As laudable as the Asset Management Company of Nigeria (AMCON) may be in taking off the burden of impaired assets from banks, concerns are being raised on a number of issues. Experts say AMCON which is currently in abeyance in the absence of President Goodluck Jonathan’s signature may spend months in courts sorting out legal issues concerning transparent pricing of toxic assets, straightening conditions for issuing the proposed $5 billion bond, setting rules that will guide against favouritism, and ensuring the electioneering campaign frenzy does not impair its workability.

Currently, sources close to the presidency say there are indications that some of Jonathan legal advisors are concerned about some of the provisions of the bill. According to Damina Advisors, also known as Frontier Market Specialists, the Central Bank of Nigeria (CBN’s) “bold gambit will raise several technical and legal issues and the AMCON management may possibly spend their first months in as many courts defending the new entity, as they will search bank vaults looking for loan collateral documents”.

It gave kudos to the central bank in that, while most of the Organisation for Economic Co-operation Development (OECD) countries such as the United States, Russia and United Kingdom, who contemporaneously underwent a banking crisis, have primarily chosen to adopt expansionary monetary policies, easy fiscal regimes (stimulus packages and the like) and other larger structural reforms of the financial system, none has really attempted to tackle the hard issue of how to get the bad loans off the balance sheets of the local banks, which Nigeria is making a serious attempt to do.

The fear is that despite wide discretionary powers given to AMCON, it is not clear how it will seek to establish a “fair market price” for the impaired assets. The apprehension is heightened in that former United States Secretary of the Treasury Hank Paulson apparently abandoned a similar American effort in late 2008 citing an inability to establish market prices for the toxic subprime loans. “It is not entirely clear how the AMCON bill will succeed where Paulson failed”, said Frontier Market Specialists.

But Okechukwu Unegbu, former president of the Chartered Institute of Bankers of Nigeria (CIBN), told BusinessDay the issue of fixing the price of toxic assets could be resolved by going back to what the prices stood at as at 14th August 2009 when CBN appointed managers took over the management of the banks and the former management sacked.

Unegbu said AMCON should fix the price of the toxic asset at plus or minus five percent of what the price of the shares stood at that time. Frontier Market Specialists however noted that important provisions of the bill give AMCON a broad mandate to hire sub-managers and other financial advisors and consultants to assist in the effort of ‘establishing a market price.’ The specialists also believe that the inventory of non-performing loans which central bank Governor Lamido Sanusi requested from every bank when he took office in June 2009 will likely assist AMCON to narrow the universe from which to commence its initial toxic asset purchases.

To Wale Abe, chief executive officer of Financial Market Dealers Association of Nigeria (FMDA), there will certainly be a guideline that will address the issue of appropriate pricing. He however advocated for dialogue between AMCON and stakeholders, particularly in the capital market in coming out with guidelines that will not be controversial.

Other unresolved issues surrounding the AMCON, according to Frontier Market Specialists, relate to how much, with what frequency and under what conditions it may issue the 7-year government guaranteed bonds it needs to finance its purchases of the bad assets.

How will this issuance affect the already existing local bond market? Will investors arbitrage away from other existing sovereign guaranteed bonds in favour of the AMCON bonds – since essentially they are both backed by the Federal Government? Is the Nigerian bond market liquid enough to absorb both large tranches of AMCON and private sector bonds? Further, a proposed “call” provision included in the AMCON bill may make its bonds less desirable than other government bonds, which may not have ‘call provisions.’ A “sinking fund” provision is has been proposed to deal with this issue, but it is not clear whether this sinking fund will be established – and with what money. The ‘specialists’ recalled that one criticism levelled against some similar state sponsored ‘bad banks’ in Indonesia and Thailand after the Asian economic crisis of the late 1990s was that some engaged in favouritism in their purchase of the various impaired assets.

It said, this dormant issue of favouritism will become acute in Nigeria if the macroeconomic environment deteriorates by year-end or the price of oil collapses during the life of the AMCON.

“Such negative macro events will escalate the tally of bad loans and decrease the appetite for AMCON bonds, necessitating a rationalization of the limited funds raised. The rationalization will put AMCON in a position to pick and choose favourites from among the tons of bad loans submitted for purchase by various competing banks”, said Frontier Market Specialists.

It added that the upcoming 2011 election may also create a turbulent atmosphere inimical to the proper sober functioning of the AMCON. The confluence of inadequate capital in the banking system, wide discretion given to AMCON, an essentially one-party state and a frenzied campaign (which may see the sitting president strongly challenged by a consensus northern Muslim candidate) may very well introduce favouritisms and ruling party nepotisms to the AMCON process as happened in Indonesia and Thailand