She stated some very salient points in her announcement, first that it has become necessary to clear the debt overhang in the economy, particularly as it relates to the stock market.
Secondly, the forbearance would remove the heavy burden on stockbrokers and allow them to fully re-enter and re-invest in the market and make the market more vibrant. And thirdly, this was in furtherance of the AMCON’s clean up of the banking sector.
She stated further that it was necessary to wipe off the debt overhangs in the capital market, as this was dampening market activity. These reasons made it clear that there was public interest involved.
The N22 billion forbearance for stockbrokers drew the most attention from the public. Some commentators talked out rightly out of point, because they had no real understanding. Even till date, many are yet to comprehend the proper context of what has transpired. It seem like stockbrokers have been made to take what Americans call ‘a boom rap,’ that is, answer for what you are not responsible for. Or as a friend of mine would say, taking Panadol (pain killer) for someone else’s headache.
Part of the misunderstanding came from the fact that the public thought the N22 billion was to be given to stockbrokers. Not many knew that this write off was inevitable. There was no way AMCON or the banks would collect this balance between the loans AMCON bought from the banks and the value of securities underlying them. It was also in the interest of AMCON that a closure was brought to this. Without a final closure to the matter many, court cases were looming ahead.
For those who are not familiar with how margin accounts work, a margin account for a stockbroker is a trading line with a bank that demands that the broker makes a margin contribution, typically about 30 percent to 50 percent of the value of the facility. The terms usually call for the bank to take control of the traded account, which will be marked to market daily and compared with the debt on the brokers’ account.
What this means is that you value the portfolio of stocks held in the account priced with the most current prices of stocks and compare with the balance on the loan account. Any shortfall is immediately advised to the broker in what is called a “margin call.” The broker has 24 hours to make up this shortfall or stocks will be sold to bring it in line. The control to do this rest with the banks, from the first day of the contract.
For all intends and purposes, the facility was a joint account and was meant to be self-liquidating. The lack of understanding of what a margin account is, for many participants including banks, was the reason for the blunder. Many lenders including the banks confused margin lending with stock purchase loans.
A stock purchase loan is where you approach a bank to give you a loan to buy a specific stock or a portfolio of securities. This is a specific obligation that you will be required to pay as contracted like any other loan.
The margin loan is a way for the market to have liquidity while giving the banks opportunity to benefit from the rapid trading velocity of the stock market. Interest is earned on the turnover without taking any risk. It is like the bank putting its money out through traders to make COT (cost of turnover) daily without really taking any risk. The 30 percent margin on the loan was the protection. It was the bank’s business to make sure the stockbroker does not trade over the line and expose the bank to risk.
It was the failure in this regard, which should rightfully be blamed on the banks instead of stockbrokers who are now made to bear the brunt of what essentially was a system failure. This was also why at the National Assembly hearings on the AMCON Bill, stockbrokers opposed the section that attempted to class all borrowers as bad debtors. They argued that their positions were different. Banks either accept that they have made a mistake and write off the loans and take over the under lying securities or restructure the loan into a long-term loan backed by these assets until they regain value.