The capital market public hearing fiasco

The exchange of verbal missiles between the Chairman of the House Committee on Capital Market, Herman Hembe, and the Director-General, Securities and Exchange Commission, Ms. Arunma Oteh, which the country (indeed the world), has witnessed in the last couple of weeks could be viewed in one of two ways: either it could be seen as a shameless grandstanding by two bruised egos; or, a testament to open, transparent governance in Nigeria. Transparency cannot (nor should it) preclude the occasional washing of the proverbial dirty linen in public. For me, though, I think it is a lot more serious than any of the above propositions. Imagine for one moment, that the entire fabric of Lagos, Kano, Port Harcourt and Aba was razed to the ground by a man-made earthquake, and we were only left with Abuja and Ibadan as the only centres of economic activity in a country of 150 million people. How terrifying would that be? Now, imagine what happened to our capital market in 2009. The market capitalisation went down from a total of N13.5tr to N4.6tr, one-third of what it used to be, within a space of ten months, with no corresponding reduction in the overall number of people whose livelihood depend on it. This is as bad as having 2/3 of the fabric of our economic centres razed to the ground in one fell swoop. The stock market crash was not just a crash; it was a big train wreck.

A market crash of such magnitude is normally a once-in-a-generation occurrence, requiring an equally once-in-a-generation overhaul of the system to prevent its recurrence. The fact that this has not been forthcoming from our political leaders is a lamentable dereliction of duty starting with the president to the most junior legislator in the National Assembly. A market crash is not something talked about inside taxis and in beer parlours. People do not readily appreciate the relevance of it to their lives unless you explain to them that it means small businesses being starved of funds as loans become frozen; pensioners having their live savings wiped out; companies laying off their employees; unemployment, especially youth unemployment, growing exponentially; foreign investment drying up and suicide rates among the most vulnerable investors rising among other things. This list is by no means exhaustive, but suffice it to say that the consequences are dire. The Governor of the Central Bank of Nigeria, Mallam Lamido Sanusi, did intervene upon assuming office in 2009, by bailing out a number of “distressed banks”, that were most exposed to the major losses in the capital market. Sanusi, it must be stressed, did the right thing in the wrong way though. He erred, in my view, by treating the bank bailout as a straight forward finance issue requiring, in his words, “no appropriation” from the National Assembly. It was anything but straight forward. Bailing out of any organisation with such huge public expenditure (over N600bn) is always a political question requiring a clear and unambiguous political mandate prior to such action.

Having said that, Sanusi’s unfortunate usurpation of parliamentary powers now seems a mute point considering the shenanigans from the people inside the Securities and Exchange Commission, Nigerian Stock Exchange, and the Capital Market Committee of the House of Representatives. Let me deal quickly with the substance of the issues at hand and (time permitting), touch on the ‘mundane’ issues of Oteh’s behaviour and judgment. I will also explain why any allegation of impropriety levelled against the head of the SEC can never be seen as ‘mundane’. It is a very onerous position, requiring the stringent discretion on the part of the post-holder. First, on the regulatory and accountability issues arising from the crash, a market crash of this magnitude is, without doubt, evidence of regulatory failures, since market regulations are, in main, always two to three steps behind the main events. There is a limit to how much anticipatory regulatory provisions any system can put in place since regulations are based on empirical evidence, and quite rightly so. I do not think, however, that buying back stocks is the right answer for our government to undertake. Taxpayers money should not be expended to ‘save’ investors who have seen the value of their stocks virtually wiped out. It is often asked of a potential investor thinking of a high yield on an investment whether he/she wants to “eat big” or “sleep well”. You cannot have both. Prior to the Nigerian capital market crash, many got so engrossed in the former that they are no longer able to do the latter. For others, it was the other way round. With the level of public money injected into the banks already, they should be compelled to extend credits to small businesses. Furthermore, rather than buying stocks or pumping money (quantitative easing) into the market, government should raise capital expenditure and clamp down on waste, and corruption as a preliminary step towards restoring confidence in the market.

In addition to the above, it might be in order to review the powers of the regulators to see how they can be strengthened. Companies that fail to comply with the regulator’s rules on filing and reporting should be severely punished and held out as an example for others. Speculative buying and market manipulation are serious offences that distort the market. Where there is a clear evidence of abuse of this kind, it should be treated with the utmost severe criminal sanction. It might also be possible to consider how the CBN could act in concert with the SEC to monitor critical movement of stocks with the view to mounting a counter-measure to blunt aggressive short-selling and other speculative flows in the market. This has its limits, of course, but it ought to be understood by anyone thinking of a mercenary raid on our stock exchange that they may gain something, but they may also lose big. As part of a major overhaul of the system, it may be necessary to have our own ‘Dodd-Frank’ in Nigeria. The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Barack Obama in July 2010, following a similar crash in the United States of America. It is the most comprehensive reform since the Great Depression in 1929.

Finally, on the issue of bribery allegations. First, it was right that Hembe stepped down from his position as the chairman of the investigating committee. Ms Oteh should also be relieved of her position as she appears to be a tainted figure. Capital market matters are national security matters, equally important as national intelligence matters in the presidency. Second, any future ethical concerns a DG of the SEC may have against any lawmaker in future should be reported straight to the House Ethics Committee and not wait until summoned to a hearing. The floor of the National Assembly should not be turned into an arena for mud-slinging. Also, hiring bank employees who are themselves players in the capital market was a gross error of judgment on Oteh’s part. She misses the point by saying they did not take part in any regulatory matters. That is completely irrelevant. She has given the appearance of impropriety by hiring those bankers, and that is what counts. Hembe has promised to “go to court” to “clear” his name. The only court that should matter to him right now is the court of public opinion, which smells a rat in the labyrinths of the National Assembly.

Oke, PhD, a specialist in International Capital Markets Law, Financial Regulations and Economic Crime, wrote in from London via [email protected]