Lessons from Ghana’s money market crisis

In July 2007, Chuck Prince, the former CEO of Citigroup, famously made a comment (in reference to the bank’s reckless underwriting practices at the time): “When the music stops, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We are still dancing”.

He would later swallow his words. But nonetheless, his comment became emblematic of the financial services industry’s complacency. That very complacency, which continues to play out in the post-crisis era, is never far away from home. Ghana is grappling with an explosion of fund management crisis. A crisis that is the product of years of complacency, from both players and regulator(s).

A mix of regulatory lax and short-termism from players allowed products with (high) guaranteed returns to thrive. As the money market became more yield-driven, fund managers became even more aggressive with their asset allocation (in the search for yields), ignoring the basic tenets of a money market fund: a safe and short-term warehouse for money. The crisis would later be triggered by a sheer coincidence.

When the central bank, the Bank of Ghana, began its own clean-up of the banking, as well as the microfinance sector in late 2017, depositors panicked and began to withdraw their funds. However, depositors, oozing with lack of confidence, could not draw a line between their banks and fund managers, and so they extended the run to the funds (specifically the guaranteed funds).

And that is when the music stopped. Mountains of complaints were funneled to the regulators citing inabilities of fund management companies to honour, on demand, client withdrawal requests. An audit of the funds revealed something grotesque.

There was no segregation between client and operational funds. Furthermore, fund managers placed the money with their own peripheral entities (which familiarly speaks to weak corporate governance practices).

Even worse, the funds were invested in instruments that were too illiquid and with longer maturities. To honour redemptions, they borrowed Peter to pay Paul. After all, clients only had penchant love for returns and could care less where the returns were coming from. To drain the swamp, Ghana’s capital markets regulator, the Securities and Exchange Commission (SEC), swang into action in November 2019.

First, it revoked the licences of 53 fund management companies. It has since increased fund management minimum capital requirements 20-fold. And in the absence of a compensation fund, the government then asked the recently created bad bank, Consolidated Bank Ghana, to take over the compensation process. It is estimated that funds amounting to eight billion Ghana Cedis (equivalent of $1.4 billion, at the time of my writing) are locked in the 53 closed entities.

Back-of-the-envelope calculations suggest 60 to 70 percent of the funds are invested in illiquid assets and are deemed to be irrecoverable. Essentially, investors are staring at massive haircuts. Ben Bernanke, the former chairman of US Federal Reserve, posited: “You have a neighbor, who smokes in bed…Suppose he sets fire to his house. You might say to yourself: ‘I’m not going to call the fire department. Let his house burn down. It’s fine with me’.

But then, of course, what if your house is made of wood? And it’s right next door to his house? What if the whole town is made of wood?”

Well, this posit brings it much closer home. A much better outcome is for investors to investigate whether their funds are ring-fenced with wood or fireproof materials, and not be blinded by the promise of super returns. But even more important, a clarity in the definition of what constitutes a money market fund can always provide an even better guidance for stakeholders.

Happy holidays and Merry Christmas!