Dr Boediono & Century fiasco

Dr Boediono has finally came out and "defended" the bailout of Bank Century for the first time as Vice President last Friday. Nothing really new. He basically reiterated that a bailout was the best option to prevent a bigger crisis in the financial system. But the press conference failed to answer fundamental questions about his role and actions as central bank governor on two major issues: fraud and the bailout.

It is better to separate these issues to get clearer picture of Dr Boediono's role, even though they're closely related. The fraud led to the bailout. While Dr Boediono was sworn in as new central bank governor in May 2008, he was not a new guy. He was director of the central bank prior to various cabinet posts. He is clearly not a new guy in town when it comes to Bank Century and people behind the bank.

In fact, Dr Boediono should have been in a better position to prevent the whole mess from happening, because of his position in various administrations. He was finance minister when Century was established out of a merger of three banks in 2004.

THE FRAUD

For those who already read financial reports of Bank Century for 2004-2008, they could easily find "strange things". Out there, rumors about the plan from existing shareholders to sell the bank have been widely circulated since 2006. In April 19, 2008, we published a report about Bank Century: For Sale?

Initially, Texas Pacific Group through its local partner PT Northstar Pacific planned to acquire both BTPN and Bank Century, merge them to create a bank at the size of bigger than Bank Mega. TPG/Northstar accomplished the acquisition of BTPN, but dropped the plan to acquire Century.

Sources said various investors backed off after learning information about the real condition of the bank, which in December 2007 had total asset of Rp14.5 trillion. They have smelled something even though they have yet to conduct due diligence. Later on we learned about PT Antaboga Delta Securities scandal, and scores of frauds systematically committed way before they emerged in public.

The very basic question is, where was Bank Indonesia, which regularly supervised the bank, received regular updates and reports, and have access to the bank's operation?

Bank Indonesia officers several times said they have smelled something in the bank long, long time before the bailout. If they knew, why they didn't close the bank in early 2008? Was there a design to wait a financial market crisis to justify the bailout? And, where was Dr Boediono in the supervision of Century?

Among the major frauds committed by the bank and its owners is the mutual fund offered to its depositors since 2007 for a total outstanding Rp1.5 trillion. Did Central Bank know about this product? What Dr Boediono did in his capacity as central bank governor? Of course the easiest answer is "well, you know frauds regularly passed even the best supervisory system."

But even if that's the case, you should have moral obligation to resign, especially because at the same time, Bank Tripanca committed frauds in Lampung as well. Once again, we never heard of "real actions" from central bank leaders, whether it's disciplinary or administrative punishment on Bank Indonesia officers for the frauds before their noses.

THE BAILOUT

November 12, 2008: IDX suspended the trading of Bank Century shares for the second session today due to rumors about serious funding mismatch. 

Both central bank and stock market authority disclosed no details about what's happening at Century, a bank with total asset of Rp15.23 trillion on Sept 30, 2008. The bank's financial report for Jan-Sep 2008 looks OK with net profit of Rp51.6 billion, declined slightly from Rp61.4 billion in Jan-Sep 2007.

Century's operating profit slashed from Rp81 billion to Rp49 billion, while equity increased slightly from Rp1.185 trillion to Rp1.213 trillion. It is too tight, close to the minimum CAR of 8%. That's why the bank planned a rights issue of above Rp400 billion to raise its capital.

The bank invested Rp3.87 trillion in marketable securities, of which Rp1.67 trillion in US treasury notes and Rp1.112 trillion in medium term notes. Century invested in Rabobank (US$20 million), Credit Suisse (US$63 million), and Nomura Holdings (US$40 million).

Century told stock market authority that time that the bank was in good shape and that the mismatch in inter-bank transaction was just a matter of administration and timing. "The issue is a mere delay of pre-fund allocation. But the issue has been settled, so we could participate in the market again on Friday, November 14," Hermanus H. Muslim, CEO of Bank Century told IDX. 

The bank dismissed rumors about serious funding mismatch but admitted it was short of Rp5 billion several minutes before the cut of time at Bank Indonesia.

The same day, Dr Boediono also echoed Century management's explanation that what's happened at Century was a mere technical problem. Few days later, central bank officers corrected Dr Boediono's statement. Siti Fadjrijah, deputy governor of Bank Indonesia, admitted Century was clearly in liquidity crisis.

Fadjrijah said Century's capital adequacy ratio (CAR) dropped from 14% as of September 30 to negative 2.3% on Nov 21. Century's CAR declined as the bank's largest depositors pulled out after the bank defaulted on a US$56 million loan payment. "Century could have paid the debt if our interbank loans ran normally. The problem is that no bank wants to lend the money to Century because of these liquidity jitters," The Jakarta Post quoted Fadjrijah today.

What's the problem?

Fadjrijah pointed to the Asset Management Agreement (AMA) in 2006. According to Century's financial report for Jan-Sep 2008, the bank entered into AMA with Telltop Holdings, Singapore, pursuant to the settlement and pledge of US$230 million worth of securities issued by Century. Under the agreement, Telltop put pledge security deposit of US$220 million in Dresdner Bank (Switzerland) Ltd.

The Post quoted Fadjrijah that Century defaulted two payments. First on Oct 30 for US$55 million, and another US$55 million on Nov 3rd. 

