcement agencies have some clearly definedroles to play in ensuring that financial crimes are dealt with, pressure mountedto coarse compliance, and the full weight of the law brought to bear on wrongdoings we insist that this must be done within the laws guiding the conductof such regulatory agencies such as EFCC, NDIC, SEC, NSE and CBN.

The more interesting and unexplored partnership opportunity in such a crisisought to have been the exploration of the value an agency like the FederalBoard of Inland Revenue presents.

Somewhere along the way, these regulatory authorities would discover thatthey have a better ally in the tax authorities as a collaborative partner inkeeping the banks, debtors and investors (local and foreign) honest enough.

Take the instance where it was reported that Bank CEOs contributed money tothe Yar Adua campaign and the purchase of a private jet for a church head.Why was the tax authority not empowered to seek the facts and trace how thepayments were funded? This would have revealed much more insight into how


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these individuals functioned. Indeed, it could have stemmed the fabled recklessness exhibited or debunked the rumours that gave rise to such.

In the current scenario, the tax authorities ought to have been brought in toverify the fictitious accounts created by the banks to facilitate the deception inthe record books and margin loans accounts. The tax authorities would havebeen able to validate the true net worth of debtors; and on this basis, the CBNcan actually affirm that the banks gave loans to persons or firms beyond theircapacity/net worth.

The opportunity is still not lost and the approach is recommended to the CBNas part of its overall strategy.

CBN Banking Crisis & the Silence of Accountants & Auditors

This is a no-brainer. We did not get to this state without someone, somewhere,somehow knowing what was going on and for the clean out to be complete the reporting accountants for public offers and auditors of the five banks orany other bank where impropriety or/and potential material risk issues havebeen identified must be culpable.

The standard duty of care and fiduciary responsibility of the auditors to themembers of a company must be sufficient grounds for a class action by theinvestors in these banks.

Auditors collected large amounts in audit and non-audit fees. Thesedeclarations by the CBN raises questions about the value and credibility of bank audits, auditor independence and quality of audit work, economicincentives for good audits and the knowledge base of auditors.

To leave the matter unaddressed is to ignore the factors that impactconfidence in a market where trust is broken on account of these expose. Thequalified audited accounts of Finbank Plc for the period ended April 30, 2008 byMessrs Akintola Williams Deloitte and Messrs Aminu Ibrahim & Co on accountof the treatment of goodwill should have been followed through by the NSE,SEC and CBN before now. What other trigger was needed to be placed onenquiry?

To assume that the adoption of IFRS or GAAP will address the concerns andcredibility gap created here is to ignore the enabling blocks of the possibleconspiracy of criminality acts that has been alleged by the regulators.

CBN The Bank Audit Committees

Deriving from the above is the subject of the Bank Audit Committees reviewthat the CBN needed to have undertaken as part of a larger corporategovernance assessment its constitution, deliberations and review of actionstaken during the period under which actions described have taken place.


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These people should be made to answer to the questions being raised by theCBN in terms of corporate governance, risk management and reliability & accuracy of their financial information. Lessons are there to be learnt from thefindings that such an important review would unfold and this ought to be apriority task.

CBN The Shareholder Associations

This point is quite ironic. The pre-consolidation years were dominated byshareholder activism led by the late Chief Akintunde Asalu. Over the years,unverified complaints and outright claims of compromise against theassociation and its numerous versions led to a weakening of the voice andperhaps, value/relevance.

At best, they positioned themselves to question and put on enquiry, CEOs,management and the board on the misuse of power and excesses.

The relevance and place of this, hitherto whistle blowing apparatus of ourmarket should be reconsidered and a pronouncement made on the value orotherwise of continuing to retain the vehicle in the scheme of things. Themarket developments, it must be said, have altered the historical relevance of such an organisation/grouping.

CBN The Disclosure of Debtors List

If you thought very little else about the CBNs decision to publish the list of debtors, three working days after the CBN Governor had appointed actingGMD/CEOs for the five banks and declared the desire to follow due process;you must concern yourself as to the wider implications of the action on privacyof data, sanctity of contracts with banks, and the role of the CBN as a debtrecovery organ. These matters are discussed in section 3 of this report.

CBN The Protection of the Sovereign Banking Brand

This basic principle of privacy is a universal banking principle on whichSwitzerland has built its national reputation and some of its leading dominantSwiss global banks. There is a huge debate on why this should continue in thelight of the possible use by terrorists, tyrants and transparency-averse individuals. Yet the country has found a way to protect this system and fendoff attempts to change it.

The parallel here is not so much about debtors but the larger role the CBN hasin protecting the image of its institutions - not to condone corruption, illegalityor indeed management incompetence in risk management. It goes far muchdeeper than that. The point here is that while we must cleanse andraise the standards of our banking institutions but we must bemindful not to kill our own national institutions over disclosure andtransparency. The wisdom to do this is what separates one nation from the


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other; and defines the leadership attribute required to deliver on the goals of developing Nigeria into the financial hub for Africa.

