Bank Negara RCI –A Political Witch hunt?


September 26, 2017

Bank Negara RCI –A Political Witch hunt

by Wan Saiful Wan Jan@www.freemalaysiatoday.com

The hearings of the Royal Commission of Inquiry (RCI) on Bank Negara Malaysia’s foreign exchange trading losses has ended. They called in 25 witnesses, and apparently more than 40 relevant documents have been scrutinised.

Image result for Bank Negara HQ Building

The RCI was to investigate the losses incurred by Bank Negara in the early 1990s. The RCI was led by its chairman Sidek Hassan, who is former Chief Secretary to the government and current chairman of PETRONAS.

At the beginning of the RCI, Sidek told the public that they had been given five key tasks.

Image result for najib vs mahathir

Zeroing the Blame on Dr. Mahathir for Bank Negara Forex Losses.But what about 1MBD Scandal?

First, to determine the authenticity of the allegation on the foreign exchange trading losses suffered by Bank Negara Malaysia in the 1990s and its implications on the national economy.

Second, to determine whether BNM’s involvement in the foreign exchange trading activities which caused the losses had contravened the Central Bank Ordinance 1958 or any relevant laws.

Third, to determine whether there were hidden facts or information relating to foreign exchange losses suffered by BNM and misleading statements given to the Cabinet, Parliament and the Public.

Fourth, to recommend suitable actions to be taken against those found to be directly or indirectly involved in causing the losses and hiding the facts and information on the losses.

Fifth, to recommend appropriate measures to ensure the incident will not recur.

I find the increasing demands for RCIs rather worrying. Yes, indeed it is a legitimate tool that we can use to investigate any pertinent matter. But the fact that we see more and more people calling for RCIs on various issues show that there is a lack of trust in the regular mechanisms or institutions that exist to investigate matters.

We already have bodies like the police and the Malaysian Anti-Corruption Commission (MACC), plus various other law enforcement agencies, whose jobs are to conduct investigations on matters under their purview.

Public demand for RCIs to be formed imply that they do not fully trust the existing institutions, and that is why another body needs to be formed. This declining trust in our public institutions worries me.

In any case, the formation of this latest RCI is another low in itself. It was formed to investigate a matter that took place 30 years ago, when there are more than enough things that remain unresolved today.

The Malays have a saying about this: “Gajah depan mata tak nampak, tapi kuman di seberang laut nampak jelas.”

Supporters of former Prime Minister Dr Mahathir Mohamed have claimed that the RCI is an attempt by the government to tarnish his legacy. They have a point.

The focus of this investigation seems to be on Mahathir alone. With a stretch, perhaps it will implicate Anwar Ibrahim too. But the focus seems to be Mahathir.

I find this truly amazing because the RCI was formed only when Mahathir formed a new political party that is currently challenging UMNO.

When he was still in UMNO, nobody was interested in investigating him. And when he was Prime Minister, many of these people, from all races and religions, were kissing his hands.

Some of the current members of the Cabinet were Mahathir’s ardent defenders soon after the losses were incurred by Bank Negara. They stayed sheepishly silent while Mahathir was their leader. And they continued to be silent even after Mahathir’s retirement as Prime Minister in 2003.

Is it a coincidence that these politicians suddenly found their conscience a few months after Mahathir founded a new opposition party?

Where did they hide that conscience during the years when they were worshipping Mahathir?

Malaysia follows a Westminster-style democracy where the cabinet as a whole acts collectively. There is no one-man-show. All members of the cabinet are collectively and equally responsible for all the decisions.

Now with the new-found conscience, can we reasonably expect that everyone who has ever served under Mahathir’s Cabinet will take collective responsibility for any recommendations made by the RCI?

Or are they going to blame Mahathir alone since he is now an opposition leader, while claiming infallibility for those who are still in government?

An RCI is an institution that we usually appeal to in order to boost confidence in our system of government. When other bodies cannot fully fulfil the trust burden, we often appeal to entities like the RCI to step in and play their roles.

The high regards commanded by an entity like the RCI is the reason why it usually works. That is also why such a body deserves the word “Royal” in its name. But abusing an RCI like this is completely unacceptable. It erodes trust in yet another institution in the country.

