An Assignment on

Reasons of Stock Market Crash during 2010-2011

and the Corrective Actions Taken there after
Course Code: 406

Submitted to
Md. Thasinul Abedin
Assistant Professor, Dept. of Accounting, CU

Submitted by
Mohammad Sahjahan
ID: 17301046
Semester: 8th (2016-17 session)
Dept. of Accounting, CU
Reasons of Crash during 2010-2011 and the Corrective Actions Taken
thereafter

The term—Stock Market Crash, most probably, is the worst nightmare of an investor. Within
just a blink of eye, a rich investor may become the poorest man by losing everything he had
once.

Like the renowned stock markets worldwide, Bangladesh’s stock market has also experienced
this catastrophic event not just once but twice, in 1996 and in 2010-11. The crash can be
happened for various reasons. Instead of just a single cause, generally a mixture of them lead to
the stock market crash. We shall look into the reasons behind the stock market crash happened in
Bangladesh during 2010-11.

Before we go further, let me illustrate in brief what did actually happen in that crash. First, an
Asset Bubble was created— meaning the stock prices were risen up dramatically far above the
real value ignoring fundamentals of the economy. The bubble had become so big that no one
could ignore it. To make it stop from growing further, the related authorities took initiative to
cool it down. But the cooling down process did not go very well. The bubble got burst, overall
stock prices fell off the ground in huge amount. The stock market experienced its biggest crash
ever in its history.

Now the questions are- What did cause the bubble to happen? What did trigger that bubble to
burst? Was anyone behind this to blame? Who was the mastermind? We shall look forward to
the answers by using as minimum numbers as we can since it becomes too overwhelmed with
lots of numbers and figures.

During 2009-10, Money supply in the stock market had increased. How? Commercial banks of
the country started putting their reserve money in investments ignoring any rules whatsoever.
Obviously, rather than investing in real assets they were investing money in the capital market
securities since those can be liquidated more easily and conveniently. However, the inflows of
money to the stock market were increasing but the securities existed in the market were same. As
a result, the price per share had increased.
Observing this situation, a big game was played. The players of this game had experiences about
how to make the securities more attractive as some of them were the mastermind of the 1996’s
crash. They played several moves. One of the moves is that they bought most of the stocks in
private placement. Now the private placement is risky. In one hand, it does not require much
disclosure. On the other hand, by placing stock privately, the available shares in the market
reduce. As mentioned earlier, the demand was increasing but the supply was not sufficient or
even decreasing. This pushed the stock price to go up.

The prices were increasing. People who had some savings became interested to put some money
in these lucrative investments with the hope to gain from future price increment. Now, this was
not enough. The players were still greedy enough to rise the prices more. They played even with
SEC to make and keep the environment in their favor. Firstly, they shaked SEC’s structure a
little bit. Some of the players were accused that they lobbied the recruitment of the SEC’s
chairman and a member. Some SEC’s members were directly involved in this game and some
other indirectly according to the investigation report conducted back then. Secondly, the
companies raised the value of assets artificially and also using the loopholes of accounting
method. They used “mark to market” to value the assets. The world witnessed a great fallback of
using this method. Any future projected income can be recorded at current period under this
method. So, it became easy to manipulate assets’ value greater than ever. As World Bank
documented, “listed companies en masse revalued their assets in 2009 and 2010, to mark to
market their real-estate holdings, an incidence that exceeded similar activities over the previous
two decades taken together, and resulted in sky-rocketing net asset value of the stock”.

According to another investigation report, an investigation conducted by Index Development

Committee, DSE used the wrong method of Index calculation, wrong share numbers by
including or excluding non-tradable shares or right shares and bonus shares, calculating the
Index at inappropriate dates etc. These all added extra fuel to raise the price up including the use
of Book Building Method which was used as another tool for price manipulation.

Prices were going up. Newspaper was making it a hot topic. People who had any savings had
invested and who had no cash were selling their lands, borrowing money to invest in the stock
market. However, most of the people investing here had no knowledge at all or very little
knowledge about how share market works, what the financial statements actually are, what these
statements represent, why price goes up or down in the stock market etc. To see how much
money people were investing, consider this scenario. During the period, around 600 branches of
brokerage houses were opened in more than 30 district. 1.3 million new Beneficiary Owner’s
(BO) accounts were opened.

Lastly, among many other reasons, one last notable reason is Share Split, Bonus Share etc.
Generally, these types of share issuance increase the numbers of shares. But the actual value of
the net asset does not increase because no cash or any consideration is paid for this type of
issuance. Thus, number of shares increased and price per share must decrease. But our case, the
price did not decrease at all. Meaning, they were making fool everyone by just increasing the
stock numbers without any down change in the price.

