Malaysian Maverick: Mahathir Mohamad in Turbulent Times Read online

  To avoid a financially difficult and politically embarrassing direct bailout, the government chose to use Petronas, the only state-owned institution that packed enough financial punch to do it. Under the complex RM2.49 billion arrangement, Petronas bought the bank from its major shareholder, National Equity Corporation, injected fresh capital, and acquired RM1.26 billion of problem Hong Kong loans from the bank. Petronas ended up with about 90 per cent of the equity, with the balance in the hands of the Minister of Finance Inc. Analysts calculated that Malaysia eventually would lose a total of about RM2.26 billion in bad loans, plus millions of dollars on forgone earnings on government funds diverted to the rescue.[59] Rather than impose an onerous financial burden on the treasury, the Malaysian government, in effect, decided to pay for the losses with accumulated and future earnings from the oil and gas industry.

  Petronas's acquisition of Bank Bumiputra was almost certainly illegal. The Petroleum Development Act prevented the company from getting into the banking business. Dr. Mahathir, though, was unfazed, and defended the legality and logic of the takeover. "Petronas has excess funds and is the only organization capable of absorbing such things," he said.[60] But when a lawyer representing the Democratic Action Party filed suit in the Kuala Lumpur High Court challenging the transaction, the government pushed a retrospective amendment to the act through Parliament clearing Petronas's participation in any non-oil venture. While the government succeeded in legislating the litigation "out of the window", as the Malaysian Bar Council said, the High Court imposed a price for the government's lack of respect for the rule of law: It ordered Petronas and the government to pay the lawyer's legal costs.[61]

  Unrepentant as ever, Dr. Mahathir claimed victim status on behalf of bumiputras when he addressed the UMNO General Assembly in 1986. In the same speech as he admitted Malaysia's involvement in the tin drama, he said, "Why is there only a fuss about Bank Bumiputra? Because it is a scandal, or because it is bumiputra?" The collapse of Singapore's Pan-Electric Industries Ltd., he said, caused the loss of RM16 billion in stock market capitalization, but it did not elicit the same reaction. "Why was it not raised by the scandal-mongers from the opposition parties? Could it be because it was not committed by bumiputras?"[62]

  The comparison was spurious and contained ethnic overtones — what former deputy premier Anwar Ibrahim called, after he had been discarded by Dr. Mahathir, "subtle racist innuendos" — to suit the Malay audience. Pan-Electric, one of Singapore's biggest conglomerates, rocked the Singapore and Kuala Lumpur stock exchanges and triggered an unprecedented three-day halt in trading when it suddenly went into receivership in late 1985. It brought down affiliated companies, sent share prices crashing across the board and exposed a tangled web of precarious stock-contract agreements. But no public funds were involved, and the paper losses could conceivably be retrieved as the markets recovered. Furthermore, Tan Koon Swan, Pan-Electric's influential shareholder — who also headed the governing Malaysian Chinese Association and was a member of parliament — was held responsible. He was jailed in both Singapore and Malaysia for his role in the company's financial demise.

  Hussein Onn, the former premier whose integrity was unquestioned, took the opposite stance to Dr. Mahathir over Bank Bumiputra's brush with oblivion. "We are asking for trouble if the matter is played down," he told local reporters. "It will happen again if we don't learn our lessons...".[63] Appalled by the skullduggery and upset by the government's weak and reluctant response, Hussein maintained a critical profile as events unfolded. As an adviser to Petronas with access to Bank Bumiputra's accounts, Hussein said in early 1985 that questionable loans in Malaysia, given out to all kinds of people, could match those in Hong Kong.[64]

  His warnings were as prophetic as they were ignored. Five unhappy years later, in October 1989, Petronas had to save Bank Bumiputra again. The bank announced a loss of RM1.06 billion for the year ended 31 March 1989, after making RM1.23 billion in provisions for interest payments from loans previously recorded as revenue but never actually received by the bank. Once more shareholders funds were wiped out — RM949 million this time.[65] Petronas injected another RM982.4 million, giving the energy company almost 100 per cent ownership of the bank. The restructuring package included an extra RM450 million in provisions made in earlier years but never reflected in the bank's paid-up capital, in addition to the RM1.23 billion already noted.[66]