If Mahathir has done any wrong in the Bank Negara forex dealings, then those people who were in his Cabinet at that time should have resigned in protest, or they should at least have spoken, then. Not just now. But they had 30 years to do it.

Failing to resign at that time shows that they have no real principles. And what a shame that they damage public trust in the noble institution of the RCI too in this blatant exhibition of their hypocrisy.

Wan Saiful Wan Jan is chief executive of Institute for Democracy and Economic Affairs (IDEAS).

 

Bank Negara Malaysia Forex RCI – what it has, and has not, established


September 23, 2017

Bank Negara Malaysia Forex RCI – what it has, and has not, established

by P. Gunasegaram@www.malaysiakini.com

Image result for nor mohamed yakcop deputy chairman, khazanah nasional berhad

No Longer Deputy Chairman, Khazanah Nasional Berhad. Finally. He may end up carrying the can. But that is purely academic; the foreign exchange loss incurred by Bank Negara Malaysia is real–some RM30 billion

QUESTION TIME | Three people collectively knew of what exactly transpired in Malaysia’s RM31.5 billion foreign exchange losses, but the demise of one of them results in a missing piece of evidence which would have provided the link in the chain of accountability as to who was ultimately responsible.

Even as the first casualty of the Royal Commission of Inquiry (RCI) into Bank Negara Malaysia’s (BNM) foreign exchange losses occurs, it is clear that the commission has not established much going by the proceedings which ended two days ago.

If the political intention in the setting up of this inquiry, or inquisition as some have called it, is to ascribe blame to and imply benefit to some – especially the Prime Minister at the time, Dr Mahathir Mohamad – it has not been conclusive.

But the extent of the losses to the country is clear – RM31.5 billion between 1991 and 1994, given to the RCI by a BNM staff member. Even this piece of vital information was in the public realm for some time, although it is good to have clear confirmation now.

The difference between the situation at BNM (highly irregular and speculative trading by the central bank) and 1MDB (alleged theft) are quite different even if the amounts involved are of the same order of RM30 billion. No one except the counterparties to BNM’s trade, including currency trader George Soros, benefited from the massive positions taken by BNM.

It was also established that there were attempts to hide the extent of losses, widely reported at the time to be just RM5.7 billion, going by the deficiency in shareholders’ funds of BNM for 1993. In fact, the RCI was told by a BNM official that several papers involving the losses were classified under the Official Secrets Act. But it was not established who decided to classify the documents.

There were gaps in terms of the chain of command that led to the losses which the RCI was not able to fill. Former Bank Negara advisor Nor Mohamed Yakcop said he accepted his fair share of accountability over the foreign exchange (forex) losses incurred in the late 1980s and early 1990s.

But he said he never discussed the forex transactions in the years between 1986 and 1993 with both the then Finance Minister Anwar Ibrahim and Prime Minister Mahathir, which if true, absolves them of blame for the losses.

“The forex losses occurred, there is no denying it. There is also no denying my accountability for the forex losses. I accepted my fair share of the accountability and resigned from Bank Negara.”

Nor Mohamed became the first casualty of the RCI as he resigned his Deputy Chairman’s position at Khazanah Nasional Bhd, the government sovereign fund which he had helped nurture back into capability and trust starting in 2004 under previous Prime Minister Abdullah Ahmad Badawi.

He had been under political pressure to finger Mahathir over the forex scandal but he steadfastly refused to do so.

Lengthy document

He issued a document of nearly 4,000 words to the RCI, which makes compelling reading, outlining the events leading to BNM’s forex trading activities.

“Prior to 1985, BNM was not active in external reserves management, including forex trading, given the relative stability in the international foreign exchange market.

“The situation changed in 1985. On 22 September 1985, five OECD countries met in private at the Plaza Hotel in New York and decided among themselves, without consulting other countries, that the yen and the German Deutsche mark should be strengthened significantly against the US dollar by way of market intervention,” he said.

This was the exact same argument given by Mahathir as I explained in this article when he justified BNM’s interventions in the currency market.

