Indeed, some of the accounts were opened with banks bearing the cost one hundred percent during the public offerings ostensibly to meet up with the initial hypes that their offerings would naturally be oversubscribed.
Consequently, the firms are finding it difficult to play by the rules of the game which requires servicing of the accounts at intervals, since most of the clients have little or no initial stake in the transactions. But analysts say that the present predicament which has resulted in loss of over N1 trillion was as a result of their insatiable appetite for floats and lack of adequate knowledge of the market, among others.Specifically, BusinessDay gathered that the firms wanted quick harvest from the soaring share prices then and consequently exposed themselves to the inherent dangers of speculating with borrowed money. Most banks in particular jettisoned the rules of the game and gave out large sums of money to friends, staff, other corporate organisations and in some cases used fronts to purchase the stocks.
Margin loan is a facility from a broker/bank to a client that essentially functions as a margin account for purchase of shares. It is a brokerage account in which the broker levels the customer’s cash to purchase securities.
If the value of the account drops below a certain level due to drop in the share prices, the account holder will be required to deposit more cash or sell a portion of the stock. A margin is a leverage which means that both gains and losses are amplified depending on the market prices of the shares.
Giving a graphic description of the situation, a top banker said: “Margin trading is essentially borrowing money from a broker or bank to purchase stocks. But what really happened in this case was the fact that it was the banks themselves that approached some of their friends to come for facilities to purchase their shares to avoid either being under subscribed or just to give false impression in the market that their shares are doing well since the “forces of supply and demand were at work. Margin trading is extremely risky just as buying on margins is definitely for everybody. But you know in our situation here, it is the end that justifies the means.
“You should not blame the banks alone because there is no way you expect them to be watching while some other institutions are making money because at the end of the day it is the balance sheet that matters.
“It is unfortunate that we are learning our lessons in this hard way, but I can assure you that it will be over one day.â€
According to a financial analysts, Biodun Adedipe, it is as a result of lack of due diligence on the part of the banks that brought them into this mess. Acknowledging that the losses were colossal, Adedipe said that the banks were actually new to it but were eager to do business just like the investors.
The managing director, Personal Trust Savings and Loans Limited, Anthony Onwuye, said the problem started when the banks were in a rush to make money by using short term funds to purchase shares without proper analysis of the situation.
According to Onwuye, what was expected from the banks was to actually find out the kind of stocks that were being purchased with the loans.
“In a situation where speculative money was used to purchase IPOs of dead companies that were just being repackaged or new issues without enough information about these companies left much to be desired,†Onwuye said.
The president, Value Fronteira Limited, Martins Oluba, was of the view that the banks got their fingers burnt because they were capitalising on the favourable monetary policy to offer margin facilities
Oluba advised banks to be wary of latching on any opportunity to make quick money, while at the same time advising the government to handle the issue of fiscal and monetary policies with care.