It is not an easy task but we must note that the same battle for full disclosure,transparency and accountability is going on all over the world, but they arecareful not to destroy their national financial and banking institutions formarket expediency. Notice that the G7, G20 and more are yet to reach auniversally accepted consensus on these matters because each country is busyprotecting their own national market. Should we not be proceeding with thesame caution in Nigeria?

No matter what we do in Nigeria, the west would never concede that our banksare better than theirs, now that we give them a talking point by describing ourleading bank executives as criminals even before we have brought them beforea court and given them the right of fair hearing.

The banking brand will now be equated with the Nigerian brand. That will notbe the problem of the media as the Honourable Minister of Information wouldhave us believe. That was a controllable action we scripted ourselves.

CBN Why was the choice of a very public action necessary?

Could we have fixed these problems with a different approach withoutresorting to washing our dirty linen in public? The validity of this question isapparent from a review of actions by countries that have treaded this pathbefore us. As we all know, the whole Western world is constantly demonizingChina and their businesses for being inferior and so on; but the Chinesegovernment and people ignored the criticisms and continually marched intonew markets, acquiring some of the worlds best resources and global brandsfunded by Chinese banks.

The sense is that, if we could address this problems in some ways other thanridicule our sovereign brand in the process, would it resolve the objective forthe exercise in a manner that promotes our national economic well beingwithout covering up the cracks in the banking mansions we built up?

Without doubt, these problems will go away at some point. When that timecomes for our banks and bankers to go out and attract credits andinvestments, would they be accorded the very high respect to borrow for ourbenefit as they commanded before now? The world tends to have longerand stronger memory of our history, than we do in Nigeria,unfortunately.

CBN Learning From History

Sometimes, in our national engagements, there are moments that make youlaugh, while at other times, it seems easier to cry for our leadership on issues.Last Monday, August 17, 2009 alone our capital market (NSE) lost N380bn in


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one day, N20bn short of the total sum being invested in the five banks. Whereare the circuit breakers for the shock and awe approach adopted?

You may want to check the history of some of the world largest financialinstitutions and discover the origin of their wealth; then we may begin to seewhy some analysts held out some measure of appreciation for the achievementof our contemporary banks all along. Lets examine two below:

LESSONS OF H ISTORY Latin America

In the May 2008 IMF working paper 08/135 titled - Central Bank Involvementin Banking Crises in Latin America by Luis Ignacio Jcome(http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1153751# ); The centralbank involvement in 26 episodes of financial disturbance and crises in LatinAmerica from the mid-1990s onwards was reviewed.

The paper finds that, except in a handful of cases, large amounts of centralbank money were used to cope with large and small crises alike. Pouringcentral bank money into the financial system generally derailed monetarypolicy, fuelled further macroeconomic unrest, and contributed to simultaneouscurrency crises, thereby aggravating financial instability. In contrast, whencentral bank money issuance was restricted and bank resolution was timelyexecuted, financial disturbances were handled with less economic cost.However, this strategy worked provided appropriate institutional arrangementswere in place, which highlights the importance of building a suitable frameworkfor preventing and managing banking crises.

LESSONS OF H ISTORY Japan

The point has been established that no national economic stimulus will succeedunless the banking sector is repaired. The lesson from Japan dictates thatactions by the CBN/SEC/NSE/Federal Government should be well co-ordinated,devoid of ambushes and packaged as a rescue plan rather than a punitiveplan because its impact will determine the fate of the wider economy.

Our knowledge of the Japanese crisis of the 1990s and early 2000s with rootssimilar to the current global crisis is worth revisiting.

At first, Japans leaders underestimated how badly the real estate collapsewould hurt the countrys banks - where a policy of easy money had fuelledstock and real estate speculation, as well as reckless lending by banks.

Many in Japan thought that low interest rates and economic stimulus measureswould help banks recover on their own. In late 1997, however, a string of bankfailures set off a crippling credit crisis. Prodded into action, the governmentinjected 1.8 trillion yen into Japans main banks. But the injections toosmall, poorly planned and based on little understanding of the extent of thebanking sectors woes failed to stem the growing crisis.

Fearing more bad news if banks were forced to disclose their real losses,Japans leaders allowed banks to keep loans to zombie companies on their


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balance sheets. Japan, instead, experimented with a series of funds, in part,privately financed, to relieve banks of their bad assets.

The funds brought limited results at best. For one, the funds were too small tomake an impact. The depository for bad loans had no orderly way to sell themoff. And the purchases that did take place failed to recapitalize banks becausethe bad assets were priced so low.

So far, the Yar Adua administrations plan avoids the hardest decisions, likenationalizing banks, wiping out shareholders or allowing banks to collapseunder the weight of their own bad debts as did Japan. In the end, Japan hadto do all those things .

Economists say these blunders meant Japans financial system did not start torecover until late 2002; six years after the crisis broke. That year, thegovernment of the reformist leader Junichiro Koizumi ordered a tough audit of the countrys top banks.

Called the Takenaka Plan after Heizo Takenaka, who headed the governmentsfinancial reform efforts, the move finally brought the full extent of bad loans tolight. Initially, banks lashed out at Mr. Takenaka. The government cant orderbank management to do this and that, Yoshifumi Nishikawa, president of theSumitomo Mitsui Financial Group, complained to the press in October 2002.

