Someone was kind enough to forward my blog post yesterday to Mustafa Chike-Obi, AMCON CEO and he said he wanted to explain some of the things I was wrong about in my post.
We had a 17 minute telephone conversation this evening (16/12/12) so this is an update to explain what I learnt after speaking to him. I also have the audited AMCON accounts which I got this evening but I havent had the chance to go through them yet. So this is basically me relaying Mr Chike-Obi’s side of the story and not an analysis of the numbers.
1. Firstly, he didn’t quite like my ‘Grand Theft AMCON’ headline. I tried to explain that it wasn’t necessarily malicious but more a play on the ‘Grand Theft Auto’ video game (he said he knows the game). But he seemed quite upset what looked like me trying to malign him and his staff. That certainly wasnt my intention and he stressed, several times, that he wasnt making any money from doing this.
So I’d like to apologise to him and any AMCON staff who felt offended or maligned by that headline. The issues at stake are far more important than calling people names and this is an issue that doesn’t need any kind of distraction.
2. Now to the meat of the matter – AMCON reported a loss of N2.37trn on Friday. Now according to Mr Chike-Obi, this amount in its entirety was what the government put in the banks to replace depositors’ funds that had simply disappeared. According to him, this money belonged to 10 million depositors. So you had N10,000 in Bank XYZ but due to mismanagement and all sorts, that money was actually no longer there.
Interestingly he did mention that N2trn of that amount belonged to various government agencies. This further reveals the almost incestuous relationship going on between government and the banks. This is also reflected in the fact that govt is the biggest borrower from the banks crowding out the private sector. I have seen stats that show something like N7 out of every N10 in circulation is govt related.
It’s also interesting that govt agencies had N2trn sitting as deposits in the banks. Of course I don’t fully know the composition of these deposits but it would be interesting to know which govt ministries/agencies/departments had these funds in the banks.
Note that this N2.37trn is gone from the point of view of AMCON. It cannot be recovered. So of the N300bn which belonged to private depositors, some of it could be yours, Dear Reader.
3. He said that without this bailout, the problem would have spread to the other banks and everyone would have lost confidence in the entire financial system. I am not a fan of bailouts and I concede that my opposition to them is based a lot on ideology. So I don’t expect to win an argument as to why banks should not have been bailed out. In my own case, I would have refunded depositors but then made sure the banks were wound down completely and made sure they disappear from the financial space. But that’s me and I am certainly not Mr Chike-Obi who had to do face the reality of the situation and deal with it.
He also mentioned that Hallmark Bank which went bust a decade ago still has outstanding items till today to resolve. So in his view it was much better to bail out the banks and allow them to continue regardless of them being zombies.
4. Now I mentioned the N1.6trn ‘acquisition costs’ that he mentioned to the public. It appears I misunderstood or misread his quote to Bloomberg. According to him this is what AMCON paid in total to acquire the loans it did. These loans come to a total value of N3.3trn so AMCON paid, according to him, 40kobo for every N1 loan it bought. Now this is a completely different proposition from what I thought.
Looking at the list of loans, it does look like AMCON paid more than 40% for the loans – the Zenon loan was bought at 64% of the face value by a rough calculation of the numbers. I will admit I havent totalled up the numbers as it has to be done manually from a PDF sheet and the document seems to have a lot of typographical errors. So perhaps some of the loans were bought for much less than 40% of their value such that when the whole portfolio is averaged out, you get the 40% he referred to. I will do this sometime this week and see what the numbers look like.
5. He was very adamant that AMCON was going to make money off these loans eventually. If they did pay 40% for the portfolio of loans they bought, then it will be very hard for them to lose money as with a little bit of aggression and diligence they should be able to recover the money from the debtors. I wish them all the best with this. Any AMCON debtor reading this – be nice and repay what you owe.
6. I also asked him about the N100bn sinking fund which the banks are supposed to contribute to as a way of repaying AMCON. He said this was an annual charge to the banks. He mentioned this was calculated as 50 basis points (0.50%) per annum of the banks’ profits (or revenues, I didn’t hear this part properly. Blame MTN). This charge will go on for 10 – 15 years. Based on this, the numbers start to make some sense – if the banks stump up N100bn every year for 15 years, we get to N1.5trn which is close enough to N1.6trn. Given that this charge is based on profits (or revenues), he fully expects to raise more than N100bn per annum in the coming years as the banks fully recover from the crisis.
This sinking fund is what will be used to finance AMCON’s activities in future making it an independent/stand alone body.
