Bank Regulators in Africa in the wake of the financial meltdown: When Ignorance is Bliss.

While answering questions from a panel of journalists about the risk exposure of Financial Institutions (F.I) in Cameroun and Countries of the BEAC region to the financial crisis, the finance minister of Cameroon said with such bravado that the risk was non-existant. He further explained that there was no risk whatsoever because banks in the BEAC zone were not allowed to invest in all those toxic assets that brought major financial institutions down.

However, he failed to mention the exposure of the Central Bank to the same toxic assets that translated in a huge loss in million of Euros. But the explanation given by the Finance Minister was applauded as some kind of foresighting of the upcoming trouble. That type of Monday morning quarterbacking is somewhat intriguing because it makes it seems that  Banks in the BEAC Zone and elsewhere in the SSA region were not allowed to invest in those types of vehicles because the regulating body (COBAC) already knew they were toxic (highly doubtful). Or was it simply because the regulators could not understand them to begin with, since those complex financial instruments required a high level of monitoring and risk assessment structures ?

In hindsight, we can all appreciate financial institutions all over the World that while able to comprehend and have access to some very complex financial instruments, chose very carefully when and what to invest in.  But I cannot co-sign ignorance being used as a sign of wisdom when it’s obvious African F.I didn’t participate in the feast because the regulators couldn’t figure out what the hell was on the menu.

Is it possible to be pro-markets while being anti stock exchanges when it comes to some developing economies?

The price of a stock is a function of multiple factors among which the markets participants play a major part. When the participants are panicking and dumping stocks, prices crumble and it becomes inevitable to request a “bailout” especially if the tumbling companies are a vital part of the economy or major component of GDP.

When it comes to Africa, let’s consider the example of any country with it’s own currency, a vibrant private sector, and a decent local consumption level. If there was to be a major economic downgrade, what will happen then is that, their central bank will issue bonds to help sustain the crisis. Local and foreign institutional investors in the best scenario will purchase that debt. The debt from that country has a market value only because investors foresee a chance to recoup their money ! (It’s that simple).

Now, let’s take the example of an African country in the CFA zone. Lately, they have been pushing hard for the public to embrace and show more enthusiasm towards the creation/extension of their local stock exchanges. If any of these countries major indexes or leading publicly traded corporations were ever to tumble for whatever reason (market manip, naked option shorting, etc..), their entire economic system would collapse (Iceland). Not “might” but “will” collapse.

In the aftermath, no financial institution will be crazy enough to purchase bonds from those states to help them refinance and re-structure their growing debt, simply because there’s no constant local demand to speak of (mostly). So, the only other option will be to hand the key of the country to Bretton Woods and let them run it as they see fit. But in most of those countries, Bretton Woods already got those keys !

Bottom line: Let’s make sure the foundation is solid and the safeguards are there, before moving forward.

It’s funny how things often turn out.

You know all those sayings people have:  how only a leader shines in time of crisis. How it’s harder to be different when everyone else is doing the exact same thing. How daring to go against the herd always reveal a winner etc… If those sayings apply to the current situation (crisis) and the financial sector in Emerging Countries (E.M), we could have new leaders at the end. Given how some financial companies have performed under the tough business environment in E.M, shouldn’t they be the new models ?

Indeed, what I’ve actually found out is that some E.M deserve more credit than they get for staying put and sticking to their accounting practices when everyone else adjusted theirs ! The change and modifications that were allowed under new accounting rules created a mess more complex than complexity itself (!). There is not a firm out there capable to effectively deconstruct what’s what: where the junk assets are, who they belong to, how much they’re worth. Sometimes, the underlying asset attached is just non-existent !

Don’t get me wrong, before trying to nullify my remarks by reminding me of all the structural differences between the West and E.M, all I’m saying is all should be fair in warfare. If the top executives and leaders in management are picked from their OUTSTANDING performance despite the hostile environment, then the best are no longer in the West ! Bottom line.

I’m just saying…

THERE IS NOW A REAL RISK OF A POTENTIAL BANK RUN SOMEWHERE IN THE U.S BANKING SYSTEM !!!

In the Afermath of the Indymac Bank collapse on Friday, many fear that some banks might witness a run for deposits as customers reach to get their savings out in fear of further banks collapses. This is due to the fact that many banking clients were not aware that the term “FDIC Insured” only meant: “Up to $100K “. The remaining part cannot be recovered (unless the bank assets sale generates enough liquidity). This leaves us with a spike in the general public looking for more information about their savings, checkings or money-market accounts. It’s interesting to know for example that if you have multiple accounts in one bank with each holding less than 100k, you also need to make sure that the total amount in all those accounts (combined) with that particular institution is less or equal to $100K. Otherwise, your money is still not safe (that is, if anything was to happen) !

It doesn’t help that the Fed and other banking regulators now admit that there is a potential for more potential banking failures in the horizon but the FDIC would not be able to handle all of’em at the same time.

The next 72 hours would prove to be crucial as regional banks would be first in line to reassure not only depositors but investors as well.