  This time around Bank Bumiputra blamed heavy lending for real-estate and property development in Malaysia, not Hong Kong. Mohamed Basir Ismail, the new executive chairman who had brushed aside Hussein's comments with the assurance that Bank Bumiputra's bad loans were no different from those of other Malaysian banks, now admitted that the bank was struck by plummeting property prices in 1984-85. As he put it, "We lent a lot of money all over the place."[67]

  While Basir cited Malaysia's Banking Secrecy Act in declining to identify delinquent borrowers, records from a court case revealed how politically-connected clients had treated the publicly-owned bank as their own private account. According to the records, the major offender was UMNO, which borrowed RM200 million from Bank Bumiputra in September 1983 to build a convention centre and office tower in Kuala Lumpur to house the party's headquarters. For the huge project, UMNO also borrowed RM50 million from state-controlled Malayan Banking Bhd., and RM13 million apiece from United Malayan Banking Corporation and Perwira Habib Bank Malaysia Bhd.[68] UMNO for years failed to repay any of the loans or the interest on the loans, which by July 1988 amounted to nearly RM300 million owed to Bank Bumiputra alone. The details were contained in records released in a legal suit after Malaysia's High Court ruled in early 1989 that Bank Bumiputra could foreclose on UMNO's Putra World Trade Centre, as the headquarters complex was known. Bank Bumiputra filed the suit, uncharacteristically, only after UMNO was declared illegal in 1988 and its assets surrendered to an Official Assignee, a government official.[69] Consistent with Bank Bumiputra's plundered history, UMNO avoided foreclosure after "negotiations", during which the party agreed to repay the loans but resisted the payment of interest,[70] which was estimated at RM126 million in late 1989.[71]

  Petronas and Bank Bumiputra split towards the end of 1990. Typically, the sale of the bank to the government was not announced at the time, but Petronas confirmed it when queried by foreign reporters. The energy company said it wanted to "concentrate on its core business and other businesses with strategic fit to its core business". The price, also unannounced, was estimated RM1.15 billion.[72] Since Petronas did not have to disclose its financial details, it was hard to calculate how much it lost in total when acting as Bank Bumiputra's holding company and financial saviour.

  Although Petronas was out of the picture, Bank Bumiputra failed to mend its wayward ways. It went bust twice more in the next eight years, each time being kept afloat by a government ever willing to reload the vaults by the back entrance as fast as the funds were handed out through the front door. The bank announced growing profits in the early 1990s boom times and often proclaimed that it was committed to purely commercial objectives, as the government prepared to list it on the stock exchange. Abdul Khalid Sahan, the latest executive chairman, declared in late 1996 that the "dark days" were over, with strong recent profits due largely to "more sound management and improving the quality of loans".[73] But with Bank Bumiputra answerable to only a single shareholder, the Minister of Finance Inc., and still not in the hands of independent professional managers, it continued to be afflicted by a civil-service mentality and addicted to bad habits.

  The onset of the Asian economic crisis in 1997 revealed familiar weaknesses that belied the hype. Bank Negara said in March 1998 it had stress-tested Bank Bumiputra's loan portfolio, and that in a worst-case scenario the bank would need RM750 million to meet capital adequacy requirements.[74] Six months later, after the bank posted a loss of RM1.4 billion for the year ended 31 March 1998, the government pumped in RM1.1 billion — RM350 million beyond the imagined limit.[75]

  Ju
st six months after that, in what amounted to the fourth bail-out of Bank Bumiputra in 15 years, it was merged with Commerce Asset-Holding Bhd., Malaysia's sixth-largest banking group. They formed Bumiputra Commerce Bank, a new entity with RM65 billion in assets that was listed and would be punished by the market for poor future performance. At RM1.58 billion, Commerce Asset got a bargain: Bank Bumiputra's commercial-banking operations with a clean balance sheet. In a fit of generosity that matched previous decisions on the bank, the government agreed to take over all non-performing loans, estimated at RM7 billion, at face value. The government agency set up to buy bad loans and clean up a banking system damaged by the regional crisis paid as little as 60 per cent in the case of other banks. Also, the government pledged that the agency would accept at face value any Bank Bumiputra credits that turned sour during an 18-month period after the merger was finalized.[76] The only consolation for most Malaysians was the disappearance of Bank Bumiputra, a pet monster that gorged itself on RM10 billion or more of their money in a decade and a half.