Unfortunately, Century's financial report didn't explain in detail about the AMA with Telltop, including information about who's behind Telltop, nor about maturity of the facility.

Century has two other asset pledge agreements: 

1) Secured Credit Line Agreement (SCLA) with The Saudi National Commerce Bank where Century pledged its US Treasury STRIPS worth US$115 million and MTN of US$10 million.

2) Asset Pledge Agreement with First Gulf Asia Holdings Limited (FGAHL), key shareholder in Century, where Century pledged US$40 million certificate of deposit in FGAHL with promises that FGAHL will help Century in getting credit facilities from international banks.

LPS said it will inject Rp1 trillion into Century to keep the bank alive. Later on we knew that the total funds injected have ballooned to Rp6.7 trillion to keep the bank alive.

Actually, Sinar Mas Group has signed the LoI to acquire 70% shares of Century. But Bank Indonesia governor Boediono said that to protect depositors & customers, Lembaga Penjamin Simpanan (Deposits Insurance Company) has taken over the bank and had injected capital. As a result, Boediono said Sinar Mas' acquisition plan has been dropped.

The bailout decision was made in November 21, 2008, reportedly after 9.5 hours of meeting led by chairperson of Financial Sector Stability Committee (KSSK), Dr Sri Mulyani Indrawati (finance minister). 

In an effort to calm down the market, Boediono said Century is the only problematic bank at the moment and he didn't see other banks could fall into the same problem. But few weeks later, another bank collapsed in Lampung, Bank Tripanca, with outstanding debt of Rp1.7 trillion to five major banks (BRI, Mandiri, Deutsche Bank, BEI, and Mega).

Of course this case led to the question of "systemic risk" used by KSSK as the rationale of Century bailout. Why not bailing out Tripanca if "trust" and "systemic risk" are main reasons behind the bailout?

MOTIVES

Dr Boediono said last week that his main motive in the bailout of Century was only to save the economy from falling into financial crisis like 1997-1998 banking crisis. He clearly managed to keep his reputation good in the face of most Indonesians and international market, that he took no personal gain out of the decision.

But bear in mind, Dr Boediono was not alone. He worked in a system. He made decisions based on inputs from staffs. So, even if Boediono didn't take personal gain, we can't just assume that the whole system was right. We can't just assume that every body in the central bank has the same motive with Boediono.

A doubt started to emerge when Dr Sri Mulyani Indrawati told Supreme Audit Agency (BPK) that she doubted the quality of data provided by central bank for the bailout decision. Had the central bank misled KSSK? Who should be responsible for that?

Dr Boediono said there was no intention to bailout the bank only to make sure big depositors (like Boedi Sampoerna, reportedly with over Rp2 trillion in the bank) will get their money back. Once again, we can't just accept this statement as the only truth, especially because lots of people involved in the process. 

SYSTEMIC RISK RATIONALE

According to LPS, as of November 20, 2008, the day before the bailout decision, total third party funds at Century with above Rp2 billion per account was Rp5.2 trillion. Unfortunately LPS didn't elaborate further, how many accounts?

But assuming Boedi Sampoerna has over Rp2 trillion in the bank, probably the Rp5.2 trillion funds were only controlled by several people or companies (including two state-owned companies, PT Jamsostek and PT Timah Tbk). These people/companies would have been the clear losers should government decided to close down the bank, because LPS would only pay those Rp2 billion and below.

According to LPS, there was Rp5.6 trillion third party funds with account below Rp2 billion that should be guaranteed their payments if government decided to close down the bank. 

Of course some might say, "see, the cost would be less by Rp1.5 trillion if government closed down the bank, not Rp6.7 trillion." But government would say, "the potential losses would have been bigger, intangible, if closing down the bank triggers capital flight or rush in banking system."

Still, lots of questions should be asked to reveal the truth behind the bailout. Not to mention the relationship between the bailout and the alleged "fee" to be paid to Susno Duadji (head of criminal investigation unit at National Police), who paid active role in "helping" Sampoerna recover his funds. Susno was reportedly furious at Century management because Sampoerna found it difficult to get his money back even though LPS already injected Rp6.7 trillion into the bank.

THE SEQUENCE OF EVENTS

BAILOUT

November 12, 2008: Central bank spotted mismatch of funding at Century.

November 14, 2008: Central bank injected short-term facility (Rp632 billion) to Century; The same day, central bank changed the regulation on short-term facility from CAR 8% to CAR 5% to justify the disbursement of Rp632 billion funds.

November 21, 2008: KSSK decided to bailout Century.

November 23, 2008: LPS injected Rp2.776 trillion into Century.

December 5, 2008: LPS injected Rp2.201 trillion into Century.

February 5, 2009: LPS injected Rp1.155 trillion into Century.

July 21, 2009: LPS injected Rp630 billion into Century.

November 1-20, 2008: Total funds withdrawn from Century = Rp1.2 trillion.

November 20-Dec 31, 2008: Total funds withdrawn from Century = Rp4.5 trillion (consisted of BS Rp500 billion, two state-owned companies = Rp500 billion).

by Ferdy Hasiman, Haryanto Suharman, Teguh Hidayat, and Yosef Ardi

(This article is taken from yosefardi.com)

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