Creating wealth from thin air was irresistible and frictionless for a government churning out dollar bills. In a globalization-led international division of labor, while China led the world in industrial production, US led in the production of the dollars.
But with the ease to produce dollars in exchange for foreign goods and services, came temptations to issue negative-value debt dollar, especially when meeting debts and trade deficits made that inevitable.
Maintaining this dollar de facto reserve currency monopoly, high oil prices were needed for nations to keep a religious faith with petrodollar. With such dollar imperium, evacuating inflation-targeting and negative-value debt dollar seemed to have no difficulty, especially as Wall Street and (the Fed) Federal Reserve System were helped by Bank for International Settlement (BIS) in manipulating global stock markets and money supply.
With unprecedented deindustrialization and job losses, came the problem of meeting growing shortfalls in government revenues, especially when that was happening at a time of sky-rocketing military and social spending. In such dwindling revenue situation, attracting foreign money to finance vast US deficit spending became a matter of life-and-death. So, China not only exported goods to US, it also financed America’s consumptions as well as its numerous wars around the world, including the trillion dollar Iraqi and Afghanistan wars.
But it reached a point, keeping foreign money coming required raising interest rates, especially as euro currency seemed to be threatening dollar’s reserve currency monopoly. Here, US government found itself in a perilous situation: Don’t raise interest rates and stop inflow of foreign money; raise interest rates and ignite economic nuclear bomb.
Notwithstanding America’s high unemployment, crushing credit card and mortgage debt burdens (standing at 290% GDP), coupled with the killer oil prices that drained household income, dropping the bomb would have further devastated the economy, to say the least. Not having any other better option, the Fed had to drop the game-changing bomb anyway.
Immediately the disastrous effects manifested. Not only that millions of defaulters were foreclosed. For millions who lost their homes, losing their credits too meant full-membership in the already overcrowded US unemployment and bankruptcy markets.
On October 9, 2008 with Wall Street on fire, came chain-reactions that quickly brought the global financial economy on its knees. Trillions of dollars were erased from the global stock markets and with unprecedented institutional and corporate insolvencies worldwide accompanying it, quickly the global economy frozen got completely frozen, dragging global oil prices along. Salvaging the situation, governments around the world rushed in with equally unprecedented public money in bailing out their financial institutions, particularly banks.
By setting aside $13.9 trillion, US government hoped that besides putting out the fire and rebuilding Wall Street, it would have cleaned up the financial institutions’ subprime assets, reduced volatility of banks’ stocks, and then fully restarted America’s economy. But in this effort to fully restore liquidity in the US illiquid economy, the Fed had no option but to transform itself from “lender of last resort” to “lender of only resort” and the “buyer of last resort.”
For eurozone governments, mitigating the crisis and restarting credits they injected 2.7 trillion euro into eurozone banks. Removing troubled assets from British banks, 850 billion pounds was injected into banks by the government. China, with over $3.4 trillion foreign currency reserves war-chest, pouring hundreds of billions of dollars into its banks was done with much ease. So, bailing out banks became commonplace around the world.
Not fully linked to the overleveraged and overstretched complex subprime mortgaged-led crisis, were Nigerian financial institutions shielded from the global crisis? Plummeted oil prices as a result of Wall Street-led financial crisis, which the economy was fully linked to, Nigerian banks couldn’t have escaped the contagion, more so with most of their assets concentrated in oil trading/marketing companies.
With stock market dropping 66% (from N13.5 trillion to N4.6 trillion, losing unheard-of N8.9 trillion), coupled with $15 billion flight from the market by 419 foreign portfolio investors, who did so in search of arbitrage outside Nigeria, why shouldn’t banks’ bloated stock values be eroded?
Also, if recalling their margin loans witnessed unprecedented defaults, why shouldn’t the big hole created in banks’ balance sheets put the banks in such grave situation?
As worrisome as external shocks were, the effects of poor corporate governance practices, absence of sound macro-prudential guidelines, de-marketing, accounting frauds and media cover-ups, coupled with regulatory lax, were more troubling for banks continued existence.
It was this badly rundown banking industry that Sanusi Lamido Sanusi had to inherit on June 3, 2009 when he became the CBN Governor.
Now, let’s put ourselves in Sanusi’s position. Just appointed the country’s number one banker at such a troubling time for Nigerian banks; at a time when the entire financial sector was bleeding to death, when banks were fraud-ridden, and when banks as well as the capital market were fully in the hands of financial hoodlums, what would you’ve done?
Would you have joined the status quo since there’s little you could do given the prevailing situation? Or would do, as Sanusi did, in your determination to fully clean-up and reposition the banks, be ready to step on the toes of so many powerful bankers and their politician friends?
But for former chief executive officer of First Bank (Nigeria’s oldest and biggest bank), turning around the banks was more of a personal challenge for a man who knew what the industry had degenerated into, and the grave consequences it would unleash on the entire economy should it be allowed to just continue.
In my next article I will fully examine all the options on the table the governor had to choose from; and whether all actions he took were appropriate or not. In examining most of the controversies most of decisions he made have generated so far, particularly the injection of N620 billion into nine banks after routine stress tests conducted by CBN and NDIC officials found them unhealthy, my next article will remind the reader why the CBN in fostering the flow of money and credit to facilitate orderly economic growth, job creation, etc. should, besides enforcing sound risk management, macro-prudential rules, and good corporate governance, being the bankers’ bank, should from time to time provide banks with all the critical fund shock-absorbers they require to perform their duties as the largest providers of credits to the real economy.
In our fractional reserve banking system, where confidence is the determinant factor, and where slightest bad news could easily trigger a run on banks, my next article should endeavor to explore what would have happened to the nine ailing banks had Sanusi gone to our lawmakers for appropriation approval with all publicity it could have generated in our newspapers. In other words, whether not going to the National Assembly was what kept the nine banks still alive today should be discussed.
In the case of the Assets Management Corporation of Nigeria (AMCON), and the blames leveled against its chief executive officer Mr. Mustafa Chike-Obi, besides fully examining AMCON’s funding sources, the special powers it enjoys, its nonperforming loans (NPLs) acquisition strategy, well as its valuation methodology, issues such as the legality of the three nationalized banks, and many more others, will come up in my successive next articles.
Having participated in the recent Ad-hoc Committee on the investigatio
n into the Near Collapse of the Nigerian Capital Market, and also having my personal submissions on page 20 of the controversial House Report, to ensure that Nigerian recognize how much facts were muddled by the Report, I strongly believe that presenting facts as they are supposed to be is what I owe to fellow Nigerians, especially as someone who has spent years researching and writing about financial and money issues.
Let’s agree that if it is fair for the House to blame the present governor for the errors of his predecessors, the present House leadership should be ready to accept blames for the shortsighted oversights demonstrated by their predecessors during the ravaging financial crisis between 2007 and 2009.
Until my next articles, let’s agree with Deng Xiaoping that ”It doesn’t matter whether the cat is black or white, as long as it catches mice.”