EPISODE 15: One disaster to cover another disaster (part 3)

Nor Mohamed Yakcop’s first job is to issue a White Paper to “exorcise the ghost” of the RM30 billion Bank Negara forex losses a decade ago to establish his suitability as the Second Finance Minister – apart from professionalism, a full commitment to accountability, transparency and good democratic governance -- Lim Kit Siang, 2004

THE CORRIDORS OF POWER

Raja Petra Kamarudin

Tan Sri Nor Mohamed Yakcop was sworn in as senator yesterday to pave the way for him to take his oath as Finance Minister II at Istana Negara before the Yang di Pertuan Agong on Monday.

Nor Mohamed said his task is to assist the Prime Minister, Datuk Seri Abdullah Ahmad Badawi, in carrying out the policies of the Treasury and that he will serve as a professional. This is an inadequate understanding or definition of his Ministerial duties – as apart as being a “professional”, he is not exempted from the Ministerial duties of responsibility and accountability. Nor Mohamed cannot only be responsible and accountable to the Prime Minister himself – when he is also responsible and accountable for his actions and decisions to Parliament, the people and country.

If Nor Mohamed is not prepared to accept the principles and responsibilities of public accountability, then he should remain as Economic Adviser to the Prime Minister and decline the political appointment as Finance Minister II.

Nor Mohamed’s first job as Finance Minister II should be to issue a White Paper to “exorcise the ghost” of the RM30 billion Bank Negara foreign exchange (forex) losses a decade ago, which he had played such a pivotal role, to establish his suitability as the Second Finance Minister – that apart from professionalism, he is fully committed to the principles of accountability, transparency and good democratic governance.

Up to now, the government has failed to “come clean” on the colossal Bank Negara forex losses as a result of speculation in the international currency markets from 1992-1994, with the losses cited as ranging from RM10 billion to RM30 billion.

In Parliament in 1994, I had given reasons as to why the Bank Negara’s forex losses as a result of its forex speculation operations could have amounted to as high as RM30 billion, which had not been seriously rebutted by any top government leader or Bank Negara official.

The reasons which I had advanced in Parliament in 1994 for a Royal Commission of Inquiry into the colossal Bank Negara forex losses remain valid today, and should be the terms of reference of the White Paper which Nor Mohamed should present publicly as his first Ministerial duty, viz:

1. To determine the actual extent of the colossal forex losses suffered by Bank Negara 1992-1994;

2. Whether there had been any financial malpractices and abuses in view of the inconsistencies and conflicting explanations about the colossal forex losses; and

3. Establish how Bank Negara could incur such colossal losses.

One question which I raised in Parliament on May 3, 1994 in my speech on the 1993 and 1994 Supplementary Estimates had remained unanswered in the past decade and continues to haunt the corridors of power  –whether Bank Negara’s maximum exposure at the height of its forward foreign exchange speculation was in the region of RM270 billion, which was three times the country’s GDP and more than five times the country’s foreign reserves at the time!

Before the RM30 billion forex losses scandal 1992-1994, Bank Negara had come under scathing international criticism. In 1989, Bank Negara was criticised by Western monetary officials for speculating in the yen and the US dollar at a time when the Group of Seven industrialised countries were trying to stabilise the currency markets.

In April 1991, a Reuters news agency report from London described Bank Negara as “a dominant force on the foreign exchange scene for some years” and it was accused by some forex operators as “a market bully”.

The 1991 Reuters report states:

“Over the past two years it has stepped up its trading volume, and this year it has started dealing in what dealer described as ‘really massive amounts’…

“Typically, Bank Negara operates in US$50 million lots, compared with the market norm of US$5 million or US$10 million and deals with maybe six major banks in Europe and six in New York, dealers said.

“One trader said the only dealers rivaling Bank Negara would be the Japanese funds. But while these funds enter the market no more than once or twice a year, Bank Negara is coming in and doing yards (billions) of dollars a day.

“”Its recent technique has been to hit major banks for US50 million each, then his them 10 minutes later," dealers said.

“Then it changes centre, and does it all over again.”

The April 1994 issue of Malaysian Business – one of the publications in the New Straits Times stable – reported that Bank Negara’s maximum exposure in the foreign exchange markets reached as high as RM270 billion – three times the country’s GDP and more than five times the country’s foreign reserves at the time!

Some Government leaders were wise after the event, and one of them was none other than Tun Daim Zainuddin, under whose first tenure as Finance Minister from 1984-1991 the Bank Negara’s unorthodox forex speculation started, who said on April 4, 1994 that while those responsible for the huge forex losses of Bank Negara had accounted for their mistakes by resigning, central banks should never “play with fire” with such forex speculation.

Daim, who was then the Economic Adviser to the Government, said:

“Central banks must not play with fire by venturing into speculative money markets where the risks or losses are high.

It is wrong to think that you cannot lose when you play in money markets. You see, if you make, someone else has to lose. When you have limited funds, you do not speculate.

You must not go into this. It is different if you are pursuing long-term investments but if you are speculating, do not go into this unless you are prepared to face losses. 

Central banks have a certain role to play and this (speculative venture) is a dangerous area where the risks are high. You should not play with fire.”

In 1995, a book on international high finance, The Vandal’s Crown by Gregory J. Millman had this to say about the Bank Negara forex scandal:

"Using all the resources a central bank commands - privileged information, unlimited credit, regulatory power, and more - Malaysia’s Bank Negara became the most feared trader in the currency markets. By trading for profit, Bank Negara committed apostasy against the creed of central banking. Instead of working to ensure global financial stability, Bank Negara repeatedly shoved huge sums of money into the most vulnerable market situations in order to destabilize exchange rates for its own profit" (p.226)

"(Bank) Negara operated behind a thick veil of secrecy. The bank seldom spoke publicly about its controversial trading activities. Yet it was increasingly clear to foreign exchange traders that Bank Negara’s operations in the foreign exchange markets went far beyond simple self-defense. It became the most awesome currency trader in the world. (p. 227)

(Bank) Negara’s market manipulation was so egregrious that one American central banker said, ‘If they tried this on any organized exchange in the world, they’d go to jail.’ However, in the unregulated international currency markets, there were neither police nor jailers. The only rule was the rough justice of the vandals, and it was this rule that eventually brought (Bank) Negara down.

In 1992, (Bank) Negara took on a large pound sterling position, apparently expecting Britain to maintain the discipline required by the European Exchange Rate Mechanism. It was a bad economic and political judgement. (Bank) Negara lost approximately $3.6 billion when Britain withdrew from the ERM, letting sterling collapse. The next year, (Bank) Negara lost an additional $2.2 billion. By 1994, Bank Negara was technically insolvent and had to be bailed out by an infusion of fresh money from Malaysia’s finance ministry." (p.229)