The Bull in the China Shop – Part 1

“…Manipulate the truth long enough and eventually you're selling something that doesn't exist."

EXECUTIVE SUMMARY :The long-awaited intervention in our financial services sector, starting with the banking industry was unleashed on August 14, 2009 guided by a deliberate 'shock and awe' objective by the Sanusi Lamido led CBN.

In sacking the CEO's and Executive Directors of five banks - a generational

practice and culture was designed to be consigned to history.

When the move came, it took more than a scalpel to remove the malignant

tumor that had become a cancer to our collective conscience – the resolution

of 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 practice

of 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 value

base for the CBN and other regulators) demands that the list of debtors, status

of margin loans and its provisioning, status of underperforming & nonperforming

loans, and capital be disclosed for those banks 'cleared' as well.

Even the critics acknowledge that not doing anything on this development

would 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 the

china, but just how much damage will be left behind.

A critical insight into what the market should look towards has remained

unanswered or is unavailable. The Market must, in a sense, be able to gain

some measure of the following - strategic & tactical objectives, scope/coverage

of 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 the

private sectors desire for an edge in business. This often leads to 'incestuous

relationships' at all staff levels right to the very top. At this stage, regulatory

oversight capacity and efficiency is compromised and the outcome is the mess

we always come back to.
The Theory of Reflexivity becomes manifest
The principle of reflexivity was perhaps first enunciated by the sociologist

William Thomas (1923, 1928) and known as the Thomas theorem: that 'the

situations that men define as true, become true for them.'

Sociologist Robert K. Merton (1948, 1949) built on the Thomas principle to

define the notion of a self-fulfilling prophecy: that once a prediction or

prophecy is made, actors may accommodate their behaviors and actions so

that a statement that would have been false becomes true or, conversely, a

statement that would have been true becomes false - as a consequence of the

prediction or prophecy being made. The prophecy has a constitutive impact on

the outcome or result, changing the outcome from what would otherwise have

happened.
An example of this is the interaction between beliefs and observations in a

marketplace - if traders believe that prices will fall, they will sell - thus driving

down prices, whereas if they believe prices will rise, they will buy - thereby

driving 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, especially

those of the 'yuppie banker' or 'power-banker' years; it certainly did not reflect

in their conduct during the post consolidation years. They seemed to have

simply recalibrated the actions taken then and moved it to another level.

In this new enterprise, our stock exchange and securities commission appeared

either clueless or hamstrung by such 'relationships' and an overbearing

political climate under the Obasanjo administration that was reportedly

punitive in response to dissent and intolerant to ethical challenges to decisions.

The stage was thus set for what we find today. We wish our financial

professionals had read the book by George Soros on the subject matter - we

would not be where we are today!
It really is time that egos get checked at the door, and we start adopting a

general understanding of what is real, and what are lies. This, according to the

theory of reflexivity holds true for both the CBN (and its new day allied

agencies) and the market.
In the treatise (which we reproduced in the section titled 'Identifying the

Unintended Consequences', George Soros reflected the basis of the current

reality:
“..Take, for instance, the banking industry in the United States. After the

breakdown of the banking system in the Great Depression, it became closely

regulated and very rigid; but when the restrictions were relaxed, the industry

swung to the other extreme and entered a period of revolutionary change. I

can locate the transition point with great precision: it was on that

evening in 1973 when the management of First National City Bank held

an unprecedented meeting for securities analysts in order to promote

the stock as a growth stock. The pattern in the rise and fall of the Soviet

system closely parallels the pattern in the fall and rise of the American banking

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

The 'conspiracy of criminality' that ensued post-consolidation therefore was

not intentionally engineered by Prof. Chukwumah Soludo, the ex-CBN

Governor. He simply presided over an initiative fraught with inherent execution

risks that could only have been mitigated by an equal, if not higher oversight

capacity and capability plan.
He, we believe, must therefore take responsibility for not doing enough in this

regard. History must however be fair to him and recognize that consolidation

was inevitable and it took a lot to carry it through. He, on his own part, must

accept the professional responsibility for the collapse of the system.

The symptoms are what we now focus on – bad loans, excessive credit

expansion, unreliable financials and drop in shareholder value and market

confidence.
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 to

grow our financial systems; we ignored the age-old wisdom that 'markets left

unregulated 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 financial

services sector with the newswire that S&P has cut Nigeria's ratings deeper

into junk; though outlook appears stable at this point. Some may ask the

question why we surrender our economic and financial objectives to the whims

and decisions of the international order but for the purposes of this report, we

recognize the importance of such 'measures of risk' as universally acceptable

tools of engagement in our quest for integration and market leverage. Until we

are able to muscle the necessary clout to take on the order, we appear not to

have much of an option. This is the consequence of our un-integrated approach

to managing the state.
During the week just ended, the flurry of market activities on all sides can be

captured thus:
The CBN seized control of five banks close to insolvency with armed

guards in tow (FT),
threw out management (often big shareholders),
demanded payment from debtors three (3) days after this ground shaking

action, named some of Nigeria's leading lights in an advertised list the CBN later

admitted to having errors, had SEC call for the DG of the Nigerian Stock Exchange to provide a response to a 7 day ultimatum, demand the removal from council of the

Erastus Akingbola,
and learnt that two CBN Deputy Governors (Mrs. Juliet Madubueze and

