The spectacular free fall of the Pakistani stock market, 3000 points or 30 per cent in two months, demonstrates that rigged exchanges, weakly regulated capital markets, gullible investors and hype driven brokers with multiple conflicts of interests are a lethal cocktail.
It does not surprise me that postmortem on the crash conducted by the Development Policy Institute in Islamabad branded Pakistan as the most manipulated stock market in the world. This judgment is far too harsh because most stock markets in the emerging markets are rigged casinos dominated by insider syndicates and politically connected broker cabals on the exchange.
However, it cracked me up that Pakistan's financial best and brightest blamed the crash not on the Big Three Bears (let alone the Goldilocks behind them!) of the KSE but on "the media, regulators and illiterate investors." Hello? I have heard about the pot calling the kettle black but blaming media, regulators and illiterate in investors for the most cynical and ruthless financial manipulation in Pakistani history is surely the pinnacle of chutzpah.
It is a shame that influence peddling and political patronage is the most valuable currency of financial power in Pakistan. The handful of super brokers who made billions when the KSE went ballistic in both directions have long built their own Versailles, their fortresses of immunity from the laws of economics, let alone retribution or ethics. This is a pity because, without the punishment of market manipulators and inside traders, the capital markets of Pakistan will never, ever evolve into a serious international bourse.
After all, who went to jail for the scandals of the 1990s?. I regret the predictions I made in my column "Bubbles and Bloodbath on the KSE" exactly a month ago have now come all too true. The KSE index fell from 8000 to 7000 in a month since I wrote my column. Real estate prices, in the ritzer defence housing societies of Karachi and Islamabad (the new monetary centres of enlightened moderation!) have dropped by 20 per cent, the State Bank hiked interest rates just as the share market bubble popped with a vengeance, exactly the same epic central banking blunder made by the Federal Reserve after Black Tuesday, a contributory factor in the US economy's descent into depression.
The financial market crash only reinforced Pakistan's awful reputation as a rigged exchange. It would be unthinkable for a credible Western emerging market fund manager to allocate fiduciary money to Pakistan now after the regulatory surveillance and disclosure deficiencies of the stock market converge into a sordid scandal.
I am also stunned that the guardians of the Pakistani capital markets allowed the KSE to become a monetary Frankenstein, the mother of all speculative manias. The SECP, our fabled regulator, did not protect the small investor it was sworn to protect. The central bank took no action to curb the high octane leverage that took the KSE from 1800 to 10300 in less than four years in a roller coaster of maniacal, not merely irrational, exuberance.
Surely, the Prime Minister, an international banker form Citigroup in a past professional incarnation, could have warned the people about the perils of leveraged KSE speculation. Instead, Shaukat Aziz hailed the stock market's ascent as the result of President Musharraf's macroeconomic reforms. While true enough, nothing is also more harmful to the Pakistani economy than a market meltdown whose lessons are not heeded by the captains and kings of Islamabad.
The life savings of millions of Pakistanis have now vanished forever into money heaven. The Prime Minister has warned investors to beware of scams and conmen -- but what about the pinstriped pirates who run the show on the KSE? How can the Pakistani stock market regain the trust of citizens and international investors if the guilty powerbrokers of the bourse are not punished for their conspiracies against the poor investor? Bureaucrats, bankers, politicians, generals, brokers, regulators, market punters. Pakistan is run by an incestuous elite who make money in the stock exchange with impunity and the sort of fabulous consistency that enabled Mrs. Bill Clinton to become the best cattle futures trader in the history of Arkansas.
DIB, the Dhabi Group and Prince Walid have pinpointed Pakistan as an investment destination. President Musharraf and Shaukat Aziz have done their best to attract billions in FDI everywhere from Davos to KL into Pakistan but all their efforts will fail if the capital markets remain manipulated by a cabal of powerbrokers who consider the exchange their Abbu's jagir. Learn the lessons of history.
The Roman Empire, the most powerful superpower in the ancient world, collapsed not because its legions lost to the German barbarian tribes on the battlefields but because its princes and priests abandoned all ideals of justice in their fatal ballet of greed, decadence and appeasement. The SECP should crack down on the Caesars of the KSE, not include them on its self-serving inquiry boards. When poachers become gamekeepers in the capital markets, all hope is lost.
by Matein Khalid
© Khaleej Times 2005