Image result for mahathir mohamad

“If the political intention in the setting up of this inquiry, or inquisition as some have called it, is to ascribe blame to and imply benefit to some – especially the Prime Minister at the time, Dr Mahathir Mohamad – it has not been conclusive.”–P. Gunasegaram

Bernama reported on November 5, 1990: “Speaking to reporters after delivering a keynote address at the 17th Asian Advertising Congress here, Datuk Seri Dr Mahathir said, ‘We are stabilising our own currency.

“‘When they do something it is always alright. We are trying to protect our currency. We have lost a lot of money before when they revalued their currency like the yen. We lost a lot of money because we borrowed yen, when they devalued their currency we also lost money.

“‘So what is wrong with our protecting our own interest, why is it when they can protect their interest and we cannot. I cannot understand this.’”

That’s clear indication he condoned currency trading by BNM. Of course, that does not necessarily mean Nor Mohamed would have taken instructions from Mahathir, although they were on the same page in their views.

The person who Nor Mohamed reported to was Jaffar Hussein, then BNM Governor. He quoted Jaffar’s speech which advocated active intervention in the forex markets to manage reserves, to indicate that Jaffar was the main architect of the policy. Mahathir too put the responsibility of the forex trades on Jaffar.

Said Nor Mohamed in his statement: “I need to elaborate on this point because Allahyarham Tan Sri Jaffar Hussein is no more with us, and it is important that we recognise the wisdom of this great man. The Governor believed that by active management of the external reserves, we will be able to acquire the skills, knowledge and experience required to serve the nation, when required, both in developmental activities as well as to overcome any financial crisis that the nation may face in the future. He termed this as ‘market expertise’.

“Indeed, Allahyarham Tan Sri Jaffar Hussein’s foresight regarding market expertise saved the nation during the 1997/1998 financial crisis. In a strange twist of history, the skills, knowledge and experience acquired in BNM enabled the nation to implement the Unorthodox Measures of September 1998.”

And Nor Mohamed went on to enumerate how he used this “expertise” to help rescue the country from the ravages of 1997-98 Asian financial crisis and saving the country hundreds of billions of ringgit.

Missing link

However, former Finance Minister Anwar Ibrahim, now an ally of Mahathir under Pakatan Harapan, fingered Nor Mohamed as the person most responsible and had wanted him sacked.

Anwar said Nor Mohamed was found to have overstepped his boundaries following the forex losses.

“He did not report the true picture to him (Jaffar). I instructed that Nor Mohamed be sacked, if possible, by 4pm (on the day of the meeting). If he didn’t resign, I would have sacked him.”

Asked about Nor Mohamed’s comments about learning a lesson, he was scathing: “His assertions are absurd. You must be accountable. It doesn’t have to cost the country billions to learn a lesson. He should go back to business school (to learn a lesson),” said Anwar.

Mahathir similarly laid the blame on Jaffar. Citing a meeting with Jaffar, he said he was informed verbally by the then governor that BNM could strengthen the country’s reserves and currency through forex trading. Jaffar’s decision to go actively into forex trading, said Mahathir, was not made with his knowledge.

“As Prime Minister, I was never involved in Bank Negara’s administration and I believe that I was not permitted under the law to get involved in its policies and affairs.”

Mahathir, however, says this does not mean that the Governor, then, never talked about the central bank in general terms.

According to Nor Mohamed, in his written communication to the RCI, he was tasked with implementing the external reserves management policy as determined by the BNM’s board.

“…I reported both to the Governor and the External Reserves Committee (ERC). I spoke to the Governor on external reserves management regularly, and certainly whenever there was a large movement in the exchange rates. I also reported to the ERC whenever it met. The membership of the ERC comprised, amongst others, the Governor, Deputy Governor, and the Advisors. Further, there were weekly Senior Officers Meeting, where the external reserves matters were sometimes discussed.”

However, then deputy governor of BNM Lin See Yan has a different story to tell. Lin told the RCI he was first informed about the losses by the former bank Special assistant to the Governor, Lee Siew Kuan.

