The BISX Crisis

First Published: 2001-11-13

BISX has now joined the list of individuals and commercial enterprises seeking “taxpayer” hand-outs. That is, if BISX gets the infusion of cash it seeks – some 2 million dollars – the taxpayer will pay; including those who exercised their judgement not to participate in BISX, should the treasury decide to shield BISX from its decision failures.

Intelligent persons may agree or disagree on whether the conditions were right to have founded a stock Exchange in the Bahamas; such persons may agree or not that there is no broad based investment culture in the Bahamas that appreciates a stock portfolio as an investment vehicle, sufficiently, to sustain a Stock Exchange under the current arrangements; such persons may agree to disagree over whether public institutions in the Bahamas have created, or possess the credibility to create the necessary pre-texts in a capital poor society – broadly speaking – lacking confident consumption or consumption backed by an ability to produce or by savings and investments. And even where saving is practiced it is done so as long-term hoarding; either through term-deposits or unconventional methods, such as asue.

As such, persons may disagree on the particulars, but no one can reasonably disagree that the recent requests for cash infusions constitutes a significant failure.

What is particularly galling in the public commentary made by the principals of BISX concerning their need for cash is that they took no responsibility for their failures…in their most recent public comments speaking of themselves in the third person. They offered no secondary business plan publicly, even as they requested public funds, and seemed to have drawn the share price of B150,000 for BISX equity from their own perceptions of their need to survive rather than any credible assessment of their market value.

What is significant about this – amongst other things – is that such hubris raises direct questions of credibility. That is, how can we have faith in the regulatory integrity of an institution which fails to obey the basic values of its own business or the standards to which it must hold listed companies for the protection of investors?

There are also problems with the Secondary market. Some listed companies are clearly in serious difficulties, and its plain to see from the vantage-point of even the unschooled observer that such firms are in need of independent advice on restructuring and consolidation. And this observation is not drawn merely from the share prices at the moment, since many of the firms carrying low share values are in as strong or stronger positions than when first listed. However, some listed companies are not sufficiently forthcoming, either through annual reports, or releases explaining management decisions or corporate health, affording potential investor to learn along with market principals or contribute to its systemisation. How can BISX be trusted to enforce regulations in these respects?

Notwithstanding foregoing considerations concerning the readiness of this country for a market as currently constituted, many of Bahamians may wish to suffer through the learning curve with our first international stock exchange. However, this goodwill must be drawn upon responsibly. Further, a stock exchange should be an out growth of the buying and selling choices or transactional history of a people, and not a super-imposition of an institutional structure inconsistent with their money-related habits. The New York Stock Exchange traces back 209 years, to the “Buttonwood Tree Agreement” (they met under the tree) by 24 stockbrokers and merchants in 1792. The NYSE was in business for 136 years before there were regulators or regulations. It was founded not by government, but by brokers, reporters, bankers and merchants. This “organic” form of development means that NYSE was a market regulated enterprise and its senior staff were persons known to and chosen by the principles of the listed companies. BISX officials seem to have missed or ignored this factor in the exchange’s development.

In these respects, what follows is a general advice, since there are particular problems which ought not be transmitted by this media. But BISX and the government should give public undertakings as follows:

First under no circumstances should BISX receive taxpayer cash, unavailable to companies under its stewardship. And certainly, no other company should be the subject of taxpayer largesse. Some investors may find this harsh. However, taxpayer funds should not be used to secure the profitability of private investment decisions. This should force BISX to come up with a model to secure shareholder returns. The danger of infusing The Exchange with public funds is it prevents BISX realizing market consequences for its decisions; even as BISX holds its listed companies to the results of their decisions.

Second, BISX should reveal its new business-plan – as a confidence building gesture – outlining how it plans to restructure to attain a workable structure given the transactional patterns or spending, savings and investment choices of this market-place.

Third, rather than asking (begging) government to place the privatised utilities with BISX, it ought to get to work and show how such a move will benefit the investor by creating a greater, more directly sustainable supply of investment vehicles. The Exchange should release its proposals for public consumption, showing why it should be given the opportunity to trade public pensions or treasury instruments.

By demonstrating the benefits of a greater supply of investment products, BISX may aid the potential investor by educating him on the market system in which he lives, creating a nexus of trust which has been damaged by its undisciplined request for more monies and the unjustified pricing of its equity.

There are two final points and a comment: both points were made perceptibly by Ms.Catherine Kelly in an article weeks ago. First there seems to be an inherent conflict of interest in the management and advising arrangements in BISX. Often this charge is taken to mean that something underhanded is afoot. That is not so. But prestige and credibility come from the ability to meet and exceed independent standards. As such, BISX must get out of the business of advising itself insofar as this is true.

Second, the price-per-trade on BISX at B50.00 is plainly extortionate. We have little means of determining how the price was arrived at, and it would be vulgar to speculate. A cursory interview amongst potential stock-holders reveals that they are price averse to the price-per-trade. Ms. Kelly advised rightly looking to “discount brokerage” models in this respect. Such models will not solve the volume problems however. On that score, it may have been wise to have established BISX’s trading platform on fourth generation networked, web-enabled technologies for greater efficiencies and adaptability? Oracle Corporation and Micro-Strategies Inc. provide these systems for simulations to MBA training for University departments already.

This would mean that BISX could employ the over-the-counter sales method (and pricing). If such undertakings could be initiated, BISX may be able to ride the curve of increasing technological literacies in the Bahamas for the medium and long-term. Under this structure BISX would not immediately become a powerhouse its principals erroneously seem to think it already was. However, it would be positioned to grow, whilst educating its potential clients, creating the nexus of trust and developing the perception that it is a credible repository of public trust.

There is a role for government – though not as the financial guarantor of BISX’s success:

First, a real time-table on privatisation of the public enterprises must be released, and considerations on the possibility of an equity distribution through BISX must be clarified. This must come with an audit and appraisal of the asset value of the utilities, leaving the potential investor with a firm appreciation of the short- term solvency, and medium to long-term prospects of the companies. Having said that, there is little real reason to believe these additions will boost activity.

Second, serious study of the prospects for a bond market ought to be explored, but not as a means of BISX’s salvation. Rather as an independent component of a maturing securities market; to be listed conditioned on BISX’s managerial competence.

Second, clearly international investors may invigorate trading on the exchange, however, before we invite overseas interests to invest here, shouldn’t we get our business right; so that we do not risk terminal embarrassment by further decision failures? Moreover, we would have to remove exchange control restraints, which requires a time-intensive review, which would not forestall BISX’s demise.

Third, there must be new companies legislation, outlining and strengthening Director’s responsibilities, and setting proper benchmarks for listing and de-listing companies beyond the limits of BISX internal protocols. What this means is that it puts BISX under pressure to follow its own protocols in assessing whether a company should be, or continue to be offered to the public. It would make the margin of credibility obvious.

Fourth, BISX regulators must understand that they are not in charge of the listed companies, and BISX cannot micromanage company decisions, or replace the duty of shareholders in policing and punishing companies for their decisions if need be. Market regulation is a limited function having nothing to do with management decisions, so long as such decisions are lawful, and pose no conflicts of interest.

In conclusion, the IEF is resolute in the position, that there must be no government expenditure of taxpayer funds to shield BISX from market forces. These are the surest disciplinary agents of the Exchange’s long-term credibility. If the government made promises to BISX stakeholders, then they probably need to be filled on pain of litigation. If not, BISX must become an example of what it requires of companies listed on the Exchange.

The Institute for Economic Freedom (IEF)

cum The Nassau Institute (NI)

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