Malaysian Maverick: Mahathir Mohamad in Turbulent Times Page 22
Indonesian Minister of Mines and Energy Subroto and officials of the state tin company turned him down flat. They knew Zaidner was smart and experienced enough, but he did not always play by the rules. Back in the 1970s, when he worked for Amalgamated Metals Corporation, he had been fired after company executives raided his office in Zug, Switzerland, and found a troubling paper trail. The evidence suggested he may have bribed an Indonesian official and his Bolivian assistant, who both worked for the International Tin Council in London. There was also evidence of other irregularities intended to gain an edge in the tin market. Although the episode was hushed up to save embarrassment to the Tin Council, the Indonesians knew about it since it was their man who was involved with Zaidner. Subroto was a like-minded ally of the "Berkeley mafia", the team of acclaimed technocrats nicknamed after their alma mater in the United States and appointed by President Suharto, who were committed to restoring the country's reputation after the ruinous Sukarno years.
Undeterred, Zaidner took his proposal to Malaysia, the biggest tin producer, and found a more receptive audience. From his tin-trading activities, he had contacts at Malaysia Mining Corporation Bhd., the world's largest tin concern known as MMC, which was controlled by state-owned investment companies and worked closely with the government to implement tin policies. Through the company officials he already knew, Zaidner got acquainted with Abdul Rahim Aki, MMC's group chief executive, who was politically well connected. The higher Zaidner went, the easier it became to sell his idea. As an acquaintance of the chief executive told Raphael "Rocky" Pura, the investigative reporter who unravelled the escapade for the Asian Wall Street Journal, Abdul Rahim "knew as much about tin as could be contained on one-half of a ten-cent postage stamp".[4] Over the objections of some MMC advisers who knew of Zaidner's tainted past, Marc Rich was appointed as the company's tin-trading agent.
Another essential piece of the picture was Dr. Mahathir's presence at the top of the government. Hussein Onn was still prime minister when the Cabinet approved a clandestine plan to support sagging tin prices, but he was ill and Deputy Prime Minister Mahathir was effectively running the country, and would soon take over formally from him. The prospect of outwitting the West appealed strongly to the nationalistic Dr. Mahathir. He often complained that commodity producers such as Malaysia got a raw deal when trading their goods in international markets, which he felt were controlled by the industrialized nations.[5] Looking back much later, Dr. Mahathir acknowledged being conned by Zaidner. "He spun a very attractive story", suggesting "it would be possible for us to keep the price of tin high and in the process make a lot of money for ourselves," Dr. Mahathir said. "I must admit I was very new to all this. I didn't understand."[6]
Although the International Tin Agreement was one of the few successful global commodity agreements, Malaysia was becoming disenchanted with the pact's ability to deliver adequate returns on what was once the country's major foreign exchange earner. All 30 member countries, both producers and consumers, were required to contribute metal or cash to an International Tin Council buffer stock, where a manager was empowered to buy tin when the price fell below a specified level and sell when it rose above a certain point. A weakness from Malaysia's standpoint was that any increase in the price band had to win the backing of a majority of both producing and consuming members. When consumers led by the United States denied producers' demands for higher prices in July 1981, as Dr. Mahathir officially assumed the premiership, the Malaysian government instituted the Zaidner-inspired scheme.
In preparation for its covert attempts to prop up tin prices, the government involved ranking civil servants in the Ministry of Finance, the Ministry of Primary Industries and Bank Negara Malaysia, the central bank, as well as tin industry officials. To hide Malaysia's tracks, MMC executives incorporated a local company called Maminco Sdn. Bhd. with paid-up capital of just RM2, which became the government's secret vehicle to carry out the tin-buying plan. Abdul Rahim and an MMC accountant held one share each and served as directors. Nordin Ismail, a leading trader at MMC and Zaidner's friend, became general manager. The finance ministry directed state-owned Bank Bumiputra Malaysia Bhd. to extend credit to Maminco through its offshore branches to pay for the tin. Bank Bumiputra's coffers in turn were topped up with funds held offshore by the national oil and gas company, Petroliam Nasional Bhd., known as Petronas.