He also said he was then informed about the losses by “friends from the International Monetary Fund (IMF)”. “They told me ‘we know you have made open positions and you have made big losses, please stop it’.” Both Lin and Lee then went to see Jaffar whom Lin said had confirmed the losses.

“We asked how big the losses were, he said he was not sure.”

Jaffar, said Lin, had then agreed that Lee, with the help of former Bank Negara Assistant Governor Abdul Murad Khalid, were to then carry out preliminary investigations immediately. The investigations then had found that Bank Negara had large open forward positions in multiple currencies which meant that the bank would suffer more losses.

“As a central banker, (for me) the risk was not acceptable,” said Lin.

Circumstantial evidence

Meantime former Finance Minister Daim Zainuddin, during whose tenure from 1985 to 1991 BNM started engaging in active forex trading, denied any knowledge of forex dealings, raising the question as to who the instructions came from. Daim also said if he knew about the forex trading, he would have stopped it.

Mahathir, as explained, is likely to have known and sanctioned BNM’s orthodox foreign exchange activity. The three people who would have known for sure the chain of authority are Mahathir, Nor Mohamed and Jaffar. Mahathir and Nor Mohamed’s accounts to the RCI implicate Jaffar, who is not here to defend himself.

The RCI is expected to complete its probe within three months from the date of its setting up on July 15 and thereafter submit its report to the Agong.

But unfortunately, there are not many conclusions that it can make considering that the RCI comes 25 years too late. What is clear is RM31.5 billion in losses were made.

What is not clear is how they were made and why certain people were given so much authority to trade way beyond the normal acceptable limits for a central bank. No central bank has before or since lost more money on trading than BNM.

The answers will continue to be in the realm of conjecture and circumstantial evidence. There can be little doubt that Nor Mohamed was doing what he thought was best for the country. But it should have been very clear to him that he was taking a large risk because the losses would have been massive – and turned out to be so – if his bet was wrong.

Was he acting entirely on his own when he took that bet? Is it likely he consulted no one before he made his bets? Who gave him the go-ahead to make such unprecedentedly large bets? Did he exceed the limits set by BNM? Were there any limits?

Was Jaffar indeed the architect of BNM’s forex policy? Remember, his background was accountancy  – he was a partner at PwC. He was known to be conservative when he was CEO of Malayan Banking. Was he protecting someone when he took the rap?

This hastily convened RCI, which has a couple of months to complete its report and recommendations, is not going to answer all these questions satisfactorily.

 

Nor Mohamed Yackop– Not Sacked but elevated under Mahathir, Badawi and Najib Razak


September 9, 2017

Nor Mohamed Yackop– Not Sacked but elevated under Mahathir, Badawi and Najib Razak

Image result for nor mohamed yakcop deputy chairman, khazanah nasional berhad

Khazanah Nasional Berhad’s Deputy Chairman–The Currency Trader  Rogue who broke Bank Negara Malaysia–Nor Mohamed Yakcop. He was never made to account for his excesses. Instead, under Mahathir, Badawi and Najib Razak was elevated. That is the genius of Malaysia

ANWAR Ibrahim wanted to sack Bank Negara Malaysia’s (BNM) Assistant Governor Nor Mohamed Yakcop for exceeding his boundaries in forex trading, the Royal Commission of Inquiry (RCI) into the forex losses, heard today.

Anwar, who was then Finance Minister, told the RCI that Nor Mohamed had not only exceeded his boundaries, he had also failed to provide an accurate report on the losses suffered by BNM through forex trading.

Image result for nor mohamed yakcop deputy chairman, khazanah nasional berhad

“The final explanation (by Jaffar) was accurate because (it) verified that Nor Mohamed exceeded the mandate given to him. “(Nor Mohamed) did not give an accurate report to him (Jaffar).

“I instructed that Nor Mohamed be sacked, if possible at 4.00pm (during their meeting),” said Anwar in reference to a conversation he had with the then Bank Negara Governor Jaffar Hussein in 1994.

Anwar added he would have initiated the sacking if Nor Mohamed refused to resign. Nor Mohamed resigned from his position in April 1994.

