"It is generally agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of stock exchanges." - John Maynard Keynes in his book ‘A Tract on Monetary Reform’ (1923) Book 4, Chapter 12, Section 6, pg. 159

 

In past posts, I’ve argued that the cycle of negativity from regulators can’t help the market no matter the good intention driving it, especially if the objective is to promote the re-emergence of a virile and functioning financial market for Nigeria that can hold its place in a new world economy.


Today I'm turning my attention to the reactions from the market place about the real and imagined unintended consequences and wider ramifications of the statement attributed to the CBN Governor, Mr. Sanusi Lamido Sanusi, on Saturday, July 10, 2010 in Asaba where he had presented a paper on "The Economy In Perspective: Consolidating The Gains of The Banking Sector Reforms" and for which the press coverage had presented the market in such a prose that it necessitated a rebuttal within 24hours from the apex regulator’s communication team.


Nigerian newspapers and online newswires (local and international) had picked up on aspects of the comments made during the session on Saturday, July 10, 2010 with screaming headlines causing maximum panic and apprehension to the investment community, depositors, bankers, stockbrokers, regulators, investment professionals, market operators, analysts, and the general public.


Catching our breadth

Would it have made a big difference if the CBN Governor had used the phrase "bankers took unnecessary risk" in place of the word gamble; or if he had used the term "poorly supervised capital market" instead of casino?


By the way, we had used the terminology as an analogy with reference to what transpired then just as it has been used by other responsible persons hoping to draw a link with what must change. The Director General of the Securities & Exchange Commission had said publicly that “it was unfortunate that people thought that the stock market was a one directional casino that never traded down”.


At the same forum, a serious minded financial journalist had also expressed concerns with the state of affairs describing the Nigerian Capital Market (NCM) regulatory framework as an analogue regulator in a digital market to much acclaim by the stakeholders present sometime in February 2010.


Symbolisms have always been with us though. Prior to the new DG’s appointment, the Musa El-Faki led SEC had on February 14, 2008 or thereabout made allegations against six firms it termed as enjoying 'unprecedented capital appreciation in their stock prices' - AP Plc, Afroil Plc (a decided case), Big Treat Plc, Capoil Plc, First Aluminium Plc, and IPWA Plc (page 52 of the Proshare NCM 2009 Report - http://www.proshareng.com/reports/view.php?id=1940). This in itself generated a huge media exposure owing to the exchanges between the NSE and SEC.


Not just this once, the Director General/CEO of the Nigerian Stock Exchange, Dr. Ndi Okereke-Onyuike had openly complained of price manipulation and had taken decisive steps to address this sore but usual infraction in any capital market – a development that occurred with such frequency that led to a situation where market players themselves likened the aftermath of actions in the capital market to that of a 'casino'.


In general, the thinking then and now was such that an open admission of the rot we had dug ourselves into would amount to a first step in the cleansing process that was needed to rebuild the market, laying the foundation for a rescue and reform agenda needed from the money and capital markets – as a bridge to what must happen to avoid such a nomenclature being ascribed to this important institution of wealth creation in the economy.


Thus, the CBN Governor’s statement should naturally amount to nothing more than an acknowledgment of our reality as at that time. The reaction that took place subsequent to the Saturday publication must therefore be located somewhere other than in what the CBN Governor said, and how he said it - but perhaps in how often he repeated the same cliché, the stature of his office, and concern about the intended purpose.


So what was it SLS was reported to have said?

I will rely on the exact wordings as used by a leading newspaper, in its cover page story reproduced here http://www.proshareng.com/news/11316


Immediate deductions to be made from the publication and rebuttal

The rebuttal’s basic assumption is that the news report was deliberately misrepresented for sensationalism. It then goes on to place in 'proper context' the exact news – as it was used. There are a few reasons why this position, justified as it is, should be placed in context and the matter dealt with once and for all.


First, the CBN should by now have realised that in a digital age, the CBN Governors’ speech is not an opinion but a commentary/appraisal from a policy maker. Thus, any commentary from the CBN Governor would naturally make front cover of the business and mainstream news platforms – making such comments as alluded to in the rebuttal, makes it all the more juicer. CBN however could have helped its course if such a speech was loaded on its site and sent to all opinion platforms after the speech; thus mitigating any misrepresentation or out of context quote – his explanatory comments such as reported would have therefore been naturally discounted by the investing and general public (and in most cases go unreported given the context it was used).

 
Second, the CBN Governor has developed a reputation or created a perception as a very passionate and principled leader who believes very strongly in the country and the vision of a financial market place founded on trust, integrity and an application of best practices – values which those who have benefited from the system cannot and would not permit to be enthroned and as such; any mis-step or statement open to ‘misrepresentation’ becomes an "open game". The examples of such abound and perhaps it is time to reflect on this ‘need to say my own side of the story’.


Third, the barrage of messages from the CBN has equally played right into the hands of those who seek to use signals, innuendos and mis-steps to defend a viewpoint; or at the other end of a spectrum, validate a CBN action post-script-fed conspiracy theory on the ‘true’ motives behind the interventions. Ironically, no one intelligent enough to discern and articulate the dimensions of events leading up to the intervention will invalidate the diagnosis and basis for intervention by the CBN Governor. The problem it seems lies with the prognosis and execution.


