Shenanigans of no consequence

Why was the National Assembly's Finance Committee hearing, held on Friday, to probe the stock market crisis of March 2005, closed to the media? Parliamentary debates and hearings are supposed to be open to public. Closed hearings are only conducted if the discussion involves national security or defence.
One may surmise that the decision to hold close door hearing must have come from the treasury side. Perhaps it stemmed from the fear that the former Chairman of Securities and Exchange Commission, Dr Tariq Hasan, might have unsavoury things to reveal which could be an embarrassment for the government. This fear was unfounded.
Whatever the former SECP boss had to say was already public knowledge, through his letter, written to the Prime Minister, upon his removal. Copies of the letter were circulated to the President, the Chief Justice of Pakistan, the NAB Chairman, etc, and duly published in the media (including this newspaper), earlier in the year.
If he had something more to further embarrass the government - he was and is at liberty to do so. His observations about diluting the margin requirements, Continuous Fund System (CFS) and an increase in the level of speculation in the exchange, since his removal were adequately addressed by the officials at hearing.
In any event, the opposition members on the committee, would not lose an opportunity to score points in the media on the conclusion of the hearing. This is exactly what happened last Friday. Government's resolute defence put across so cogently by the Advisor on Finance, Dr Salman Shah, was lost in the screaming headlines reporting the Press conferences, held later in the day, by the opposition members and Dr Tariq Hasan himself.
It is quite clear that the investors in very large numbers did indeed lose millions on the bourses in March 2005. This loss was not because of any sudden economic downturn; or a collapse of a large listed company; or a fraud of any description. It was, in fact, simply due to the failure to carry out settlement of voluminous deals on a bloated market.
The crisis was a direct consequence of issuance of changes in rules which were communicated by the Regulator (SECP) to the management of Karachi Stock Exchange, as part of the on-going reform process to demutualise the bourses. If any of the brokers (and some of them are major investors as well) made a windfall then too it was because of the conditions created by the weakness in regulations governing the exchanges that were approved by SECP and adopted by the three bourses.
Reforms need to be undertaken comprehensively in an integrated manner to give good results. Our banking reforms provide an excellent example where the government, the regulator (SBP) and the stakeholders (banks) worked hand-in-hand to strengthen the balance sheets of banks. Similarly, capital market reforms were initiated to bring transparency in bourses and create a level playing field and aiming to make brokers (members) more accountable to the investors and the regulator.
Khalid Mirza, the SECP Chairman prior Dr Hasan, also ran into obstacles and did battle with the big brokers. He too had a bone to pick and complained about their access to the corridors of power that the big brokers generally enjoyed in this country. However, Mirza's understanding of the way the bourses functioned was definitely much better than Dr Hasan's.
As a skillful administrator, Mirza was also successful in organising a motivated team at the SECP which unfortunately the lonely lawyer, Dr Hasan, could not retain. His demeanour and interpersonal skills were a handicap. Instead of carrying the capital reform process forward in a paced manner, Dr Hasan got entangled in a mess.
He first tried to merge the three exchanges (Karachi, Lahore and Islamabad) as part of the demutualisation programme. Naturally, he faced stiff resistance from the Karachi based members. Simultaneously, he decided to phase out carry-over trade (COT), ie 'Badla' financing, replacing it with margin financing, with SBP promising help. Instead of making good on the promise, SBP put a cap on the banks' exposure to the capital market. That forced the banks active on the bourses to pull back.
In the Ministry of Finance Dr Hasan was involved in legal work undertaken to develop the Financial Sector Reforms package. He was expected to be well-versed in the regulatory framework in the banking system.
The State Bank of Pakistan, can no longer force the banks to provide credit to any particular segment of borrowers. It was naïve on his part to expect the banks would step forward and make up the liquidity drain emerging from the phasing out of Badla financing. Most banks even today do not have the trained manpower or the monitoring software system in place for working margin financing system.
Mirza, in his term, had already largely addressed the risks involved in 'Badla' financing. It was no more possible for lenders to suddenly withdraw funding. However, one risk remained. Borrowers were conducting transactions prior to arrangement of funding. They could face difficulties when the interest rates rose to an abnormally high level. Obviously, the good lawyer Hasan was depending on his Commissioner (Securities) Shahid Ghaffar, a former Managing Director of KSE, and his successor, Moin Fudda, for guidance and assistance.
Ghaffar's former Boss Khalid Mirza is on record saying "Shahid Ghaffar has a bee in his bonnet when it comes to Badla - even though it is the best suited financial instrument for our market." Both Ghaffar and Fudda had seen at close quarters the mechanism employed by the big brokers to manipulate the system to their advantage.
Unfortunately, the duo was soon joined by another big opponent of Badla lending, Yasin Lakhani, upon his election as Chairman of KSE. The trio had strong views which converged when it came to Badla and the big brokers and diverged when it came to demutualisation. His stubbornness to change a wrong decision also proved a stumbling block in resolving the issues facing the exchanges.
Prime Minister Shaukat Aziz's lieutenants (Dr Salman Shah and Omar Ayub) had to play the role of pacifier when the March crisis erupted and small investors suffered due to anachronistic relationship between the regulatees and the regulator.
Since October 1999, Dr Tariq Hasan was familiar with the thinking of his boss, Finance Minister Shaukat Aziz.
The minister's lines of communication with all major players in the market place were well known to him. He had witnessed at close quarters the way the Finance Minister handled systemic risks to the financial system - whether in banking or the capital market. Ministers are not regulators, nor are bureaucrats. They are expected to talk to the stakeholders and try to obtain opposing view-points prior to decision making, instead of taking decisions in isolation. As far as Dr Salman Shah and Omar Ayub are concerned, they were only assisting their boss who holds the portfolio of finance.
The allegations made by Dr Hasan lose weight when he says that he resigned in August, 2005. His resignation was not accepted, but why was he then fired in February, 2006. He could have walked out in August - after all no one had shackled him to the post. He continues to be a Commissioner in the SECP even now - after his removal from chairmanship. The critique put forth by him through a 'white paper' at this late stage is of no consequence. It only provides an opportunity to the opposition to lambast the government without substantiation or proof.