Its absolutely absurd.

But Mr. Takenaka stood firm. His rallying cry, he said in an interview onWednesday, was, Dont cover up. Dont distort principles. Follow the rules.

I told the banks clearly, I am in a position to supervise you, Mr. Takenakasaid. I told them I am not open to negotiation. Sounds similar to SanusiLamido? It took three more years to finally get the majority of bad loans off the banks books. Resona Bank, which was found to have insufficient capital,was effectively nationalized. From 1992 to 2005, Japanese banks wrote off about 96 trillion yen, or about 19 percent of the countrys annual G.D.P. ButMr. Takenakas toughness restored faith in the banks.

That was a turning point in the banking crisis, said Mr. Gomi of the FinancialServices Agency, who worked with Mr. Takenaka on the audits. By then, otherfactors had fallen into place that aided economic recovery, including a boom inexports to the United States and China.

Conclusion . Playing the Zero Sum Game

We must be clear on this one point - the foundation upon which we built wasnot solid and the surprising conduct as described in the disclosures made ismind boggling and seriously disturbing to say the least.

However, that must be as far as the drama goes.


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The rest is steeped in the factual reality of the failure of regulation to movein tandem with the dynamic changes the banking sector unleashed . If we had deployed foresight in the management of this rapid build up of capitalthrough a commensurate build up of capacity (see comments under corporategovernance) to manage the increased activity and process demands that wouldensue, we might have a different outcome than we are confronted with today.

We failed to do this and must now deal with the consequence of the lack of andabsence of capacity planning and risk/contingency planning in the operationsof our financial services regulatory system.

The truth, if it must be told is that this is as much a failure of the oversightfunction by those entrusted with policy, supervision, enforcement and remedialaction as it is as much that of the recklessness of a market long on greed andexuberance.

Caution was simply thrown to the winds by the players and the regulators andmarket commentators maintained a distant watch emboldened by incestuousrelationships at varying layers of the value chain.

This is a sovereign failure at the very minimum.

There is a serious need for change in mindset and the rules of engagement inour financial services sector.

The challenge now is how to go about concluding the work started bySanusi Lamido Sanusi! The Sanusi Lamido Sanusi plan would have beenprepared from June 2009 when he came in. The thoroughness or otherwise of his plan will determine a lot not just for our banks, but the wider economy.

We might as well get it all out of the way in one fell swoop and this mustdefinitely include the Insurance companies, Asset Management Firms, Auditors,Stock broking firms, the Securities & Exchange Commission, the Nigerian StockExchange and the NDIC.

What do we have to lose again?


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Our regulators have mastered the art of, and ability to hold two opposingideas and approaches to a singular issue in mind at the same time and still

retain the public authority to adjudicate on issues that challenge the other viewpreviously or simultaneously held by them."

THE CBN GOVERNORS ADDRESS , DEBTORS LIST & MATTERS ARISING

It is instructive to recall, as a description of his mindset, a comment made bythe Governor to a colleague in response to what regulators must do to buildconfidence in our markets, after a meeting of the board of Enhancing FinancialInnovation and Access(EFInA) years back when he said that " Let's cut thechase and bite the bullet. You only die once". This thinking and school of thought, which defines his honest approach to the issues affecting the

fatherland is well respected and embraced by so many of us even as werecognise that in this clime, this mindset and outlook is fraught with risks andunintended consequences.

Our initial response to the decision to take action by the CBN was welldocumented here - http://ww.proshareng.com/news/singleNews.php?id =.

Critics of the former Governor and the CBN had made claims of incestuousrelationships between the CBN Governor and the banks, the possibility of wrong doings by some CEOs in the management of their banks as seen fromsome decisions taken which would surprise a first time banker, the quality of their loan assets and credit management efforts after the consolidation, thepeople capacity and process management of risk and contingency/collateral,the blurring of lines due to the ill-informed application of universal bankingprinciples, the increasing negative perception of bank CEOs occasioned bytheir less than conservative lifestyles.

Yet, it should not be lost on the new CBN Governor that it is important to thepublic that the apex regulators along with support regulators of the marketdemonstrate that they take commensurate action to deal with their internallapses as a critical part of restoring market confidence.

Things truly needed to change.

To deliver this change, we sought the conduct of a stress test on theNigerian banking system as a critical component of determining the truestate of the industry. This was contained in our July 18, 2009 Half Year Reviewof the NCM published - http://www.proshareng.com/reports/view.php?id=1937 (executive summary) which was a follow up to our NCM 2009 outlook (issuedin February 2009 - http://www.proshareng.com/analyst/downloads/ncmFULL.zip .

The report, on pages 30 - 35, focussed on the challenges to the capital marketand the banking system based on the exposures of listed banking institutionsto margin loans and the contagion effect of the global market crisis onaviation, Oil & Gas, Real Estate and credit lending to firms and governments.


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Further, in our public presentation to the media in April 2009, we made it clear(http://proshareng.com/reports/view.php?id=1939 ) that the issue that confrontsthe market is yet to unfold. We affirmed that this issue could not be wishedaway and we would have to confront it at some point.