Maminco, which began buying tin in large quantities on the London Metal Exchange in July 1981, continued with the purchases through most of November. They were mainly for three-month forward delivery. Maminco traded through Zaidner and Marc Rich, who placed their orders through member firms of the exchange. Maminco also bought physical tin on the Penang market in Malaysia. The heavy buying forced up three-month futures prices by 20 per cent to about 8,600 pounds a tonne. The appearance of what the international press dubbed a mystery buyer was particularly conspicuous in the industry, since actual demand for tin was fairly slack as the developed world headed for recession. Experienced industry hands suspected Malaysia, but Dr. Mahathir's government consistently denied it.
The Malaysian-induced price rise helped producers obtain an increase of almost 6.9 per cent in the Tin Council's price-support range in October.[7] And it was not costing the Malaysians much, as buyers of three-month forward contracts had to pay only a 10 per cent deposit. But after four months the market began acting — well, like a market. The higher prices started to stimulate extra production, and when the United States announced it would sell some of its 170,000-tonne strategic stockpile of tin, Kuala Lumpur howled in protest.[8] Worse for the Malaysians, many London Metal Exchange traders, betting that the mystery buyer would not have deep enough pockets to sustain the operation, began to sell tin short three months forward, expecting prices to collapse.
As Pura reported in the Journal, these developments prompted an important switch in tactics by Zaidner and his Malaysian clients, "one that effectively changed the Malaysian plan from a price-support operation to an attempt to corner the tin market".[9] In late November, Malaysia switched from buying three-month futures to spot purchases of physical tin for cash. The tactic, provided Malaysia could maintain its spot buying, set up short-sellers for a squeeze. It meant that traders holding contracts to sell tin three months later, in February, might find no physical tin available to meet their obligations. They would have to buy tin from the mystery buyer at a higher price than that at which they contracted to sell, or default on their contracts.
The Malaysian move sent spot prices soaring to a peak of 8,970 pounds a tonne, and set off a global scramble by short-sellers to get tin into London Metal Exchange warehouses by late February 1982. While the Malaysians looked like they were going to make a killing, the stakes were soaring dramatically and Maminco became dangerously exposed. It needed to borrow huge sums, as much as RM1.5 billion at one point, at interest rates of around 20 per cent, and pay storage and insurance on bulging tin stocks that eventually reached 40,000 to 50,000 tonnes. Maminco had to bite the bullet and pay the cost of holding the hoard in order to keep prices high, because its most recent purchases were made at fairly high levels. The thinking was to sell 15,000 or 20,000 tonnes to the short-sellers at a huge profit to pay for the entire exercise, and hang on to 20,000 to 30,000 tonnes indefinitely.
Alas, ever-rising prices attracted more releases from the U.S. stockpile and supplies from other sources that had to be absorbed. At the same time, end users of tin began reducing their inventories as the economic recession deepened. With the tin market braced for an expected squeeze on short-sellers, the London Metal Exchange changed its rules and let trader-members off the hook. It permitted short-sellers to pay a fine and avoid having to purchase tin from the mystery buyer at steep premiums. The move helped sink the Malaysian plan, but it was likely to fail anyway. After taking a close look at Zaidner's books, Marc Rich fired him and began to dump its tin, sending the spot price tumbling by 1,700 pounds a tonne in a single week.
