With the new millennium, came western deindustrialization and financialization, popularized as the ”New Economy.” As gamblers’ haven, the new economy reduced government to mere spectator in a game determined by the supremacy of the market forces. So synonymous with casino capitalism, that the new economy moved the casino capital of the world from Las Vegas to Wall Street.
But behind this jamboree consumerism, were millions of factory workers displaced as factories fled to fast emerging economies like China and India. Even the presence of mass joblessness did not stop everyone from wanting to take part in what’s also known as paper economy. Besides encouraging every homeowner (including the unemployed) to go about refinancing their mortgages as well as to load their homes with more and more debts, the new economy in promoting a kind of ‘free lunch’ for everyone, loaded citizens with unprecedented personal credit card debts.
Creating wealth from thin air became as irresistible and frictionless as government churning out dollar bills nonstop. By doing so, the new economy had turned globalization into an international economic system, where China was leading the world in industrial production, while the US, leading in dollar production. But with dollar increasingly the only product the US exported, came the temptation of an endless issuance of negative-value debt dollar, especially in an effort to meet domestic debts and trade deficits.
Besides using petrodollar to keep the dollar as the world’s de facto reserve currency, evacuating inflation-targeting and negative-value debt dollar also required some advanced financial engineering work by both the Wall Street and the Federal Reserve System. Using Eurodollar to control critical industrial investments, it too was another dollar evacuative channel. It also required constantly manipulating and crashing stock markets around the world. That’s the only way to ensure that nations around the world kept a kind of religious faith with the dollar.
Little wonder the Gramm–Leach–Bliley Act of 1999 came to free US banks from the ”Glass–Steagall Act,” which since 1933 prohibited banks from participating in financial speculation, including securities and insurance services. Invariably, the new economy needed to break all the regulatory shields that protected depositors from bank immoderation, particularly assumption of excessive liabilities and engaging in accounting excesses such as books cooking.
In other words, now synonymous with self-regulation, corporate window dressing, highest bidder financial ratings, and management excesses, the new economy easily co-opted government turning Wall Street into financial criminals’ hideout. With the new economy overleveraging and overstretching risks, it’s understandable why tracing and evaluating mortgage financing became so difficult and complex that a single complex mortgage could involve as many actors as mortgage brokers, specialized originators, the securitizers and their due diligence firms, managing agents and trading desks, as well as investors, insurances, and providers of over-the-counter repo funding.
Having borrowed heavily to meet shortfalls in government tax revenue and bloated social spending, it came to the point the US economy could no longer continue to attract foreign money to finance government deficits without raising interest rates. But raising interest rates at a time when high oil prices already drained household income coupled with high mortgage obligations (after having extracted so much equity from their homes) and suffocating credit card debt overload exceeding 290% GDP, couldn’t be more devastating. Forcing millions of US households homeless and penniless as result of evictions and foreclosures, the interwoven new economy placed the economy on a time-bomb.
That time-bomb eventually exploded on October 9, 2008. That day, a devastating financial tsunami destroying Wall Street’s trillions of dollars, not only accelerated institutional and corporate insolvencies nationwide, but quickly turned itself into a global financial fiasco with stock markets around the world melting down. The frozen US consumer wealth soon dragged other economies along, with annualized GDP plunging 14.4% in Germany, 15.2% in Japan, 7.4% in the UK, and 9.8% in the euro zone. It couldn’t more devastating for leading US industrial giants such as GE, GM, IBM, and Ford. Not only did Wall Street gambling burn them beyond recognition, with the party over, they came to the discovery of having also lost their hard earned industrial leads to foreign competitors.
Shocked by the level of devastation, government after government had to massively inject direct cash into banks, all with the hope to stop bleeding banks which was already freezing domestic loans. Setting aside $13.9 trillion to strengthen Wall Street soon turned the Fed from “lender of last resort” to both “lender of only resort” and the “buyer of last resort.” But to fully restore order and reduce banks’ stock price volatility as a result of illiquid assets, a ”Troubled Asset Relief Program” (TARP) was quickly created by US government with the goal to purchase toxic assets and equity from financial institutions.
Besides the US, mitigating the banking crisis and the accompanying credit squeeze, government after government had to intervene with massive injection of bailout money. In England, cleaning up banks’ balance sheets led government to inject 850 pounds of taxpayers’ money into the country’s banks via preferred stock. Eurozone governments on their joint intervention injected 2.7 trillion euro to bailout the zone’s banks. With $3.4 trillion in foreign currency reserves, Chinese government had no difficulty throwing hundreds of billions of dollars at its banks in effort to recapitalize them.
But besides pouring taxpayers’ money to bail out the financial institutions, governments around the world also saw the urgency to tighten up all the regulatory lapses, including banks’ unrestrained creation of credit, inaccuracies of financial reporting, and culture of dishonesty. Besides broader standards replacing narrower rules, more frequent reporting was recognized as one of the ways to reduce the obsession with end-of-quarter numbers. Also, increased insider whistle-blower incentives, especially by those whose intent was never to benefit from it, was recognized to reduce corporate excesses.
Like other globalized economies, Nigeria couldn’t escape the global financial fiasco. While excessive exposure to global oil market and local oil industries made the collapse of global oil prices in late-2008 to create deep holes in the balance sheets of banks in Nigeria, alarming was the discovery that most banks’ assets were fraudulently overvalued and overpriced to now becoming junk. But it was the discovery of toxic assets of nine banks alone totaling N1.5 trillion that made restructuring of the banking industry, starting with the immediate removal of bank chiefs, urgent. Thanks to the patriotic boldness of the CBN Governor, Mr. Sanusi L. Sanusi, the overhauling of the country’s financial system wasted no time.
Getting banks rid of these toxic assets from their balance sheets, the CBN also saw the urgency for the creation of a body run by professionals and experts who specialized in toxic assets management. So, the Assets Management Corporation of Nigeria (AMCON) became into being with that mandate. Since its takeoff in late 2010, AMCON has succeeded not only in purchasing illiquid and difficult-to-value bank assets of banks but also given the banks a new breathe of life to the extent they now lend again. As the inspector-general of toxic assets, Mr. Mustafa Chike-Obi has succeeded in ensuring that AMCON helped the banks regain their much eroded public confidence, since such confidence is so crucial to their universal fractional banking activities.
In the next part of this write-up, I will thoroughly examine AMCON’s challenges ahead, with p
articular emphasis on toxic assets evaluation and pricing.