The Governors Address

Key points in the address are:

In Nigeria, the banking system appears to have weathered the storm due to anumber of factors. Among these are the facts that our financial system is notstrongly integrated into the international financial system, as well as the relativelysimple nature of financial products and strong capitalization and liquidity of Nigeriabanks.

whereas the system in general is likely to absorb and survive the effects of crisis,the effects vary from bank to bank. A few Nigerian banks mainly due to hugeconcentrations in their exposure to certain sectors [Capital Market and Oil and Gasbeing the prominent ones], but due to general weakness in risk managementand corporate governance, have continued to display signs of failure .

As far as October last year, some of the banks showed serious liquidity andhad to be given financial support by Central Bank in the form of anExpanded Discount Window [EDW] Where the CBN extended credit Facilitiesto these banks on the basis of collateral in form of CPs and BAs, sometimes of doubtful value .

As at June 4, 2009 when I assumed office as Governor of the CBN, the totalamount outstanding at the Expanded Discount Window was N256.571 billionmost of which was owed by the 5 banks .

A review of the activity of in the EDW showed that four banks had been almostpermanently locked in as borrowers and were clearly unable to repay theirobligations. A fifth bank had been a very frequent borrower when its profileordinarily should have placed it among the net placers of funds in the market.Whereas the five banks were by no means the only ones to have benefited fromthe EDW, the persistence and frequency of their demand pointed to adeeper problem and the CBN identified them as probable source of financial instability , most likely suffering from deeper problems due tonon- performing loans .The impact of the situation of these banks was being felt by the market in differentnegative ways. Because of this staring in their balance sheets, the banks pushedup the interest rate paid to private sector deposits and their competitors had tofollow suit. They also contributed to the destabilization of the interbankmarket as many of their competitors were unwilling to take an unsecuredrisk on them . It was primarily because of these banks, or at least some of them,that the CBN took the step of guaranteeing the inter-bank market when it stoppedgranting new lines under the EDW. Without that guarantee, almost four bankswould not have been able to borrow in the inter-bank and would probablyhave collapsed .

As you are aware, we guaranteed the inter-bank market to give us the timeto conduct a thorough diagnostic of the banks and ensure that appropriate


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remedial action is taken . At least four of the banks under question have since theguarantee came into force either remained heavy users of funds at the EDW ordrawn heavily from other banks under cover of the CBN guarantee to winddownat this window. In all events, it is clear that they do not have the ability tomeet their obligations to depositors and creditors as they are in a grave

situation .

In view of the aforementioned circumstances, I instructed the Directors of Banking Supervision of the CBN to carry out a special Examination of thefollowing five banks: Afribank Plc, Finbank Plc, Intercontinental Bank Plc, OceanicBank Plc and Union Bank Plc.

The examination was conducted by a joint team of CBN and NDIC officials. Themajor findings on the 5 banks included:

1. Excessively high level of non- performing loans by the five banks which wasattributable to poor corporate governance practices, lax creditadministration processes and the absence or non- adherence to the

banks credit risk management practices . Thus the percentage of non-performing loans to total loans ranged from 19% to 48%. The 5 banks willtherefore need to make additional provision of N539.09 billion.

2. The total loan portfolio of these five banks was N2, 801, 92 billion. Marginloans amounted to N 456.28 billion and exposure to oil and Gas wasN487.02 billion. Aggregate non performing loans stood at N1,143 billionrepresenting 40.81%

3. From 1 and 2 above, it is evident that the five banks accounted for adisproportionate component of the total exposure to Capital Market and Oiland Gas, thus reflecting heavy concentration to high areas relative to otherbanks in the industry.

4. The huge provisioning requirement has led to significant capital

impairment . Consequently, all the banks are undercapitalized for theircurrent levels of operations and are required to increase their capital.Indeed one is technically insolvent with a Capital Adequacy Ratio of [1.01%]. Thus a minimum capital injection of N204.94 billion will berequired in the 5 banks to meet the minimum capital adequacy ratioof 10% .

5. The five banks were either perennial net- takers of funds in the inter-bankmarket or enjoyed liquidity support from the CBN for long periods of time, aclear evidence of illiquidity. In other words, these banks were unable tomeet their maturing obligations as they fall due without resorting to the CBNor the inter-bank market. As a matter of fact, the outstanding balance onthe EDW of the five banks amounted to N127.85 Billion by end July 2009,representing 89.81% of the total industry exposure to the CBN on itsdiscount window while their net guaranteed inter-bank takings stood atN253.30 billion as at August 02, 2009. Their Liquidity Ratios ranged from17.65% to 24% as at May 31, 2009. (Regulatory minimum is 25%)

It is important to note that at least three of the banks are systemically important(accounting for more than 5% of Assets and Deposits in the banking System) andtogether the five banks account for 39.93% of loans, 29.99% of deposits, and31.47% of total assets as at May 31, 2009.

