@ paddylo,

If a Nigerian can outbid any foreigner he should do so. . . once a company is PLC, national boundaries dissipate. . . . nothing stops a foreign company from purchasing shares in a Nigerian company presently. . .

paddy_lo:

The CBN should collaborate with the NSE and SEC to deepen our financial markets like i suggest above

paddy_lo:


I believe the banks gave stockbrokers loans on margin to play in the overall markets too. . .and they also could not pay when the market went down

Now as for banks buying back their own stock. . .that means they were effectivily long the market

To hedge that risky exposure(which is what banks like jpmorgan do everyday),they could have bought simple NSE 30 index puts(assuming it was available)

Designing products like this is very simple and even i can advise the CBN on how to set it up(or they can get Goldman sachs or South African banks)

they are binary options that are not too complex. . .and will help deepen our markets. . IMHO

I do hear what you are saying regarding deepening the financial markets with products to enable hedging and the likes, but the overriding preoccupation of the banks should not be these highly risky activities, especially in a developing country like Nigeria with such huge underdeveloped potential in the real sector. 

The advanced countries where these activities are rampant have huge, highly developed and adequately funded agricultural, industrial and manufacturing sectors which are the backbone of their economies. They also have an excessive amounts of capital in their economies that can be said to be at the best idle. If these countries had underdeveloped agricultural/manufacturing/industrial sectors that required substantial funding, trust me their governments would not allow their financial institutions to gamble away the limited capital their banks etc have, but would ensure that the real sectors are adequately funded first, then they can do ‘as they like’ with the remaining funds.  In fact, I would like to believe that this new found romance with derivatives etc in the western world is borne out of a system saturated with excess capital, running out of avenues to invest their funds in the real economy with the vault keys in the hands of unashamedly greedy bankers.

We do not have that luxury in Nigeria, the financial markets are cannibalising the limited funds that are available within the system on sustaining and maintaining itself by engaging in ‘socially useless activities’ at the expense of the real sector. This short-termism is an ideology that has been deeply ingrained into the Nigerian psyche, especially in the financial sector and would probably require a combined concerted economic, political, medical and religious effort to change.

No one really understands these instruments fully and the underlining pricing/financial models behind them including those that designed them. The Black-Scholes model is a prime example – it does work most of the time, but a singular event can trigger a reversal in all the gains and even more that that has accrued over a period of time – these activities lead to an unending and expensive self-created boom and bust financial loop. One of the inventors of this model Myron Scholes and Robert Merton (Scholes and Merton both 1997 Nobel Prize winners in Economics) were involved in a company called Long-Term Capital Management (a hedge fund) set up in 1994, which was initially very successful with returns approaching 50% a year initially, but in 1998 this company lost almost $5 billion and had to be bailed out by the Federal Reserve Bank (US govt.)! - this was to avoid a systemic risk and potential catastrophic failure of the financial system as a whole because they were seen as ‘royalty’ in the market at that time and had a lot of complex counter-party arrangements, since everyone wanted to do business with a company that had one of the inventors of the Black-Scholes model and another renowned economist as principals. The company eventually shut down in 2000. Goldman Sachs’s  CEO at that time lost his job over this episode.

Back to the Nigerian situation, the focus should be the real economy, the financial industry should channel its energy to helping develop this as a first priority, they can still continue to play the markets all they like as a second or third priority.
.

paddy_lo:

Let the banks be free to do what bankers do,and everyone will be better off for it
if not there can be no growth or jobs. . .[/b][/color]

The above would be the case if Nigeria were as economically sophisticated as some developed countries. The banks were given a free hand to do what bankers do, as it were, and we all see the results of that - the bankers simply ruined their own industry.

The mess created by the bankers is now being cleaned up by the CBN with restructuring and other methods. Many of these CBN activities are necessary first steps before we can get to your utopia.

see our problem is that we dont let the markets work like it should in Nigeria. . .
These banks should be underwriting 2 or 3 IPOs every week,
the IPOs will form new companies who will raise funds and invest in power,or agric or whatever industry u want. .
If they survive,they make money for the enterprenuers and new investors. . if not they die
and the next IPO is then funded. .

Is this your prescription for our financial market?

Banks underwriting 2-3 IPOs a week on whose orders?
who/what determines the basis for the IPOs and who determines how the funds are appropriated?
in short, i dont see a structure (legal & admin) on ground to deal with such complexities and by the way, how do you intend to deal with the zero confidence level of those who are supposed to buy into such IPOs

This is Nigeria we are talking about bro

Right step in the right direction.

@ paddy_lo

What linkages are you talking about here? Even when the financial markets were awash with cash was there any linkage to the real sector? You mentioned the AMC buying up toxic assets of N2trillion, what sectors of the economy did this sink into? Was it not to a large extent the same financial sector itself? The stock market at its height had about 70% of its weighting as banking stock! Is that not lunacy?? 

Secondly no one is forcing banks to lend - it is their job to lend. They are not lending because they do not have a clue about medium and long term bank lending and don't have the models in place to handle such. A banker who in probably 8 years has never given out a loan of longer than 9 months to suddenly start working on 5 - 15 year lending projects? This will require a thorough re-orientation and re-education process.

On the IPO issue, that has already been adequately dealt with above. But would just add; how do these companies get to the stage of doing IPOs in the first place? Wont they require funds to start up and operate for a while before they can be taken seriously? There is risk involved in any bank lending, but the question then is what is the risk profile of the real sector compare to the markets, especially derivatives and trading.

LTCM were into derivatives and hedging activities - which you have been going on about in your last few posts, so how can that not be what we are talking about?

We do need a robust financial market no doubt, one that would support the economy in general in assessing capital, not one that is playing and trading with itself.

[size=14pt]The Hausa / Fulani has lost so many gallant men (Yaradua’s hommies ) to this regime.

Sacking the CBN Governor by the Jonathan regime would be one step too far and tempting faith; in fact the regime would put an abrupt end to her functionality and legitimacy as a Government

This regime would have nailed her own coffin. Is not that Sanusi is any good, the casualty of the Hausa / Fulani stock has being insurmountable, caution had to be revoked and reigned in. [/size]