  The forex fiasco

  On 16 September 1992, ever after known as Black Wednesday, George Soros made himself famous and US$1.1 billion richer when Britain devalued the pound. He bet London would be forced to withdraw from the European Exchange Rate Mechanism; which was designed to reduce exchange-rate volatility and achieve monetary stability in preparation for the introduction of a single European currency. His wager took the form of selling short more than US$10 billion in pounds. He won when Britain was reluctant to either raise its interest rates to the levels of other participating countries, or to float its currency. For his victory, he was dubbed "the man who broke the Bank of England".

  Unbeknown to Soros, he also broke Bank Negara Malaysia, which had wagered a substantial proportion of its assets on Britain being able to hold the line on sterling. Faced with huge losses, Malaysia's central bank kept trading in the hope that the market would give back what it had snatched away. In two years the bank gambled away between RM16 billion and RM31 billion in the biggest Malaysian scandal of all.

  Bank Negara's debacle introduced Dr. Mahathir, at a distance, to American Soros and the mysterious and largely invisible world of currency trading that was to grow exponentially with globalization. A Hungarian Jewish immigrant who made a fortune from financial investing and speculation, Soros became a high-profile philanthropist with his support of democratic causes worldwide. While Dr. Mahathir did not actually meet Soros then, he was familiar with his exploits from media accounts. Later in the decade, when Malaysia got pummeled in the Asian financial crisis, Dr. Mahathir blamed predatory currency traders and financial speculators for the regional devastation. Calling for the regulation of hedge funds and currency traders, he denounced a system in which greed rules and where the value of money ranks higher than the value of human lives and human welfare. Currency trading, he said, was "unnecessary, unproductive and immoral".[77] It had "severely impoverished countries and regions, causing millions to lose their jobs, riots and strikes, political and social instability".[78] He singled out Soros as the main villain in the piece.

  Those sentiments, expressed so frequently and forcefully, represented a 180 degree turnaround for Dr. Mahathir, who was once happy enough to join the rush to make a buck from nervy currencies. His Bank Negara engaged in so much speculative activity in the second half of 1989 that the U.S. central bank, the Federal Reserve Board, privately asked the Malaysians to cool it.[79] The Bank of England offered similar unsolicited advice.[80] Bank Negara complied to a certain extent, but only temporarily. While denying it had been speculating, the bank explained that at a time of volatile exchange rates it was "actively" managing its external reserves to maintain their value. The main objective was "to be able to hedge, not to speculate", the bank said.[81]

  In treasury departments of banks across Asia, however, Bank Negara's trading was the source of astonishment. On some days, it would trade anywhere from US$1 billion to US$5 billion. While that was a drop in the US$400 billion global bucket, it was an enormous amount for a single central bank, and a huge chunk of Malaysia's approximately US$6.5 billion in foreign reserves. The Bank of Japan, by contrast, would rarely reach US$1 billion when it intervened in the foreign-exchange market in an attempt to drive the yen up or down. The United States set a record for itself earlier in the year when it sold US$11.9 billion in dollars, but that was over a three-month period, and only at the peak of those operations did it sell US$1 billion a day.[82]

  A central bank normally traded in the foreign-exchange market to influence the exchange rates of its country's currency, to buy other currencies in order to pay overseas obligations, or to occasionally adjust and balance its foreign-exchange reserves. Denials notwithstanding, Bank Negara was out to turn a profit. It actually needed cash on the way to buying heavily into the transportation industry. In September 1989, Bank Negara acquired 21 per cent of Malaysian Airlines System from the Minister of Finance Inc. for about RM772 million, raising its stake in the national flag carrier to 42 per cent. And in June the bank paid an estimated RM680 million to increase its stake to about 30 per cent in Malaysian International Shipping Corporation, the country's largest shipping company operating overseas.[83] The transactions were made by Finance Minister Daim Zainuddin to enable the government to pre-pay foreign debt.[84]