Given the extent of the asset quality problem leading to liquidity stresses, and thevariety of stress points on the banks balance sheets, failure to act to securethe financial health of these banks will clearly place the system at risk .The Central Bank has a responsibility to act to protect all depositors and creditorsand ensure that no one loses money due to bank failure. The Bank also needs to


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move decisively to remove this principal cause of financial instability and restoreconfidence in the Banking system.

Consequently, having reviewed all the reports of the examiners and the commentsof the Directors and Deputy Governors, I am satisfied that these 5 institutionsare in grave situation and that their management has acted in a mannerdetrimental to the interest of their depositors and creditors. Therefore, inexercise of my powers as contained in Section 33 and 35 of the Banks and OtherFinancial Institutions Act 1991, as amended, and after securing the consent of theBoard of Directors of the CBN. I hereby remove the Managing Directors of thefollowing banks from office with effect from Friday, August 14, 2009.

1. Afribank Plc2. Intercontinental Bank Plc3. Union Bank of Nigeria Plc4. Oceanic International Bank Plc5. Finbank Plc

These persons forthwith cease to be directors and officers of theirrespective bank. The Board of Central Bank of Nigeria has also appointed thefollowing as the MD/CEOs of the affected banks:

1. Mr. John Aboh MD/CEO Oceanic International Bank Plc2. Mr. Mahmud L. Alabi MD/CEO Intercontinental Bank Plc3. Mr. Nebolisa Arah MD/CEO Afribank Plc4. Mrs. Suzanne Iroche MD/CEO Finbank Plc5. Mrs. Funke Osibodu MD/CEO Union Bank Plc

Each of the above will head a management team that will include ExecutiveDirectors and Chief Financial Officers to be appointed by the CBN . This

team is tasked with continuing the business of the banks as a going concern. Itherefore appeal to the Boards of the affected banks, in their own interest tocooperate with the newly appointed Executive Management .

We are conscious of the fact that changing management alone will notresolve this problem . Consequently, the CBN is injecting a total of aboutN400billion into these five banks with immediate effect in form of Tier 2 Capital tobe repaid from proceeds of capitalization in the near future. This injection issufficient to resolve and stabilize all the institutions and enable them continuenormal measure as government does not intend to hold the shares for long andshall divest its holdings as soon as new investors recapitalize these banks.

Let me also advise all debtors of Nigerian banks, that the CBN and allgovernment agencies are united in our commitment to support the recoveryefforts of the banks. Debtors who do not pay shall have their namespublished in National Newspaper in due course and we will solicit of lawenforcement agencies in recovery.

Let me reassure especially the customers of the affected banks and all the banksin general that there is no cause for alarm . They should continue to transacttheir normal business in the banks where their accounts are domiciled as thisexercise is meant to further strengthen the banking industry and recapitalize theaffected banks.

I should also state at this point that the scope of the special Examination waswidened to cover all 24 banks . So far, we have concluded the audit of 10 banksincluding these five, the others being Diamond Bank, First Bank, United Bank for


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Africa, Guaranty Trust Bank and Sterling Bank. We have also commenced the nextbatch of 11 banks and hope to conclude them by end of August. In all, weexpect to conclude the audit in mid September. The Central Bank is requiringall banks to make appropriate provisioning for non-performing loans and disclosethem. We hope that by the end of this quarter, all banks would have cleanedup their Balance Sheets . On the basis of the information available to us so far,we are confident that the banking system is safe and sound and we have dealtwith the major sources of systemic risk .

I will conclude by residing that, going forward, the CBN will not waive in its desireto ensure that public confidence in the Nigerian banking system is maintainedthrough appropriate disclosure and the reinvigoration of its policy of zerotolerance on all professional and unethical conducts .

We will not allow any bank to fail . However, we will also ensure that officersof banks and debtors who contribute to bank failures are brought to bookto the full extent of the law and that all proceeds of infraction are

confiscated where legally feasible .

The Expanded Discount Window

Afrinvest in its recently released report titled Nigerian Banking Sector -Disclosure is the New Valuation Benchmark, page 21 -http://www.proshareng.com/reports/view.php?id=2014 described the developmentthus:

CBN: limitations of Monetary Policy

We also note below a number of events of significance that continue to impactmarket outlook for the Nigerian banking sector. Firstly, Afrinvest Researchbelieves that Nigeria remains largely a play on the oil price, with the outlookfor short to medium term macroeconomic performance being driven primarilyby the international dynamics of the crude oil market. We note that oil pricedynamics play a crucial role in setting the tone for federal fiscal policy, and to alesser extent, CBN monetary policy. We note also that the historical limitationsof monetary policy as a tool for setting market behaviour have been evenfurther exacerbated in 2008, evidenced by the increasing disconnect betweenthe benchmark CBN Monetary Policy Rate (MPR), the indicative inter-bankunsecured overnight lending rate (Nigeria Interbank Offer Rate, NIBOR) andbank prime lending rates to commercial borrowers.Just as rate hikes by the CBN in early 2008 failed to help containinflation, or slow down lending; so did several rate cuts later in theyear fail to achieve the desired objective of lowering interest rates orchannelling liquidity into risk assets. Indeed, credit growth appears tohave performed counter-cyclically to CBN intentions as interpreted by MPRsignals (with high growth in early 2008, and a slowdown in Q4 on the year).However, 2008 saw the emergence of a new tool that appears more than anyother to be capable of greater levels of success at ensuring market adherenceto CBN liquidity directives: the new CBN Expanded Discount Window (EDW).

