Letters
The downturn of the Colombo Stock Market should be seriously viewed
by the Government on a priority basis due to the following:
1. This would undermine the success of the Government in the
liberation of the country and the massive development projects
undertaken.
2. Create a bad image internationally for the Government.
3. Thousands of small stock investors have incurred substantial
losses and may lose further and this may lead to anger that the
Government had done nothing in this regard. It should be noted there are
nearly 350,000 investors.
4. Politically damaging in terms of votes and this is now used by the
opposition parties as a weapon to attack the Government.
The continuous decline of stock market has no valid reasons
considering the fact Sri Lanka is least affected from the financial
turmoil due to the policies adopted by your Government. When many
development countries would be in recession, our country is expected to
record a growth of 6 per cent in 2009.
Role played by Securities and Exchange Commission and Colombo Stock
Exchange
These institutions have been set up primarily to promote the Stock
Market and they have tragically failed in their duties. The members have
behaved as if everything is hunky dorey. This is the worst crisis and we
request your honour to ascertain whether the above institutions held any
single emergency meeting and called an official meeting of stock
brokering companies to discuss the crisis and take corrective measures
to arrest the decline. It would be a firm no.
Perhaps the above institutions may feel that by issuing a statement
occasionally to the press and appearing in television discussions they
have discharged their duties fully. Very sad indeed. It is an eye opener
for our country how the Presidents and Prime Ministers of powerful
countries fully devoted their time to resolve the crisis even by
unorthodox methods, such as buying equities of commercial banks.
Emergency steps to be taken
(1) Major reason for the continued decline is due to forced selling
of shares held by investors who have exceeded their margin of 50 per
cent. It is natural if the decline continued for a long period, even a
customer with a margin of very comfortable 10 per cent would be over 50
per cent and his shares too would be sold at a huge loss.
This trend should be immediately arrested by increasing the margin
limit to 70 per cent and forced selling at 75 per cent and this may lead
to improvement of the index and even an investor with a margin of for
instance 70 per cent may drop to 55 per cent to 60 per cent.
Unfortunately regulatory bodies had failed to understand this simple
solution either due to ignorance or arrogant attitude "let the market
take care of its problem". Since the market dropped substantially and
ensuring forced selling at 75 per cent strictly the risk to brokering
firms is non existent.
(2) Encourage immediately ETF/EPF, Bank of Ceylon Pension Fund, and
Government banks, to invest more in the stock market and at current
price level would give them substantial returns in medium to long term.
(3) Regulatory bodies should not take action which creates fear
psychosis among stock brokers.
For instance recent circular requesting brokering companies to submit
fortnight returns regarding details of investors over 50 per cent
margin, despite its good intention of monitoring also had led to panic
selling. We feel this matter has not been professionally handled.
(4) Call a meeting by the shareholders of controlling interests of
major quoted companies and persuade to increase their holding by at
least 1 per cent from the market as against large parcels.
(5) There had been long delays in giving important approvals from CSE,
and SEC, for some companies.
We firmly believe safeguarding the stock market is very important and
should not be any further entrusted to the regulatory bodies and we
would be very appreciative if your honour could arrange a meeting with
the undersigned, urgently, to explain matters further so that at least
(1) and (2) solutions referred to above could be implemented.
A. Ratnaweera, Rajagiriya.
V. Perera, Nawala.
Shanthi Silva, Ratmalana.
T. RUSIRIPALA
Former Chairman, Bank of Ceylon, National Gem and
Jewellery Authority
Following the latest phase of the Global Financial Crisis which took
a dramatic turn in mid-September with the collapse of the Wall Street,
American Insurance Group and the asset destruction process experienced
by the banking sector, OECD projects a certain recession for both US and
Europe in 2009.
Japanese and Korean economies are expected to stagnate. ILO predicts
world unemployment to rise by an estimated 20 mn while the number of
working poor earning less than a dollar a day will rise by 40 mn and
those at 2 dollars a day by more than 100 mn.
