Friday, November 13, 2009

Misleading arguments on Bank Century bailout

Those defending Rp6.7 trillion bailout cost of Bank Century have the following word: systemic risk. There was visible "risk" in closing down the bank. They pointed to 1997-1998 banking crisis to justify the bailout. 
This "systemic risk" argument is weak on the followings: 
First, rush on BCA was not the prima causa of the banking crisis in 1997-1998. Most banks, including state-owned banks, have fundamental problems way before the rush, especially due to poor lending practices, including massive violations of legal lending limit (LLL) to own group. These problems were not seen in 2008 when Century was in trouble. 
Second, BCA rush was seven months after government closed down 16 banks. There is no correlation between the closure of 16 banks in November 1997 and rush on BCA in May 1998. So, it is just too much to justify the bailout arguing on possible rush in the banking system. 
Third, banking crisis in 1998 was worsened with political crisis, social unrest and the downfall of Soeharto. We're in good political stability last year despite international financial turmoil. Fourth, most banks collapsed in 1997-1998 due to bad loans following the downfall of rupiah from Rp2400/USD to Rp12,000/USD. Rupiah was relatively stable prior to the Century bailout.
Fifth, BCA was the largest private-owned bank in 1998, responsible for almost 15% of total funds in the banking system. Century is a small bank, with third party funds of Rp14 trillion (before the bailout) or about 0.8% of total funds in the banking system.
Using all of these components, it is difficult to accept the "systemic risk" argument. Even if they pushed the "systemic risk" to justify the bailout, both government and central bank failed to learn from 1997-1998 banking bailout.
In 1997-2001, government injected over Rp700 trillion to bailout major banks without proper assessment on the asset quality and collateral of bank owners. Some banks and owners, with the help of sophisticated audit firms, fabricated their books to get bigger bailout funds. The combined result: hugely expensive bailout cost, even until now, and probably our grandchildren. 
Taxpayers have and will contribute substantially to profitability of banks due to the costly recapitalization bonds. Government injected BCA with Rp60 trillion recapitalization bonds. Government then offloaded the bank and recovered less than Rp10 trillion. Combined with the assets pledged by Salim Group, total recovery is less than Rp30 trillion. Running cost of the bailout is Rp7 trillion per annum, until now.
Century's owners and management managed to misled Bank Indonesia. First, there were substantial amount of own group lending, especially loans to companies owned by Robert Tantular (Century owner), violating the legal lending limit (LLL). Second, Century invested in offshore junk bonds. As a result, the bailout cost surged substantially to Rp6.7 trillion from initial target of Rp632 billion.
Should the central bank, Deposit Insurance Agency (LPS), and government ordered an investigative audit on Century, they would be better equipped in making decision: close down the bank or keep it afloat.
Finance Minister Sri Mulyani Indrawati had admitted inaccuracy of data provided as the basis of bailout decision. Such inaccuracy had ballooned the bailout cost. Rp6.7 trillion might look small compared to the 1997-98 bailout. But that's still a huge amount of money, enough to build new schools or repair PLN's transformer (which caused blackouts in Jakarta). We have lost Rp7 trillion in the bailout of Lapindo mudflow in East Java, also due to weak leadership, inaccuracy in decision making, and conspiracy between business and political elites. We can't afford to pay more!




Blogger Hai said...

Very stupid article.. Please know your facts before you speak.

One thing you should know the cost of closing Century bank on November 20, 2008 was 5.6 trillion rupiah...! that is the certain money lost that will be borne by LPS should the BI/government decided to close Century, because that is the total amount that was saved in Century that is under 2 billion rupiah and the bank was declared BKO.

And that is unlike the 6.7 trillion that is now funneled to Century that still has some possibility to be returned after Century is sold, the 5.6 trillion is non recoverable at all except by the selling of the bank asset in piecemeal way.. (building, cars, computers etc.) that is certainly has much less value than selling the bank as a whole working bank.
So the cost of closing the bank on November 2008 can be actually higher than keeping it afloat even without the excuse of systemic risk.. which is indeed a very real possibility

November 16, 2009 11:04 PM  
Blogger yosef said...

Hai Hai, I guess you have to read the previous articles carefully...I wrote the following:
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."

