Private mistakes shouldn’t be at public costs
Olusegun Sotola

Last year, the federal government set up the Asset Management Corporation of Nigeria (AMCON). The primary tasks of AMCON are to absorb toxic loans in the banking sector, free them of those toxic assets and position them for eventual take over by willing investors. This has led to asset purchase deal with 21 banks which transferred about N3 trillion non-performing loans to AMCON and consequently extricates banks of the burden of large non-performing loans.

While the idea behind AMCON is laudable, the truth is the financial crisis
that engulfed the nation and the setting up of the body was avoidable.
Many have argued erroneously that the financial crisis epitomizes market
failure. They thereby canvassed for more regulations and government
intervention. However, the financial crisis was not as a result of failure
of inter-play of market forces but regulators’ looking the other ways when they ought to have sanctioned erring players.

Indeed had markets been allowed free hand in the crisis, hard earned
public funds would have been spared. What was obvious is government
intervention in the workings of markets mechanisms, its intention to
achieve a pre determined end coupled with the failure of government
institutions set up to regulate the financial market are the primary
cause.

The Financial Crisis Inquiry Commission (FCIC) set up in the United States to investigate the 2008 Global financial crisis recently made public its findings. The report re-affirms the underlining causes of the crisis to include corporate mismanagement, heedless risk-taking and failure in government regulations. What is worrisome in the report’s findings is the fear that the crisis could happen again. Should this happen, it is not obvious if the world economy can go through similar financial crisis unscathed.

Reports across the world show that at least 33% of the value of global
companies was consumed in the crisis. Also, the global meltdown gulped
$11.9 trillion within the G20 alone. It consequently depressed trade and
led to several protectionist measures in both rich and poor countries.

According to the United Nations Department of Economics and Social Affairs (UNDESA) of the $20 trillion of public funds committed to addressing the crisis over 90% of this was used to defray the losses in the financial sector.

Expectedly, the meltdown created an opportunity for governments to become bigger at the expense of human liberty considering the numbers of take-overs, stimulus packages and establishment of several government agencies. Governments were taking over bBy Olusegun Sotola anks and using the opportunity to wield more power.

However, beyond the usual measures such as giving N620 billion to bailout about-to-be distressed banks and setting up of AMCON, it is instructive to drive the ongoing CBN reforms towards ensuring that taxpayers do not bear the costs of future failure. Making the taxpayers to pay for future bailouts create perverse incentives for other businesses. Moreover it creates collateral damage in medium to long term.

The implication of injection of public fund is that private mistakes are
being underwritten at public costs. CEOs and managements in privately
managed business outfits are handsomely paid to handle risks. When they fail to do so, their failure ought not to be at public expense. Besides, using tax earnings to help privately managed business entities is not consistent with any model of development. It saps up funds that could have go elsewhere particularly infrastructure. When government throws money into private businesses, it freezes resources that can be used elsewhere.

It would be economic disaster for Nigeria to experience a double dip
financial crisis. Three years after the crisis one is not sure the crisis
has bottomed out. Stock prices are yet to pick up. There are unconfirmed reports of possible bank failure despite the bailout. The public perception has not actually been gauged since the reforms commenced.

Moreover, the fragility of the Nigerian financial system does not give
much assurance that financial crisis of similar nature will easily be
contained unless the apex bank is ready to step on toes.

The pertinent issue is to ensure that crisis of that magnitude does not
re-occur. As noted in the United States’ Financial Crisis Inquiry
Commission’s report, “the common notion that no one could have seen it
coming means the crisis will surely happen again”. This is because if no
one could see it coming, nothing could be done to avert it. The fact is
there are usually signs. Crisis only occurs when regulatory authorities
are insensitive to the warning signals.

Warning signs were ominous in Nigeria but neglected. The financial crisis
was epitomized by crashes in stock prices that were obviously manipulated.

Banks were declaring profit that was at variance with economic indices.
CEOs and bank directors were competing for social and political space with politicians and receiving dubious ratings by several agencies. The public now knows better. These facts support the conclusion reached by the Financial Crisis Inquiry Commission set up in the U.S that the financial crisis was preventable and totally avoidable had the regulators heed the warning signs.

A careful examination of events preceding the crisis in the financial
sector showed that unethical camaraderie existed between the regulators and the operators. This weakened the ability of regulator to be effective.

This means officials at the apex bank and other regulatory agencies should avoid being captured by industry they are meant to supervise. Above all, regulatory authorities should avoid the temptation to skew the rules in favour of any of the player.

Many will argue that the financial sector instability recently experienced
in Nigeria was a mere contagion that had some parts of the world not
experienced cash crunch Nigeria may not have experience the meltdown. An objective assessment of the situation in the pre-banking crisis era revealed the crisis is a matter of time. The CBN and other regulators should be on the lookout for miraculous profit or performance report that is at variance with other economic indices.

The financial sector is central to the development of Nigeria. It is
reasonable for the CBN to look out for possible threats to financial
stability and stem such out before they slip out of hand. Private sector
bailout is expensive and largely economically unsustainable in the longer
term. Bailout is a road in which taxpayers are unwilling to travel again.

A cost-effective strategy is for regulators to quickly recognize threats
and promptly address them. This is one surest way to nip in the bud
possible future crisis.

• Sotola is a Research Fellow with the Initiative for Public Policy
Analysis, a public policy think-tank based in Lagos.