A question is still remained unanswered. How the players took all their embezzled money?
Investigation committee created back then found several “omnibus accounts” under which
several lakh shadow accounts were opened and used as tools for embezzlement. Omnibus
accounts are off-radar accounts of which information about transaction remains with the
merchant banks and SEC does not monitor these accounts. Which added big opportunities for the
players.

By now, we know how the stock prices were artificially risen up and created the bubble.
Theoretically, at some point, the bubble can not grow further or the growing process becomes
too sluggish as if it stopped growing. Then at its peak, it bursts. When the bubble burst, the
earlier buyers become the gainers, in our case the players or the scammers, and the late buyers
become the losers. In our case, losers are those people who invested their savings, and from their
selling proceeds from lands, house etc.

Keep a bit of patient. Because now, I am going point out some specific reasons that caused the
bubble to burst which is, actually, the crash. Another point is that policies taken to tackle this
crash had the time frame as same as the crash plus a bit longer. That is, while the crash was
happening, policies to tackle this was also been taken. So, I shall talk about the both subjects at
the same time. By the way, you should note that this crash was going on, more or less, two to
four months, starting from late December 2010.
As you read earlier, almost every if not all, commercial banks invested their reserves in the stock
market. The exposure rate was 30-40% of their liability and eight of the banks even invested
50% of their liabilities. Now when the prices hiked at an alarming rate, Bangladesh Bank (BB)
initiated some measurements which caused the bubble to burst.

Initially, BB increased CRR and SLR, issued new directive allowing only 10% exposure to the
stock market and the exposure would be calculated using market price instead of cost price.
These initiatives caused immediate liquidity crisis which resulted the call money rate to increase
to 180%, the highest in the history. To meet up this liquidity, the banks started to sell their stock
holdings. As you can think, selling stocks by the key investors had a significant effect. Firstly,
supply increased and no demand was there since almost all probable investors had already
invested except the scammers and the companies themselves. Hence the prices started to fall.
Secondly, when huge numbers of shares are sold out, people tend to think that something is
wrong there. So, they also start to sell their share before the prices fall any further. This is what
happened.

Another reason of falling stock prices was the suspension of the NAV method. As asset prices
were artificially increased using mark to market, the stock prices were also overvalued using the
NAV method. So, discontinuing the NAV method caused some artificial amount to cut off and
the prices fell.

To keep the market a bit stable, SEC also increased the share to credit ratio from 1:1 to 1:1.5 and
asked the stockbrokers to double their deposits against any additional trade exposure to the
capital market in a bid to control the liquidity flow. It also directed to put the stock of
Grameenphone and Marico Bangladesh on public market instead of spot market transaction.
However, these policies did not do very well.

There was still no hope. Prices were falling down though BB and SEC amended policies several
time. At last, with the report provided by the probe committee about the involvement of top
officials of SEC, the structure of SEC had been reformed. The government had appointed Prof.
M Khairul Hossain as chairman of SEC and Helal Uddin Nizami as SEC member. Further
policies were taken to make the situation better by the reformed authorities. Among them were
Automation in the stock trading system, separation of trading side from the management side of
the DSE, and some other issues relating to the separation of powers in case of conflict of interest,
regulations regarding mutual funds. All these were recommended and required by Asian
Development Bank (ADB) to obtain loan from them. However, the government took the credit
and the market was under a reforms program directed by the ADB. Over the years as time
passed, the stock market was recovering day by day, slowly.

References:

1. "Bangladesh markets rebound from deepest slump". Reuters. 20 December 2010.

[Accessed October 18 2021].
2. CPD, 2011. Independent Review of Bangladesh’s Development (IRBD) . [Internet],
<http://www.cpd.org.bd/downloads/IRBD%20FY11_First%20Reading.pdf>
[Accessed October 18 2021].
3. The World Bank, 2011. NON-LENDING TECHNICAL ASSISTANCE ON
CAPITAL MARKETS. [Internet],
<https://documents1.worldbank.org/curated/pt/946101468014063455/682420ESW0
WHIT067918B0June03002011.docx> [Accessed October 16 2021].
4. "Clashes in streets of Dhaka as stock market tumbles". RFI France. 10 January
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5. "DGEN pulls off record points". The Daily Star. 29 June 2009. [Accessed October 18
2021].
6. "DSE turnover strikes new high". bdnews24.com. 14 June 2010. Archived from the
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7. "Fresh innocents to the slaughter". The Economist. 18 January 2011. [Accessed
October 18 2021].
8. "Probe panel finds massive manipulation at Bangla stock market". India Times. 7
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9. "Price fall triggers protest". The Daily Star. 12 October 2011. [Accessed October 18
2021].
10. "Police disperse Motijheel protesters". bdnews24.com. 17 October 2011. Archived
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[Accessed October 18 2021].
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13. " Bulls on a leash". The Daily Star. 11 July 2009. [Accessed October 18 2021].
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