The fallout was a disaste
r for the tin industry worldwide.[10] Compelled to intervene to defend the artificially high floor price set when Malaysia was driving up the market, the Tin Council buffer stock manager also had to sop up the additional tin attracted by the higher prices. Although producer members agreed to restrict exports according to a quota system, they and consumers were forced repeatedly to kick in additional funds to support the buffer-stock operations. When the money finally ran out in 1985, the manager controlled a stockpile valued at about US$700 million. As the International Tin Agreement disintegrated, the market collapsed completely and prices hit record lows.[11]
In Malaysia, dozens of mines closed with heavy job losses.[12] Maminco held thousands of tons of expensively acquired tin it could sell only at a loss, and it was unable to repay Bank Bumiputra. Dr. Mahathir said later the Malaysians had to honour Zaidner's purchases, even though he had exceeded his "limited" authority when buying.[13]
Unwilling to acknowledge its part in the catastrophe, the Malaysian government devised a way of making money available to Maminco, so that the large losses would not show up as bad debts on the bank's books for lending made at the government's request. The novel solution was to create another shadowy company, Makuwasa Securities Sdn. Bhd., which again was ostensibly private but held by nominee shareholders on behalf of the government. For two years, Makuwasa was allocated new issues of shares in public companies normally reserved for bumiputras at preferential prices. The transfers were made through Malaysia's Employees Provident Fund, a national pension plan, at no profit.[14] Makuwasa was then free to sell the shares at a profit on the Kuala Lumpur Stock Exchange to repay tin losses. In his investigations for the Journal, Pura uncovered another likely back-door channel to help Maminco settle with Bank Bumiputra: a "secret service vote" in the country's annual budget. Usually used for security and intelligence-related activity the government tried to shield from public view, this item contained funds that could be spent at the discretion of the finance ministry. By effectively transferring Maminco's losses to the national budget deficit, the government made it almost impossible to detect them.[15]
Dr. Mahathir's admission in 1986 of the government's role, after five years of denials or deliberate silence, staggered the business world. He almost certainly went public at the UMNO General Assembly because the Democratic Action Party had served notice that it intended to pursue the matter in Parliament. Dr. Mahathir disclosed the parts played by both Maminco and Makuwasa, but he was far from contrite. Rather, he defended the government's actions and blamed "massive cheating" by the London Metal Exchange — allowing the short-sellers to escape — for depriving Malaysia of trading profits. "If not for the cheating by the LME, changing the rules to protect its members, the government would not have lost and the question of the government's involvement in maintaining the tin price would not have been raised at all," he said. No government official had profited, he added. "What was done by the government was aimed at saving the tin industry."[16]
Dr. Mahathir's new primary industries minister, Lim Keng Yaik, tallied up the damage a few months later. He said Maminco had ended up about RM660.5 million in the red, consisting of actual trading losses, interest paid to Bank Bumiputra, foreign-exchange losses and administrative costs.[17]
But the cost to Malaysia's reputation was incalculable, not least for having repeatedly lied. Indonesia, Thailand and other members of the Association of Tin Producing Countries, formed on Kuala Lumpur's initiative in 1983, privately thought the Malaysians brazen and hypocritical to turn up to the next meeting after Dr. Mahathir's disclosures talking about reform. Among other things, Malaysia advocated the worldwide use of the new Kuala Lumpur Tin Market as "a natural corollary of the London collapse".[18] As a non-producer of tin, Singapore had reason to feel especially aggrieved by Malaysia's shenanigans. Before Kuala Lumpur's plotting was known, the Malaysian government had persuaded the producers' group to take the moral high ground and criticize Singapore for allegedly undermining their export-control programme, by exporting tin refined from ore smuggled out of neighbouring countries.[19]
The BMF affair
Bank Bumiputra and Petronas, glimpsed in contact on the edges of the tin saga, proved a highly combustible combination during the Mahathir era. When they were brought together by the dictates of domestic politics, it was not always a comfortable or happy association.
Incorporated in 1965, Bank Bumiputra was assigned a central role in Malaysia's affirmative action programme. Specifically, the bank was to channel credit and financial services to the countryside, where the vast majority of Malays lived and worked in traditional pursuits such as farming and fishing. Bank Bumiputra was also to familiarize Malays with banking and train some of them to become bankers. A preferred repository of state funds, the bank grew rapidly, though its socio-political function inevitably caused its profitability, in terms of return on shareholders funds, to lag behind rivals. Some loss of commercial competitiveness resulting from forgone lending to non-bumiputra customers was implicitly accepted. To operate and keep watch on such a politically sensitive institution, the government usually appointed ranking UMNO officials or civil servants closely linked to the party, rather than professional managers. That left Bank Bumiputra a sitting target for well-connected business interests looking for cheap loans, the cheapest of which more accurately could be described as handouts or donations. The bank found it hard to say "no", ending up dispensing a constant flow of funds to favoured recipients in the Malay establishment.