Fourth, the CBN ought to be aware of a phenomenon in the Nigerian media referred to as “pack journalism” where correspondents on a particular desk/beat work closely with each other in such a way that if one is unable to attend an event due to commitments, he is able to report the same event ‘as if he were there’- no different from how agency reports or press releases are used. This must have accounted for the ‘syndicated’ nature of the story. This is all the more serious when one recognises that the nature of financial reporting has over the years taken on a similar outlook as that for ‘political-type news’; driven in the main by the need to catch the attention of the reader who is easily uninterested in the regular headlines that means less and less to him/her daily.


The position taken by the CBN on the ‘need to always respond’ has always been that the CBN needed to take the fight to those who sought to control public opinion about the interventions. This is true, at least from a media standpoint – as the forces gathered against such change as proposed by the CBN Governor is truly formidable and well funded; and as a responsible public officer, all he has is the weight of his office to make his case to the public – using platforms and opportunities to make his case.


Yet, the mixed deployment of cases – one which requires the defence of the policy on the one hand, and on the other hand; requiring a definition or redefinition of the argument in the public space has often led to unintended consequences spiked by mixed messages i.e. that of a fighter, a radical as against a reformer measured in approach and context but driven by a nationalist zeal to elevate his country’s profile.


Despite this, the opposition remains formidable and continues to grow in strength and renewed fervour (exemplified by the intensity of activities such as the paid advertorials and commentaries on the man, his message, ministry and mission), and designed to do one thing – highlight his strategy and approach as fraught with pitfalls and un-intended consequences – a key example of which played out on Saturday, July 10, 2010.


The Real Message Lost (in editorial judgement, perception and motive)

Sadly, lost in all these are the more cogent quotes from the CBN Governor, which if people paid attention to would have revealed the true message he sought to communicate. For the avoidance of doubt I would reproduce the quote (with specific emphasis on the highlighted phrases) from the same source that did not impress the newspaper houses but which spoke directly to intent, message and context of the Governor:

He said, “Although financial crisis is an integral part of every capitalist system, banks should stop preventing depositors and investors from technical and fundamental analysis and investors’ sophistication.


“We had a banking system in the past that was exposed to the capital market but without guidelines and regulatory system on lending margin. In the stock market, what people think about is how it will go up. But this market, this casino, is what those entrusted with depositors’ money gamble with.


"A stock market is a very funny casino. Don‘t entrust your money with gamblers. CBN rules and regulations around the banks cannot be compromised. We are not just doing the sanctioning; we are combing the banks for excellence. The banks must stop creating the impression that they have values when in the actual sense they are dying."


To salvage the situation, Sanusi advocated for a Bank Use Act, to overcome what he described as “Insurance Business and Fixed Income Bubble,” adding that the current and saving accounts of depositors would no longer be allowed for use in executing private businesses.

 
Getting down to brass tacks – Gambling and Casino as an Emotion Trigger

What is the difference between gambling and banking therefore? How does one explain the analogy of a casino with the stock exchange outside John Maynard Keynes’ interpretation?


To differentiate between the two, we could therefore start by defining them. Comparisons are often made between the two activities, but not having seen where the terms were explicitly defined, a re-course to the business dictionary would be the only outcome.


I encourage you to try to define in your own words the terms 'gambling' and 'investing' on your own and compare what you get with what we found in the seminal work by Tom Murcko, CEO, InvestorGuide.com on the distinction between the terminologies where he concluded by referring to Benjamin Graham (author of The Intelligent investor: a book of practical counsel) for further emphasis.


In The Intelligent Investor, Benjamin Graham had said: "The distinction between investment and speculation in common stocks has always been a useful one and its disappearance is a cause for concern. We have often said that Wall Street as an institution would be well advised to reinstate this distinction and to emphasize it in all dealings with the public. Otherwise the stock exchanges may some day be blamed for heavy speculative losses, which those who suffered them had not been properly warned against."


He continued: "Outright speculation is neither illegal, immoral, nor (for most people) fattening to the pocketbook …. There is intelligent speculation as there is intelligent investing. The difference lies in the outcomes and steps taking to mitigate same”.


These appear to be the founding basis for the submissions of the CBN Governor on the market – where he made the connection between intelligent investing and wild speculation done in concert with unsuspecting customers - and I suspect that his use of the term 'gambling' had nothing to do with talking down the market but describing a conduct not beneficial to investors.


It is necessary for us all to get over this debate and move on the serious arguments about the linkages needed to be established between monetary and fiscal policies; a shift from the past using a rear view mirror; and definitely a focus on creating incentives and generating enthusiasm for the market reforms needed.


I am looking forward to such a healthy debate in the weeks ahead with SLS playing a key role; as we redefine the engagement rules between the CBN, other regulators, market players, analysts, investors, the general public and the much needed media.


Olufemi AWOYEMI, FCA
CEO, Proshare Nigeria Limited