Expanded Discount Window Dynamics: Pressure Valve, or Red Flag?


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According to the CBN, the EDW was set up: ...in order to ensure a robustoperation of the discount window and in the process provide effective andefficient guidance for the conduct of monetary operations. To summarize, thekey elements of the EDW operations include:

Provision of two categories of facilities, namely; the overnight standing facility andthe fixed tenor repoIncrease in the tenor of borrowing from the window from overnight to 360 days!Increase in the number of financial instruments acceptable as collateral in thewindow to include non-FGN securitiesWidening of the base of the financial markets from which the instruments aredrawnBroadening of financial innovations to support the operations of the discountwindow

First opened in October 2008, the EDW appears in practice to have been set-upprimarily as a pressure valve to help ensure the consistent availability of

liquidity options for Nigerian banks during times of severe market stress,allowing for the use of typically less liquid short-term instruments such asGuaranteed Commercial Paper (GCP) and Bankers Acceptances (BA) ascollateral for longer tenored facilities (up to 360 days).

While the EDW does appear to have been successful in this function of smoothing liquidity mis-matches on bank balance sheets and ensuring calmand steady operations of the inter-bank market, there continues to besignificant levels of volatility in overnight lending rates, as observed by dailyNIBOR quotes.

What is less debatable is the fact that EDW operations appear to have helpedforestall a major liquidity crisis within the industry, as counter-parties remainconfident that short-term obligations will be met, irrespective of underlyingmarket conditions.

What remains unclear however (as this information is not readily availablewithin the public domain) is the extent to which individual banks may haveaccessed the EDW, the nature and underlying quality of the instruments thatmay have been pledged, and indeed an official statement as to the preciseidentity of banks that have accessed the EDW.

To this extent, and given that the CBN explicitly stated in its official circularopening up the EDW that: Institutions seeking to utilize the EDW must firstfully exhaust all alternative market sources. The EDW is to be approached on alast resort basis only, there appears to be a case for viewing access to theEDW as a red flag item.

This view suggests that otherwise illiquid assets of quality and pricing that areindeterminable by exhausting all alternative market sources are being used asa basis for securing financing from a single buyer with unlimited purchasingpower, the Central Bank. Questions arise therefore as to the transparency of the entire process, and the potential for a longer term crisis emanating fromthe ultimate treatment of these assets.


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The CBN press release of 20 August, 2009 confirmed this, when the apex bankstated that the list of other debtors/defaulters is being compiled and will be published on an on-going basis.

The tone of response of the Central Bank in addressing the grave mistakesnoted by some of the named debtors in the publications further confirms thatthe Lamido Sanusi would run the CBN like a medieval empire. This cannot begood news to those who would like to see us show character by rising abovethe resort to strong tactics to bring about change.

The Governor stated that if there is any dispute (referring to thevariances in the published amount of debts), it will be for the banksand regulator to sort it out . He went further to say that any of the debtorswho have made payments on their existing non-performing loans post May 31,2009 date should sort things out with the affected banks.

We do know of not a few who have attempted this only to be told that the orders from above hinders them from doing anything but secure all the fundsadvanced by the bank without exception. This can only be an invitation tochaos and flight of confidence.

Intent Confirmed

If the CBN wants to close down on those to whom the debts does not representan economic value offering, they can based on the zero-sum game scenario.So long that the rules of his intervention are not mired in the messianic cloakthat office holders often present themselves in.

We are concerned about the institution and the precedent we seek to lay.

A case in point is the dispute between one of the five banks and a customerover the classification of its debt as non-performing. Our investigationsrevealed that:

Both parties are agreed on the value of the debt.Both parties are equally agreed that the debt was not serviced betweenJanuary to June 2009.Both parties are agreed that payments have been made up to andincluding October 2009.Both parties are agreed that payment was made before August 14, 2009.Both parties are agreed that the company shores up the security coverageto at least 100 per cent notwithstanding the personal guarantees of itspromoters.

The bank, however, says it is under pressure from the CBN to get the client toliquidate approx N20bn debt in a matter of days (if one goes by the EFCCpronouncement, which will be 7 days).

The bank, in driving home the point said that all other banks will be informedabout the non-performing status of the account to the effect that if any otheraccount of your company in any other bank in Nigeria is performing that bankwill be forced to classify your account as non-performing, and stop further


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credit availability to you. The consequence of this is that the company will notbe able to assess funds anymore in the banking industry.

Impact Extrapolated

The bank has the option of selling the securities which were pledged and thatwould mean the debtor/customer losing the equity in his business; used assecurity/collateral in the first place through a possible sell-off of the shareson the open market or to private or vested interests.

There are just too many aspects of this approach that leaves room forconjecture and reflects the same old tired approach to execution of plans bythis nation. Given the CBN Governors pedigree as a risk manager, he shouldat least have been aware that his game plan is fraught with loopholes that willsurely be exploited. These will be a disaster if the CBN intervention is now usedas an asset transfer vehicle to produce new owners through the back door.