November 16, 2009 11:44 PM  
Blogger Hai said...

It is very good that you recognized that the cost of closing bank century is not zero but 5.6 trillion rupiah ! If you want to be fair to this whole Century affair you should mentioned that in your article more prominently.
I am sick an tired of reading "the experts" saying that the government has squandered 6.7 trillion of people's money to save Century.
That's simply not true..! because not many people realized that closing century would cost 5.6 trillion ! most people think the cost is zero !

I wonder if the government decided to close down century on 20 November 2008 and systemic risk didn't happen then what people like you and "the experts" would say...? I bet it would be in the along the line of: see.. the government has squandered 5.6 trillion rupiah of people's money... the government should save century !

And I don't know what else you guys could come up with if the systemic risk really did happen if Century were closed !

So if the saving is really only 1 point something trillion is it worth the risk of having the possibility of economic meltdown in this country ? I don't think so... I would consider the 1 point something is insurance against the economic meltdown of this country..

Imagine that you were Boediono or Sri Mulyani in the seat of the decision whether to save Century or not.. and you were facing with these numbers:
5.6 trillion of certain lost if you closed it now + the risk of economic meltdown....
(some says they knew it would cost more then 600 billion that was initially put forward) May be some 2-3 trillion of the cost in saving Century and you save the economy from possibility of economic meltdown.

I bet you don't a professorship in economy to decide which decision you should make..

November 17, 2009 12:10 AM  
Blogger yosef said...

I'm not an expert. I'm just a stupid journalist, ordinary citizen.
I just think that Century bailout is a product of ignorance and lack of supervision in the part of Bank Indonesia for many years. There won't be Rp6.7 trillion bailout if they did their job properly. You can't just start and stop there at the bailout. You have to look at the history of their supervision to judge. My question remains: where were Bank Indonesia officers in the past four or six years before the bailout? Have they done their job? Have someone held responsible for the mess? This is not just about law, it is about morality, attitude of our officers. We can argue endlessly on systemic risk...but one thing is clear: our officers failed to learn something out of the previous crisis.

November 17, 2009 12:22 AM  
Blogger yosef said...

BTW...If I were BI governor, I would have closed down Century in 2006 when I got information about what's really happened at the bank, including the violations of legal lending limit...Lucky that I'm too stupid to be even a clerical worker at the prestigious central bank.

November 17, 2009 12:33 AM  
Blogger Hai said...

Don't be naive Mr. Yosef... the whole thing has been geared up into political arena... and no longer the question whether it was the lack of supervision of the BI for many years that caused the century affair to happen that they are after. It is the decision to bail out that they questioned.. with sexy surrounding questions like.. money that used to fund presidential campaign.. or people that have closed ties to mr president that have put money in the bank etc. etc.
The question of the lack of supervision by BI since 2005 cannot take down Boediono who became the governor ONLY in May 2008. nor can it touch the flamboyant economic minister... not to mentioned the president himself.. so it won't be the issued questioned by those who eager to investigate the Century case.. who vow to make it a Century-gate...
And it is people like you whether you realized it or not or whether you are willing participant or not who they will use.. especially if you are from the media.. and the ones who don't cover both sides of the story fairly...but only one that will be advantageous to your own popularity... (of course it won't increase your readership volume if you wrote that Century-gate turns out to be nothing other than a natural case to save the country economy)

November 17, 2009 12:52 AM  
Blogger Hai said...

And Mr. Boediono who had to decide whether to close or save Century wasn't the governor BI in 2006 was he Mr Yosef ?

November 17, 2009 12:54 AM  
Blogger yosef said...

I don't see the reason why they can't inquire into the question surrounding the bailout itself. Don't be naive as well...Boediono and SBY might be considered "clean", but people surrounding them? Well, we can't just assume everybody the same. Boediono and SBY or Sri Mulyani are the "systems", not "persons". They are only parts of the decision making systems. People are not stupid, they know politics, from the fact that they reserved doubts on both sides. You can't just close the doors for such have to fight for it.
PS: I don't care about popularity. I don't make a living from that. Just love to share my thoughts through this stupid blog...
Next time, be gentle, identify yourself!

November 17, 2009 1:08 AM  

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