Days after Lehman Brothers filed for bankruptcy, Nigerian banker Mohammed Garuba gathered his business partners in an office in Lagos to figure out how to save their new investment banking firm, CardinalStone Partners. “We were confused, we were scared,” he recalls. “We were supposed to make a lot of money from corporate finance and trading, but clients were not executing trades anymore. All of that income vanished.” He and his partners decided to throw out the corporate finance and trading divisions to focus solely on asset management. “It wasn’t even about making profits,” he adds. “We were just thinking of how to survive.”
Luxury goods spiked in Lagos
Only months earlier, in April, Garuba and his partners, all of whom had left prestigious jobs at banks in the U.K. and U.S., had planned to rent a spacious property in the exclusive Lagos neighborhood of Ikoyi and set up a corporate campus for their startup. They had planned to raise an investment fund of about 2 billion naira ($12.5 million), hire 100 employees, and erect a private gym. Their timing seemed auspicious, and Garuba had plenty of interested investors, both in West Africa and overseas. “Everyone was saying, ‘Wow, Nigeria is growing,’ ” Garuba says.
Since 2005, when Nigeria’s government mandated a consolidation of its banks (from 89 to 25, with capital reserves jumping from 2 billion to 25 billion naira), Nigeria’s financial sector had been on a tear. One of those 25 banks was Zenith Bank, which held an initial public offering in July 2004, an IPO Garuba helped engineer.
Nigeria’s flush banks fueled a bubble.1“We were buying stocks alphabetically. You wake up in the morning and choose your stocks by the first letter of their names. I had a strong research background, but all of a sudden, what is research? Not even the biggest brokerages were doing research anymore because it was a complete waste of time. Everything was going up.” Bank managers’ salaries multiplied, and banks poached each other’s employees and opened new branches around the corner from older branches. “In a week you were making 10 to 15 percent returns,” he adds.
In 2007, the country had its first democratic transition after a succession of military rulers. President Olusegun Obasanjo, who, despite his success in opening a once-powerful anti-corruption agency, enjoyed the benefits of unpunished graft, gave way to Umaru Yar’Adua, a lackluster politician who won in an election marked by more fraud.
“A culture of impunity took over the country … and people wanted to make as much money 
as possible for the sake of making money,” says Sola Odunfa, a former BBC correspondent in Nigeria. “The lifestyles of the bank operators were, in many cases, obscene. They were buying private jets, buying up property all over the place.”
Garuba says the Nigerian market was too small to accommodate so much money, particularly the margin loans the banks were freely providing. “We were giving too much money to people chasing the same assets, the few available assets, and stocks rose abnormally way above their true values. You come with 1 million naira, make two or three hundred thousand, go to the club, buy champagne, and come again the next day,” he says. “All of a sudden, it’s Louis Vuitton, Versace, you buy a sports car.” The culture of impunity was pervasive: “If there was any bank that would have not been involved in all of this, the board would have removed the CEO,” Garuba says. “The money would drive anyone crazy.” Everyday investors were buying trash, he says—“There were sometimes even warning labels on the stocks.” The banks did little to protect their clients. “The money corrupted everyone. It wasn’t the banks’ fault.”
Few in Nigeria agree. Dele Sobowale, an economist with the Nigerian Vanguardnewspaper, says that once the big banks established themselves, they, like banks around the world, turned to finding quick, sure ways to deploy their capital. In the U.S., traders jumped on subprime loans bundled into credit-default swaps for double-digit returns. In Nigeria, Sobowale says, money laundering for illicit business provided a similar high-yield investment “vehicle.” (In 2009, the heads of two Nigerian banks, Intercontinental Bank and Oceanic, were charged with money laundering.) Nigeria’s big banks were not financing agriculture and manufacturing; they were profiting on fraud and rampant margin lending.
Until the crisis hit, Nigeria’s banks didn’t keep track of their margin loans. “By the time they looked at portfolios, they realized a typical $10,000 agreement was worth $500,” says Ade Bajomo, executive director of market operations and technology at the Nigerian Stock Exchange. “Banks made up 40 percent of our capital market, so if anything happens to banks, it damages the rest of economy. 2008 was Nigeria’s equivalent of the great Wall Street crash.” In the fall of that year, the stock market kept declining, and by December 2009, it had dropped 70 percent.
Lamido Sanusi, a former banker, took over as the governor of Nigeria’s Central Bank in mid-2009 and immediately began the task of cleaning up the industry. After an audit on the banks, he fired eight bank CEOs and issued bailouts worth 420 billion naira ($2.8 billion). Simultaneously, Nigeria’s Economic and Financial Crimes Commission arrested and arraigned several CEOs.
Nigeria’s Central Bank fastidiously went after the assets acquired by bank directors who had given themselves exorbitant loans from their own institutions. Cecilia Ibru, former head of now-acquired Oceanic Bank, had infamously taken out loans valued at 195 billion naira, more than Oceanic Bank’s capital reserves. Ibru is still the only director to have been convicted and sent to prison—though she spent most of her six-month sentence in the hospital. “We would have liked to see more convictions, but we’re not the only ones who haven’t with respect to rest of the world,” says Arunma Oteh, head of the Nigerian Securities and Exchange Commission. She fired the former heads of the Nigerian Stock Exchange for corrupt, permissive behavior.
Billions of dollars in Nigeria are still lost to corruption every year, but the economy has managed to attain a yearly growth rate of 5 percent to 8 percent over the last decade. Garuba says his firm has fully recovered. He admits no regrets but allows that the crash taught him that “liquidity is king.” Asked about the scores of Nigerians who lost their life savings during the crisis, he replies: “The easiest way to lose money is by following the crowd in something that you don’t understand.”
Alexis Okeowo reported from Nigeria as a 2012 Fellow with the International Reporting Project (IRP).