This is all the more relevant an issue, when one considers that the ability tosecure credits from the system is under a lock-down with the market resignedto a graveyard sense of inevitability.

Finally, what about those firms whose debts were contingent upon thegovernment paying for services or releasing mobilisation? The pay up at all cost mantra of the EFCC, whether the loan is performing or non-performingcannot be right but perhaps expedient for the CBN Governors purpose.

The Market: Where do we go from here?

Sanusi Lamidos sanitation of the banking industry will continue apace andperhaps with less finesse than it was under the consolidation CBN Chief,Professor Chukwumah Soludo. This approach will definitely have a number of positive impacts, not only on the commercial banks, but the entire domesticfinancial services system.

The tight-coupling of the financial services sector post bank consolidationhowever, makes stiff regulatory actions imperative, yet the CBN should bereminded of the need to conduct itself in a manner that recognises the cause & effect nature of Government/Bank relationships beyond the pursuit of theCEOs to an averagely financial-literate citizenry.

When this drama is all over in a few weeks and perhaps years ahead, it is mostlikely that nothing much would have changed, due to factors beyond the CBNsfervour for sacking inefficient bank executives and publishing a list of debtors.

This is a resilient system that takes it cue from the way the FederalGovernment functions. So what has really changed in the institutions of governance to encourage belief that these actions will be sustainable and canbe built upon?


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"You only find out who is swimming naked when the tide goes out."- Warren Buffet

IDENTIFYING THE UNINTENDED C ONSEQUENCES

A bank failure can be interpreted in at least two different ways: as anexceptional example of how not to manage a financial institution or as asymptom of something more generally wrong with the operating environmentand regulatory regime.

In this case, and according to the CBN Governor, there is no impendingbanking failure except for one. Which one?

Also the CBN Governor said he had audited 10 banks of which he cleared 5and took action on the remaining 5, and now has 11 banks under audit.Someone needs to remind the CBN governor that his address left out 3 banks to make up the 24 public quoted companies under his function. What are we tomake of the 3 banks not mentioned (or are we to assume that they areexcluded from the decision or a decision already taken on them without anaudit)?

The two questions above can only be explained by the CBN Governor, but inhis absence, any one of the agencies and actors now engaged in a newlyfound rumour industry unintentionally created by the CBN.

The media can also give you pointers and with the growing list of personstrying to outdo themselves and air their expert opinion on the subject, wemust assume that all 24 banks have their names in the straw-hat used by theCBN.

Going Beyond the Drama

In our report published under the title - Aug 14, 2009: The BankingParadigm Shift gathers momentum (http://www.proshareng.com/blog ), wemade it clear that the timing, approach and drama associated with thisdevelopment gives us cause for concern.

We averred that:1. The problems with our bank loans portfolio did not occur overnight and the

CBN must admit its failure as a supervisory and enforcement institution.Not doing this presents a barrier of sorts to believability of motive.

2. The leverage provided those for whom their audits were not concluded, totake steps to address concerns seen.

3. The massive sell-off of the shares envisaged will be that of those banks notenjoying or/and protected by the FULL SUSPENSION placed on the shareprice of the affected stocks.


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4. Naturally the depression of the banking stock index provides short tomedium term opportunities for investors or/and institutions interested inacquiring these hitherto value stocks as rock bottom prices.

5. The ironic twist to the point above is that the uncertainty prevalent in themarket (outside the reflexivity rule) will create a strong doubt as to whetherthe company will survive government interventions or closure. The safemoney is to stay on the sideline till the credibility of CBN pronouncementscan be discerned.

6. Just how does the CBN want to energise growth without credit tobusinesses that need them to cater from working capital expandedrequirement due to the widening gap in government service and obligationfailures?

7. How long and how severe will the ambush laid for debtors, theirharassment and effective lock-down of credit outlets last?

8. The Financial Services Authority (FSA) UK may request that Nigerian banksoperating in the UK refrain from taking deposits or obtain a depositguarantee from the CBN, one we did not provide for, to the local market.

9. The refusal to honour letters of credits issued by Nigerian Banks owing tothe general state of uncertainty and lack of clarity on the health andstanding/clearance of Nigerian banks by the CBN.

10.The extent of co-ordination with other regulatory authorities and relevantgovernment agencies is not apparent.

11.The CBN introduced/established the principle of force majeure in explainingaway the conditions that precipitated the financial crisis that exposed the

irresponsible and reckless actions of our banking CEOs thus opening upthe room for possible class actions by and against a range of persons.

12.The conflicting positions of BOFIA and the constitutional rights of citizens toconduct their business in private has been exposed in the reaction to thepublication by CBN which cannot be said followed the due process considering that the CBN is not a debt collection agency and descended solow as to start chasing debtors, who by the way, have risen stoutly todefend their legal relationships with the banks (even if only to save face).