  It was precisely in this period, between June and September, that other traders reported Bank Negara entering the market at the same time almost daily: at the start of morning activity, before the market had established a clear trend. Its heavy trading volume was enough to influence the direction of the market during Asian trading hours. Carrying out much of its trading in the highly liquid Singapore market, Bank Negara was able to cause the dollar to move up or down by between 0.75 yen and 1 yen.[85]

  The bank cleaned up nicely at first, even if it irked the Fed on principle and upset the central banks of other major industrialized countries, which were trying to weaken the value of the dollar while Bank Negara's trades often attempted to strengthen it. Boasting one of the most sophisticated trading rooms in the world, Bank Negara turned itself into a profit centre for the government by using the country's rapidly mounting gold and foreign currency reserves to play the markets in Asia, Europe and the United States.

  In retirement, Dr. Mahathir confirmed he had given Bank Negara the green light to continue currency trading after he was told about it. "They had a trading room and they informed us, and I went to see the trading room. I was quite impressed...I thought it was great and I did not disapprove of it," he said. Dr. Mahathir said the young people doing the trading were "very quick in making decisions" and he described their activities thus: "Not so much manipulation, which I was much against, but they were seeing the movement of currencies and they thought that if they are judicious in the management they can make money."[86]

  As always, Dr. Mahathir was keen to take on the developed countries at their own games. He and other Malaysian leaders deplored what they saw as the arrogance of currency initiatives taken by the key industrial nations without consulting the rest of the world. Rather than submitting to such dictates, Bank Negara was encouraged to go on the offensive, joining the pack of private currency traders trying to outwit the major central banks.[87]

  Dr. Mahathir was particularly unhappy about the 1985 Plaza Accord, by which the then G-5 — the United States, France, West Germany, Japan and Britain — agreed to devalue the dollar in relation to the yen and deutsche mark. The aim was to reduce the U.S. current account deficit and help the American economy emerge from recession. The dollar declined by 51 per cent against the yen over the next two years. Malaysia and some other Southeast Asian countries reaped huge benefits as Japanese manufacturers moved offshore in search of cheaper land and labour to remain competitive. But there was a downside, too, as the plethora of yen loans that Malaysia sought under the government's Look East policy became much more expensive to repay. Dr. Mahathir focused on the negative side. In one of many criticisms of the
Plaza Accord, he branded it "a political decision made largely because Japan's trade rivals wanted to reduce the competitiveness of Japan". The yen appreciated to the detriment of the Japanese economy and made life more difficult for people in many poor countries, for whom cheap Japanese goods meant higher living standards, he said.[88]

  Bank Negara revelled in its anomalous reputation as a "maverick, yet conservative institution".[89] Under Governor Jaffar Hussein, it won respect for nursing Malaysia's shaky financial system back to health after a recession in 1985-86.[90] Central bank inspectors became adept at detecting bad loans, mismanagement and fraud, swooping on errant banks, finance and insurance companies, and savings and credit societies. Where necessary, Bank Negara did not hesitate to take them over temporarily. But by engaging in unbridled currency trading, Bank Negara was not only assuming irrational risk but also indulging in monumental hypocrisy. Part of its mandate was to curb speculation, and it periodically reprimanded or punished foreign banks for what it called currency manipulation and rigging.[91]

  Finding itself on the losing end of George Soros's bet against sterling on that fateful day in September 1992, Bank Negara was helplessly exposed. Rather than admit that it behaved irresponsibly and grossly misread the market, the bank tried to conceal the disaster. Bank Negara buried a brief reference to a charge of RM9.3 billion against special reserve funds deep in its balance sheet at the end of its 1992 calendar year annual report, which ran to nearly 300 pages. The depth of the hole simply was not immediately apparent among discrepancies and accounting changes noted in the balance sheet. Only in response to written questions from the foreign press did the bank issue a three-page statement, attempting to explain the 93 per cent plunge in special reserve and contingency funds to RM752.6 million at the end of 1992 from more than RM10 billion a year earlier.[92]