The model of growth that prevailed particularly in the US during the
past decade and the OECD economies, was based on debt-financed
consumption and investment with excessive leveraging of the private
sector instead of one based on the real economy with wage increases
reflecting productivity growth. Central Banks and Governments failed to
foresee the growing bubble in the US mortgage market which eventually
imploded in early 2007. The operations in the financial circle during
the period were marked and founded on the belief that economic growth
could be achieved by spreading the risks in order to ultimately mitigate
risks and reduce the cost of capital.
In October 2008, world's stock markets faced an unprecedented
decline, the largest in a single week since the Great Crash of 1929.
Governor Bank of England said, "it is difficult to exaggerate the
severity and importance of those events, not since the beginning of the
first world war has our banking system been so close to collapse."
Top executives in Banks are paid enormous amounts of money in base
salary, bonuses in both cash and shares, pension provision and other
perks and benefits. Even banks that hit major problems, to the extent of
being taken over and broken up - like ABN AMRO and Fortis - continued to
pay senior executives huge salaries and arrange big pay offs.
Whether paid in Dollars, Euros, Pounds Sterling or Rupees, it seems
that success or failure results in a big pay day for bank CEOs.
The finance whiz kids who thought they had conquered risk, stand
exposed as the people who took risks with other people's lives. Millions
of workers- and thousands in the finance sector- face an insecure future
as a direct result of the chaos. While governments bail out the system,
it is ordinary workers who take the risk and are likely to lose the
most.
As for the hedge, fund managers and the other architects of the
complex financial instruments that have now imploded; they may lose a
few millions and even their job, but they have salted away enough booty
from the good years to retire comfortably. The Nobel Prize-winning
economist Joseph Stiglitz (2008) has pointed out: banks are reporting
record losses, only months after their executives walked off with record
bonuses as their reward.
Despite the outcry against the bonus culture that encourages reckless
behaviour and built in incentives for irresponsible risk taking, many of
the culprits are either walking away with huge pay-offs or are quietly
preparing to ignore public opinion and governmental views and continue
to pay themselves enormous bonuses.
Economists describe the situation where CEOs collect bonuses worth
millions while the taxpayer picks up the bill for clearing up the mess
as - a new form of public-private partnership, one in which the public
shoulders all the risk, and the private sector gets all the profit.
Governments now demand that there is no reward for failure at top
executive level. This message apparently is not getting through.
Companies lower performance targets in times of hardship, thereby
ensuring no loss of bonus!
In may 2008, HSBC sought shareholder approval to reduce performance
targets for executive long term incentive plan bonuses and increased
total remuneration. The UK regulatory body, the Financial Services
Authority (FSA) (2008), in a letter to Bank CEOs noted,
There is widespread concern that inappropriate remuneration schemes,
particularly but not exclusively in the areas of investment banking and
trading, may have contributed to the present market crisis. It would
appear that in many cases the remuneration structures of firms may have
been inconsistent with sound risk management. It is possible that they
frequently give incentives to staff to pursue risky policies,
undermining the impact of systems designed to control risk, to the
detriment of shareholders and other stakeholders, including depositors,
creditors and ultimately tax-payers.
Although these authorities encourage firms to review their
compensation policies, they will most certainly have to take tougher
action than that if they wish to have any effect on the bonus culture of
the finance sector. There is of course , a huge difference in both the
scale and the nature of bonuses paid to ordinary bank staff and the top
executives. The former rely on relatively small amounts of bonus to
augment their salary and they obviously have no control over bank
policy.
The latter on the other hand created the crisis and then profited
from it while everybody else tries to avoid the fallout of executive
incompetence, greed and irresponsibility. The worsening economic
situation may force cuts in bonuses anyway.
Central Banks the world over including ours should focus on this
aspect more seriously to avoid further deterioration in the financial
sector. |