Anwar, the de facto leader of PKR and Pakatan Harapan, also criticised Nor Mohamed for the latter’s testimony at the RCI yesterday where he had said he deemed the forex losses as a lesson that helped the country in facing the Asian financial crisis.

“His assertions are absurd. You must be accountable (for what has happened),” said Anwar when the matter was prompted by RCI panel member Saw Choo Boon today.

 

In his testimony yesterday, Nor Mohamed took accountability over the forex losses and admitted he was responsible for BNM’s forex trading from 1986 until 1993, before his resignation. He said that he accepted his fair share of accountability over the forex losses incurred in the late 1980s and early 1990s.

Nor Mohamed also told the RCI panel that he never discussed the forex transactions in the years between 1986 and 1993 with both Anwar and then prime minister Dr Mahathir Mohamad.

Source: THE MALAYSIAN INSIGHT

A Rogue Currency Trader’s Confession–Bursting Bank Negara Malaysia


September 7, 2017

A Rogue Currency Trader’s Confession–Bursting Bank Negara Malaysia

 

Text of Statement by Khazanah Nasional Berhad’s Deputy Chairman Tan Sri Nor Mohamed Yakcop before Royal Commission on Bank Negara Forex Fiasco

Image result for nor mohamed yakcop deputy chairman, khazanah nasional berhad

The Rogue Currency Trader–No Excuses for Recklessness

The forex losses happened. There is no denying it. There is also no denying my accountability for the forex losses. I accepted my fair share of the accountability for the forex losses and resigned from BNM. At that time, it appeared to me to be a sad end to my 25 years of service to the nation, through Bank Negara Malaysia.–Nor Mohamed Yakcop

Introduction

I joined Bank Negara Malaysia (BNM) in September 1968. I was promoted to the post of Manager, Banking Department in 1986.

The Banking Department was responsible for external reserves management, regulation of the domestic money market, including the discount houses, development of Islamic banking, approval of domestic bond issues, managing the Export Credit Refinance Facility (ECR), development of new financial institutions and promoting trade by way of Bilateral Payment Arrangement (BPA) with other central banks in developing countries. When I resigned from BNM in April 1994, I held the post of Advisor. I re-joined BNM again, as an Advisor, in September 1998, after the implementation of the Unorthodox Measures, which I will describe later in my statement. I served in BNM in that capacity until April 2000. In May 2000, I was appointed as the Economic Advisor to the Prime Minister, and subsequently, in January 2004, I was appointed as the Minister of Finance II. In April 2009, I was appointed as Minister in the Prime Minister’s Department responsible for the Economic Planning Unit (EPU). I retired in May 2013, and joined Khazanah Nasional Berhad as Deputy Chairman in June 2013.

Image result for nor mohamed yakcop

Policy imperatives of active external reserves management by BNM

Prior to 1985, BNM was not active in external reserves management, including forex trading, given the relative stability in the international foreign exchange market.

The situation changed in 1985. On 22 September 1985, five OECD countries, met in private at the Plaza Hotel in New York and decided among themselves, without consulting other countries, that the Yen and the German Deutsche Mark should be strengthened significantly against the US dollar by way of market intervention. This is known as the Plaza Accord. The Plaza Accord was historic because it was the first time central bankers agreed to intervene in the currency market in such a big way and the first time in history when governments set target foreign exchange rates to be achieved through active intervention.

One important outcome of the Plaza Accord was that the exchange rate of the Yen versus the US dollar strengthened sharply. (The Yen strengthened from 240 Yen to the dollar in 1985 to 120 Yen to the dollar by early 1988).

The strengthening of the Yen resulted in many developing countries suffering huge losses, since a significant portion of their external borrowings was denominated in Yen. The Malaysian Government, Government agencies, including GLCs, as well as the Malaysian private sector suffered significant forex losses on repayment of Yen loans and foreign exchange revaluation of Yen loans, following the sharp appreciation in the value of Yen arising from the Plaza Accord.

Image result for tan sri jaffar hussein

 

Malaysia’s borrowings in Yen during the early 1980s were mainly for infrastructure building. At that time, the Malaysian bond and sukuk markets were not yet developed to enable large amounts of borrowings for long periods to be obtained domestically in Ringgit. Given that infrastructure projects required long gestation period, the Malaysian government and its agencies chose to borrow in Yen, since, at that time, long term yen loans were available with low interest rates. The borrowings also coincided with the building of major infrastructure projects in the country.

