Share market, punters, greed and other foibles

I have been reading with some amusements various articles; blood curdling calls for martial law, unspecified legal action, street protests, call for disgorgements of ill-gotten profits from the recent calamities of the Dhaka Stock Exchange. I see friends like Afsan Chowdhury calling some of the participant scammers and the government prima facie agreeing that this is all a bad thing, nay, a terrible thing, a blot on the country.

I read the report and could not divine as to what exactly was so illegal, wrong or terrible. My suspicion is that is everyone is reacting to the fact that the punters who were late to the party lost their shorts.

Those of us who are a little bit familiar with the history of financial developments in the Western world beg to differ with the prevailing hang — the scammers sentiment. Strongly! What happened at Dhaka Exchange is a sudden bursting of a mini bubble that touched a lot of market neophytes because they really have not learnt to calibrate their greed. Let me dispense with the niceties and assert that the rocket fuel that propels all uncontrolled asset bubbles is GREED!

I call the share market participants punters because essentially a stock exchange serves dual function; one of capital formation for the companies that sell shares to the public directly (first time and subsequently) and two as a giant casino for the stock player, er, punters! The punters trade the shares many times over on rumours, gossip, fear, insider knowledge but the capital does not get to the corporation rather the money over and above the share offer price simply stays in the shark pool that the punters swim in.

What makes a bubble? First and foremost, easy credit and liquidity. Bangladesh has experienced a 6.5 percent GDP growth for a string of years and there happens to be little slushy sound of excess cash in the bowels of the economy looking for a home. Second thing propels a bubble is somewhat irrational belief that a particular asset will go up and up without any relationship to its productive value to the society.

In Dhaka Stock Exchange, these took the forms of listed companies. A classic example of a bubble is, of course, the Tulip Mania in Holland in 1630's. At the height of Tulip Mania in 1637, a single Tulip bulb sold for 10 times the annual wage of a skilled craftsman and in another case 12 acres of farm land was exchanged for a single bulb! More recently, the US housing bubble almost brought the whole Western economic system to its knees. Wall Street, the financial centre of the known universe has ceased to exist in its pre-2008 form. Ireland has been saddled with 100 year of debt and poverty because of uncontrolled bubble worship and tiny Iceland has been set back by scores of years in terms of its development and economic growth.

So, why is all that relevant to Bangladesh? Because it is the same animal but this time speaking Bengali and talking about martial law. The Irish government has impoverished the whole country for generations to come first by making credit easy and then by trying to rescue the imprudent banks, the punters of the Irish economy. Dhaka Stock Exchange has tiny influence on the real economy of Bangladesh as of now (this may change in the future), so any intervention — judicial or otherwise — will have the effect of socialising the risks of the punters without helping the capital formation part.

Helping the punters will create the oft quoted "moral hazard" which the economists define as ability to take risks and enjoy the benefits but not to face the losses. An intervention to save the punters will create a high tolerance for risks because the losses are apt to be socialised. This is an unwise meddling in the market economy. We desperately need the capital markets to function well and creating moral hazard is totally detrimental to creating a healthy capital market. Besides governments are never better than private enterprises when it comes to execution.

Let the punters twist from the hooks of their own greed. Let them go work in the factories but do absolutely nothing to rescue them. If history is any guide there will be more punters in the near future and they will all think that they have the magic formula to achieve the Nirvana of untold riches and some will achieve that but most will be out there throwing their shoes at any one connected to the SEC, the Central Bank and other entities that simply cannot control either asset prices bubbles or the underlying greed that cause them.

It is virtually impossible to stop bubble formation and their eventual collapse because the underlying engine – greed — is simply uncontrollable. The following are the things Bangladesh government and Securities Commission can do to avert or at least minimise such crashes and crisis in the future:

* Require better disclosure of financial, legal and business information for each company listed on the Exchange. Have the companies publish the prospectus in plain language and with generally understandable ratios and key attributes.

* Disclose all loans and outstanding debts of the majority shareholders of each company and its officers. This will allow people to see if there are guys running companies who have a history of running fast and loss with money and promises.

* Disclose all litigations against the company and its officers and make that information available on the internet.

* Make sure that the underwriters have solid credentials and cash reserve.

As you can see I am advocating more transparency. As they say, sunshine is the best disinfectant. There are many technical things that one can do or even follow the regulatory framework of the US, UK or Singapore. But the net effect may be that Dhaka Stock Exchange will become moribund. A regulatory framework is evolutionary and forms over time based on the market conditions, social ethos and risk tolerance capability of the society as a whole.

Leave the market alone, losses and gains, pains and pleasures, the whole shebang! The gains and losses of the stock exchange is the essential nature of the beast. Any tinkering with the essential DNA is counterproductive and dangerous.

So, in summary stop talking about the whole sordid mess. Let the punters take their lump of coal and use the turmoil and bloodletting to build a more solid foundation for a great capital market in Dhaka.

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Kayes Ahmed lives in Boulder, Colorado, USA with his three dogs. He runs a small yet global apparel and design business based in Boulder.