Stock market crisis: What to do?

The Financial Express (FE) of October 19, 2011 published a report on the recommendations of a premier intelligence agency of our country on how to overcome the present stock market crisis. It was not clear from the FE report if the government sought these recommendations. Nevertheless, the issues covered in the report are of considerable significance to the Bangladesh economy and the economic policies of the government. Therefore, it is only appropriate that these recommendations be analyzed and discussed in the media. Before getting into details of the intelligence agency's report, it would be useful to briefly discuss how the present stock market crisis emerged and what has happened in the market since then. It is also important to remember that a similar crisis happened in 1996 and after investigation several companies and individuals were charged with wrong doing but the case did not see the light of the day. Media reports suggest that some of the same individuals who were implicated in the 1996 crisis are also involved in bringing about the present crisis. After the democratically elected government took office, a group of individuals and companies started to manipulate prices in the stock market by either propagating false information or by deliberate manipulation of stock prices by false trades, or by trading between themselves. This was done to lure in the uninformed investors so that the artificially overvalued shares could be dumped on the uninformed investor who were then left holding the bag with useless paper. All this happened under the watchful eye of the Securities and Exchange Commission (SEC), the body that is responsible for ensuring the integrity of the market. The Ibrahim Committee found evidence to indict several SEC commissioners and their wives for directly benefiting from this scam. In other words, the umpire who should have ensured that all stock market participants play the game by the prescribed rules got involved in ripping off the uninformed investor by helping the cheaters cheat. What is the magnitude of this grand larceny? Media reports seem to suggest that billions of takas were swindled from small investors who were duped into investing in shares that were artificially overvalued. Consider the case of a major business house that was having serious debt service problems before the democratic government came to office and even had difficulties meeting their payroll expenses. Through the proceeds of the share market scam, this business house not only cleared off all their outstanding payments, their principals acquired majority shares in a private bank and became members of the bank's board. Furthermore, the same group went on a major acquisition spree buying off airlines and leasing new airplanes, buying sick companies, buying land, etc. One of the principals of this business house now sits on the Board of the Dhaka Stock Exchange! The intelligence agency report cites the lack of investors' confidence as a major reason for the present crisis. This is indeed correct but the report does not mention anything on how to rebuild investors' confidence, which is also understandable because no one measure, can restore investors' confidence. Investors' confidence eventually depends on a whole host of factors the most important being that the market is efficient in the strong form meaning that the value of a stock captures all publicly and privately held information. In other words, market prices can be trusted. Price manipulation cannot take place if the market is efficient. This is the second time in a decade where predators have manipulated prices to cheat small investors. They got away with the scam the first time, and given the reluctance of the government to make the Ibrahim Probe Report public, let alone act upon it, most people have resigned to fact that the scam stars will go scot-free this time as well. This feeling is reinforced further by the fact when television news show the principal actors behind the scam (as mentioned in the Ibrahim Report) conferring with the finance minister and other high officials of the government and SEC regarding the remedies in the stock market. As of now all the remedies seem to be directed at propping up the market. It is interesting to note that the Intelligence Agency Report in its recommendations states that action against scam stars should not be taken with any urgency in order to prevent further shocks in the market. This is baffling. If the people who engineered this crisis purely for greed and selfish reasons are not taken to task now, how will the market have any faith and hence confidence that stock prices are not manipulated? The intelligence agency's recommendation to go slow against the perpetrators not only undermines the integrity of the market, it is against the law of the land. One can argue that if the perpetrators of the 1996 stock market scam were properly prosecuted, then the current crisis would not have occurred. The current crisis occurred because the perpetrators acted with impunity because they know that eventually nothing will happen to them. This particular recommendation is troublesome for another reason. Why would an intelligence agency that is responsible for national security recommend going slow against the perpetrators of the stock market crisis? This is not a security issue. Could it be that this is yet one more bureaucratic rationale that is being created to let the perpetrators off the hook? What about the small investors who have lost everything and are demonstrating in the streets of Dhaka? Do the state and the government have no responsibility towards them? Confidence building is a long process and it shall take time. It won't happen in a day or a month or even a year. No one action shall restore investors' confidence. Investors have to believe that that they cannot be defrauded when they invest in the stock market and that is not a quick process. At the present time, the authorities have done nothing that even begins to inspire confidence. Since the market crash, every effort by the government has been to prop up the market and result has been exactly what all propping up efforts achieve - nothing. In the month of JuneJuly, the government spent about Taka 2.5 billion (250 crores) to prop up the market and within a week the market again went on a slide. Good public funds were squandered to cover up the misdeeds of the few and if more public money is spent in propping up market, the result shall be the same. The reason is simple. Stocks are claims on the underlying cash flowearnings of the company. If a firm's stock has doubled in a certain period, then it must be true that its earnings prospects of the firm have doubled as well within the same period, all other things being the same. When the stock market was making its bull run, did the earnings estimate of listed companies also increase? It couldn't have because we know that the global economy is going through a tough period and exports prospects could not have been so rosy. At the same time, our country did not experience a sudden rise in income that could be a reason for a significant increase in demand. The bull run was engineered to defraud the uninformed investors. To be concluded