13.On Friday, August 21, 2009; Standard & Poor's cut its sovereign creditratings on Nigeria deeper into junk territory. It cited the government bailout of five large banks and a fall-off in oil revenue. Nigeria's foreigncurrency rating was cut by one notch to B+ , while the local currency ratinggot a two-level cut, also to B+ . The ratings firm, which maintained itsstable outlook, said Nigeria has become less fiscally flexible after its centralbank planned a $2.6 billion capital injection into five domestic banks, which,combined, make up 40% of the country's loans. " In our opinion, thecentral bank's action has begun a welcome restructuring of Nigeria's banking system, but it also reveals deep problems in


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combination of Government inertia and abdication of responsibility? Whofills the gap created by the current action?

The Questions that Come to Fore

Dr. Martin Oluba, a strong advocate for the type of action taken by SanusiLamido on Friday, August 14, 2009 has some immediate concerns arising fromthe drama episode of last week. We combined this to the independentevaluation submitted by the Proshare team of analysts, viz:

1. Why did the CBN not carefully ascertain the correctness of some of thenames and titles of individuals and institutions in its published list of debtors? Is its admittance of the errors here an admittance of inefficiency or hasty action by the institution?

2. Since it is mandatory for banks to make daily, weekly, fortnightly,monthly, quarterly, half-yearly and yearly returns of their transactionsto the CBN, why was it that it was not able to update its records to thetime it published the list of debtors a two and half months gap?

3. Does the CBN have the statutory right to publish the names of debtorswhen indeed the banks and its debtor customers are engaged in acontract? Should it not have been better for the CBN to put morepressure on the banks (the CEOs of whom it appointed) to recoverthese debts failing which it could take further necessary actions?

4. Does this particular conduct not indicate the interference or overreaching role of our CBN in circumventing organisational initiativeand operational capacity?

5. Was it necessary to have involved the Economic and Financial CrimesCommission (EFCC) at this time? The action seems to communicateincorrectly that being in debt or having a genuine business failure is acrime.

6. Was it right to have narrowly based conclusions on the patronage of theexpanded window facility for arriving at the axed banks? Was thewindow encouraged by the CBN for banks in need of funding as a trap?

What of Union Bank with a huge deposit base and non performing loansof N71 billion, which appears to have the capacity to absorb the loanloss provision. Should the bank have been axed too?

7. Was the examination conducted by the CBN a special examination or anad-hoc investigation of records in order to zero into some target banks?For instance Intercontinental Bank insists that it was never subjected toany special examination and that the special examination was only beingconducted now by the CBN, after the decision.

8. What is the wisdom in approving the results of Oceanic Bank Plc forrelease to the market weeks ahead before such a decision, whenaccording to the words of the CBN Governor; they had observed this

disturbing trend in data upon resumption of office?


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"The trouble is that financial regulation, by its nature, can be a pretty abstractbusiness.

O F WHISTLE BLOWERS , ALARMS AND REGULATORY RESPONSE

The Central Bank of Nigeria had never left anyone in doubt about itscapabilities to respond to any issue within the banking sector it regulates. Thecurrent CBN actions however, presented a question of whether anyone saw thestorm on the horizon.

These enquiry is however not limited to the response of the CBN but indeedthose of SEC, NSE, NDIC, EFCC and the Ministry of Finance.

Who knew what and how did they respond? What lessons should the CBNGovernor and the other agencies take away from these developments to guidethem in the future.

Nigeria is not a country with a reputation for whistle blowing. It is culturallyfrowned upon and smacks of betrayal of trust. Most societies indeed adopt thesame approach even while paying lip service to the ethos and encouragingpeople to come forward.

There is just not enough incentive and protection to encourage such a criticalcomponent of crime detection and law enforcement.

In the United States of America, and arising from the Madoff scandal, anew SEC approved whistleblower proposal is in the works .

Buried deep within the President Obamas historic new proposals to overseeand regulate the financial markets ( Financial Regulatory Reform, A New Foundation ) is the outline of a provision that garnered no headlines but mightwell become the most effective new anti-fraud regulation of all in the world.

He recommends that whistleblowers who disclose fraud cases to the SEC berewarded. It is surely the only part of the massive proposal that gives insiderswith knowledge of wrongdoing a chance to speak up against and even profitfrom the types of financial and securities fraud that has infected financialmarkets in recent years. This may be the beginning of the golden age of whistle blowing - Protecting them and making their jobs easier is gettingincreased attention in the US Congress. While federal qui tam actions initiatedby whistleblowers who report fraud against the government have been aroundfor many years, the concept of rewarding those who report on securities fraud(other than insider trading ) is new, and revolutionary. The potential forsuch a statute, covering the entire growing jurisdiction of the US SEC, is vast.

While current law provides for rewards for whistleblowers who report insider

trading, a very limited class of fraud which generally does not have significant


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market impacts (and few whistleblowers); the recent Treasury Departmentannouncement makes clear this provision would be much broader in scope:

The SEC should gain the authority to establish a fund to pay whistleblowersfor information that leads to enforcement actions resulting in significantfinancial awards. Currently, the SEC has the authority to compensate sourcesin insider trading cases; that authority should be extended to compensatewhistleblowers that bring well-documented evidence of fraudulent activity. Wesupport the creation of this fund using monies that the SEC collects fromen

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