As for Petronas, established under the Petroleum Development Act of 1974, it fared considerably better. It became Malaysia's largest and richest corporation, and the country's biggest source of tax revenue and foreign exchange, with an international reputation for being a savvy industry operator. But with an assured income stream and an accumulating pile of profits, including large cash deposits with banks around the world, Petronas, too, was sometimes called upon to do duty above and beyond its original charter. Not required to disclose its financial accounts, Petronas reported by law to the prime minister, rather than the finance minister as might be expected. It was Dr. Mahathir's favourite piggy bank, to be raided in emergencies and on other special occasions.
While Bank Bumiputra was being used to buy tin on a grand scale in London, a wholly owned subsidiary of the bank was being abused in even more breathtaking fashion for personal gain in colonial Hong Kong. Bumiputra Malaysia Finance Ltd. (BMF), a deposit-taking company, got involved in what a Hong Kong prosecutor called one of the biggest fraud cases in history. It was a remarkable tale of murder and suicide, false accounting, illusory profits and bankruptcy of an order not previously seen in Hong Kong. The mastermind was a Singaporean named George Tan, whose Carrian group rode a Hong Kong property boom to dizzying heights between 1980 and 1982. Bursting on the scene, Carrian diversified rapidly into transport, shipping, tourism, insurance, finance, catering, hotels and entertainment, spreading its tentacles to Taiwan, Singapore, Malaysia, Thailand, the Philippines, Japan, Australia, New Zealand and the United States. Almost overnight, it counted more than 200 interlocking companies in the group.
Previously unknown in business circles, Tan wrapped himself in mystery and assumed a facade of respectability by hiring prominent advisers and industry professionals. He was the centre of Asia-wide speculation as investors, analysts and journalists tried to figure out the source of his apparently bottomless wealth. The answer: He was a bankrupt civil engineer living illegally in Hong Kong and had no money, but bluffed major banks into lining up to lend to him after persuading neophyte BMF to provide Carrian with free-flowing funds. In early 1980, BMF loaned the then-obscure Carrian about RM310 million without collateral to buy a landmark building in Hong Kong's Central business district, a purchase that put the company on the map as an aggressive property player.[20]
Prime Minister Mahathir inherited the BMF affair and could have chosen to step in and clean it up. No doubt it would have been a severe embarrassment for UMNO and the government, but
Malaysians surely would have appreciated a strong statement that the new premier was not prepared to tolerate blatant misuse of public funds. Instead, he opted to try to conceal the mess while endorsing a barely-legal secret plan by Bank Bumiputra to recover loan losses at the expense of other stranded creditors. With the benefit of hindsight, Dr. Mahathir said the bank was mismanaged by people who did not understand banking — "not always crooks, but quite incompetent" — who thought having a branch in Hong Kong was a status symbol. "But trying to find out who actually mismanaged it is not easy, you see."[21]
Dr. Mahathir's priority with government-controlled banks, after taking office in July 1981, was to put his appointees in charge. In the shuffle, Nawawi Mat Amin, a senior partner in an accounting firm and a member of UMNO's Supreme Council, took over as executive chairman of Bank Bumiputra in April 1982. He replaced Kamarul Ariffin Mohamed Yassin, a lawyer by training and one of Malaysia's best known bankers, who had steered the bank through six years of rapid growth. Kamarul also had excellent UMNO affiliations, having served as the party's legal adviser and headed its investment unit, but he was removed because he was close to Finance Minister Tengku Razaleigh Hamzah, a political rival of Dr. Mahathir and Deputy Prime Minister Musa Hitam. Dr. Mahathir wanted his own man running a major financial arm of the government.[22]
The details of BMF's deepening troubles were disclosed piecemeal by the regional press, digging and reporting from Hong Kong, from late 1982.[23] It emerged that BMF had not only played the property market in betrayal of its mandate, but concentrated its lending to just three borrowers, each of which ran into difficulties and could not repay. By the final accounting, BMF had loaned US$800 million to George Tan's Carrian empire, about US$123 million to companies controlled by speculator Kevin Hsu, and US$40 million to Eda Investments Ltd. and associated concerns.