Prof. Akpan Ekpo) allegedly opposed to the move, its timing and motive

have been dismissed.
This is a whole lot for our fragile market to absorb at a go. We have set

ourselves up for a big battle and it will come from all sides and even from the

blind 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 were

built more on perception than reality.
Yet, it is a historical fact of Taiwan and China, that it built its economy on the

back of 'inferior products' which defined its brand. This market, we make

bold 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 past

and address the real and present dangers in the leadership gaps in our

financial services sector across board, in a manner that does not undermine or

create unintended consequences.
Everyone accepts the need for action was imperative and Lamido Sanusi

appears to be a man capable of enthroning such a culture. On the basis of the

actions taken subsequently, we have to mitigate our enthusiasm for change

with a cautious optimism that the process will not be hijacked, distorted or

cannibalized.
We categorically state that the means, approach, timing and relegation

of the rule of law in achieving this important task remain a concern. It

does not appear as if the CBN is fully comprehended or is 'managing the

communication' of the extent of this developments. Its flip flop on issues as we

go on will reveal as much.
This report therefore is our attempt to establish our support for the need for

change, bold action and sustainable implementation of the reversal of norms

for which we expect to last for up to two years (or more depending on the

subsequent actions taken by the Sanusi Lamido led CBN).

Nothing sums up our position better than these words from FT – “The market

remains relatively fragmented. …..More transparency and consolidation are

needed. But dramatic action risks undermining worthy ambitions, such

as attracting foreign capital. Nigerian authorities overhauled banks'

management in the 1990s, but oversight failed to keep pace with market

change. The challenge now is how to finish the job.”

The Future Foretold…
In our NCM 2009 report, we noted that this was not another turn of the

business cycle! We averred as follows:
1. That the problem was not so much of a market meltdown but the

unaddressed leadership meltdown in the management of the economy

and markets;
2. That the Nigerian Capital Market was not immune from global

developments, its impact and politics on its economic and financial

decision-making;
3. That a paradigm shift has occurred and the very way business was

thought of, conducted and regulated in our financial markets must

change;
4. That the customer, investor, fund manager, analyst, journalist, regulator

and quoted companies must now learn a new way to engage the

market;
5. That this process of rediscovery will prove most unsettling and may

determine how well Nigeria, as an investment destination positions

itself;
6. That we should quickly move on from the self-denial stage and embrace

the need to employ rigor in addressing the 'simplistic and routine'

unaccountability prevalent in our policy making;
7. That each section of the report was devoted to critical success factors

needed to be considered and acted upon by those in charge of the

market;
8. That the subject of margin loans on one side and the quality of assets

carried by the banks required a stress test (this was further affirmed in

our half year and individual bank report issued up to July 2009);

9. That the investor confidence question goes beyond the usual

grandstanding deployed through newspaper commentaries and loud

sound bites at seminars. The regulators, this time, had to own up to

their failure to deliver the enabling level playing field and enforcement

needed to engender trust in the market; and
10.The choice of action needed to be taken must be one that recognises the

intrinsic impact of our financial markets on the whole economy and the

international support built over the years.
We deployed this to all members of the financial community in Nigeria, United

Kingdom, United States of America, Canada, Ghana, and South Africa. Indeed,

we took the unusual step of sending same to His Excellency, The President, his

Vice President, Principal officers in the presidency, All Ministers, CBN, SEC,

NDIC, NSE, BPE, NAICOM, Professional associations, Guild of Editors, all

members of the federal and state Houses of Assembly, all State Governors and

Commissioners, all Universities, publishers and business editors of media

houses, analyst firms and national institutions.
The motive was clear - let us all move beyond the blame game and agree

on a consensus of what was needed to be done. Our recommendations were

very clear just as our opposition to the plans put forward was rightfully

debunked. We indeed predicted that no recovery will occur in our NCM until Q2

2010, subject to the actions needed to recalibrate the changes needed were

taken with motives devoid of grandstanding.
We adopted the most 'useful' model under the circumstance and perhaps, not

necessarily the most 'honest' model. The hope was that such a situation as has

presented itself since August 14, 2009 could be avoided. The inevitable has

happened, so what next?
Managing the Bull in the China Shop…..
We were wrongful optimistic of our capacity as a people to embrace unforced

change! We now find ourselves at a cross roads of sorts. The move to 'tear

down' the negative aspects of our development legacy and to 'build' on a

foundation devoid of such practices, values and low risk management of our

financial systems, is a generational challenge.
This is the task Sanusi Lamido Sanusi has inherited. The laws of cause and

effect have now manifested, even at this early stage of the impending battle

for the soul of the market! The consequences can only be imagined if not

properly managed.
The good money is on the resilience of the Nigerian people and our markets to

rise up from this dark chapter in our national development. It is our hope that

the overriding motive remains the recognition that the consequence of actions

to be taken to deal with the subject of 'incompetence in managing a bank'

and its systemic problems does not expand on the current 'drama' being

played out by later-day converts presenting themselves as patriots or

regulators/enforcement agencies with altruistic intents. A similar case was

announced by the Senate committee on Banking and none of them took action,

so what makes this one a must-do task?
The threat of publication of names has come and gone and we are not sure it

has done much to promote civility in conduct by this country. If at all, it

revealed that for the CBN to resort to such desperate measures, the truth has

not been told about how bad the case of the bank really is.

Such actions are only taken where the going concern of an organization has

been so imperiled that the only feasible option is to call in the debts, package

the companies for resale and hopefully mitigate the systemic impact of such a

move on the industry/sector. Under this scenario, the need to wait for the

conclusion of the examination of other banks was, in terms of priority, not

uppermost. If action was not taken, the whole system would get worse.

Recognising this therefore, the question must be asked – Why is CBN not

guaranteeing the customer deposits/funds in the banks?

We leave you to make your own judgment and conclusions. To be continued