Update: Someone has been in touch to tell me that it is actually 50 basis points of the banks’ assets. Apparently the banks that were ‘clean’ during the crisis do not particularly find this funny but if we are to go by Mr Chike-Obi’s logic, then the failure of one or more banks would have pulled down even clean banks. So even if a bank didn’t receive a bailout, it got an implied bailout. I am guessing this is the logic behind a seemingly crude blanket levy on all banks.
7. He also mentioned that the government has only put in N10bn into AMCON so far (which checks out with what was reported). The rest of the money came from zero coupon bonds, of which N1.7trn is due to be repaid by the end of 2013 at interest rates of around 11%.
I asked how AMCON was planning to repay these loans and if the govt was going to have to step in make good its guarantee. He literally cut me short here and said govt was not going to be needed to come in at all. ‘We have enough cash to pay the loans’ he said. Obviously AMCON doesn’t have N1.7trn sitting somewhere so I am guessing he meant they have enough cash to refinance the loans. He also mentioned they are looking to refinance the bonds to 7 year terms. I suspect that at the time the initial bonds were sold, 2 years was the best they could obtain so they had to take it. Perhaps next year investors will be willing to take a longer term view.
So who are the investors who put up the money for these bonds? It is not immediately clear but what is clear is that the CBN is prominent as a source of funding for AMCON. Without beating about the bush, this is straightforward electronic printing of money…not the kind that disappears from NSPMC’s offices. In summary, AMCON needed money to inject into the banks to guarantee depositors funds and buy off non performing loans. The banks in question have accounts with the CBN. CBN wants to ‘invest’ in AMCON to allow it fund the banks. Well, CBN simply ‘prints’ the money and credits the accounts that need to be credited.
You as the innocent reader minding your own business simply bear whatever inflation is caused by increasing the supply of money 🙂 It’s more complicated than this in practice of course.
8. I asked about the seemingly slow pace of recovery of the loans which meant that only N85bn had been recovered so far. According to him, the plan was to recover nothing at all in the first year and then 40% in their second year. So the fact that they managed to recover N85bn means they are slightly ahead of the curve.
9. On a personal note, he was at pains to stress that he wasnt benefitting personally from all this. He went as far as saying he lived a far more comfortable life in America before moving to Nigeria to take this job complete with a smaller residence.
There’s a bigger point to be made about this. There really is no reason to trust anyone who works for the Nigerian govt. I don’t and I will advice anyone that a healthy amount of cynicism is good for you.
BUT are there people who have actually made a sacrifice to serve Nigeria? How do we move away from being cynical and at least listening to what these people have to say? I don’t have the answers to these questions but I do think there are a few good men out there. The only way to find out is to test each person. Mr Chike-Obi was very keen to explain AMCON’s side of the story and stressed there was nothing hidden about what they were doing (I didn’t ask about the rumoured sweetheart deal that Femi Otedola got recently, details of which have not been disclosed). He also extended an invitation to come and look at all their models. I plan to take up this offer when next I’m in Lagos.
I think young people, in order to be taken seriously, need to engage with these things. Some of it is mind numbingly dull and arcane even for finance professionals. But what needs to be done needs to be done. The AMCON numbers almost look as if there is a seperate economy going on somewhere in Nigeria made up of debtors and Central Bankers coming to their rescue. It is difficult to get excited about it but it is compulsory.
The audited AMCON accounts are below. A good place to start. We are all affected one way or the other by these things. Even if you don’t have money in the banks, you will be affected by whatever inflation is caused by the increased money supply.
There’s also the stink that comes from people getting bailed out for bad behaviour. He mentioned that none of the CEOs who were responsible for running their banks into the ground remains in office today. Fair enough. But what do regular people who can be put out of business by a N20 increase in the cost of diesel think about this? We need to at least begin to put in place a mechanism that ensures that this kind of thing does not happen again.
The UK and US authorities are leading the way with the recently announced G-SIFI (Global Systemically Important Financial Institutions…a fancy name for Too Big To Fail) which seeks to put in place a framework for ensuring that any bank that implodes can be safely and quickly wound down and removed from the system without requiring taxpayer bailouts.
Finally, a recent report by The Economist on the future of banking mentioned that banks in the US these days account for just 30% of lending these days. The rest of the gap is made up of all kinds of financial institutions including online peer-to-peer lenders. I think I like the look of that…the move toward a system that is less reliant on banks. In the long run this is good for everybody as the reputational damage to banks when the public see them being bailed out can never really be quantified.
I will be combing through the accounts in the coming week along with a couple of friends. If you find anything interesting, leave a comment below.