Since the Plaza Accord of September 1985, the international forex market also became much more volatile, with sharp and sometimes erratic movements in the daily forex rates. While the Plaza Accord of September 1985 was intended to strengthen the Yen and the Deutsche Mark, another agreement, the Louvre Accord was signed on 22 February 1987 in Paris by six OECD countries, again without consulting other countries, to halt the over-appreciation of the Yen and the Deutsche Mark, and this created another round of turmoil in the foreign exchange market.

Image result for Lin See Yan

Dr. Lin See Yan–Deputy Governor, Bank Negara Malaysia

This was the background that led to the decision by BNM to begin active external reserves management. I understand that the Commissions attention has been drawn to Allahyarham Tan Sri Jaffar Hussein address in New Delhi, India on 5 December 1988. In that speech the Governor had publicly set out BNM’s rationale for the active external reserves management policy. Let me quote, extracts from that speech by Allahyarham Tan Sri Jaffar Hussein:

“Why are we so active in the market now, compared to before? There are a number of reasons. First, until recently, our external reserves were not large, being only US$4 billion at the end of 1984. This has now increased to US$7.8 billion, thus justifying a more active management of reserves.

Secondly, the exchange rate volatility since the Plaza Agreement of September 1985, had changed the stakes of the game. Whereas in the past an active management of reserves might have made a difference on yield of twenty basis points; it now makes a difference of maybe 500 basis points. So it is worth the trouble. Thirdly, forex trading is today a 24-hour business and there are opportunities throughout the day to deal…

I recall one occasion when some bankers made an attempt to speculate against the ringgit in off-shore centres on one of our national holidays, when they thought we would be closed for the day. To their surprise and cost, we opened up our dealing room during that national holiday and intervened in the off-shore centres to stabilize the ringgit and in the process taught those bear speculators a lesson they are not likely to forget…

…When I joined the Central Bank in 1985 from the private sector, I was informed that the main thrust of reserves management in Bank Negara was to preserve the value of what we have and the main considerations were safety and liquidity. To that, I have added a third and fourth dimension: profit optimization and market expertise.

I basically took the stance that risk-taking in reserves management included not only the risk of losses, but also the risk of falling behind inflation, of not earning as much with our scarce resources as we could. The primary motivation is still to preserve and conserve the value of what we have…

To me, in the last analysis, an active reserves management policy goes beyond the additional return and risks. A key advantage is that the active involvement has given us a greater feel of what is really going on in the foreign exchange and capital markets…

Central banking by decree and fiat can no longer budge markets, but market skills and influence of market psychology can do the trick…

I might also add that in a developing country, where foreign exchange trading skills are scarce, it is the duty of the Central Bank to be the provider of skilled manpower in the market, to be an educator of such technical skills and to be in the forefront of banking and computer technology…….I notice even the Bank of England is now actively adopting this policy”

The Governor’s main point was that the primary motive for the active external reserves management was the mitigation of the downside impact of major changes in foreign exchange rates on Malaysia’s foreign currency assets and liabilities. Let me repeat what the Governor said in New Delhi: “the primary motivation is still to preserve and conserve the value of what we have.” We sought to acquire the skills to manage the external reserves better and also, in a broader context, to assist the nation when required. The larger deals, beyond the limits given to the forex traders, were to protect the external reserves and the value of the Ringgit, by way of diversification. At that time, BNM had no specific limit for such diversification deals.

Image result for nor mohamed yakcop's book on forex trading

 

To understand further the role of external reserves management in achieving the objectives of a central bank, please allow me to elaborate on the link between the stability of the Ringgit exchange rate, monetary policy and external reserves management.

Maintaining a stable Ringgit in the late 1980s to early 1990s

In the Malaysian domestic market, since the late 1980s, there was a continuous large inflow of US dollars by investors, including some short-term inflows or “hot money”. If BNM did nothing, the inflows would have resulted in the Ringgit strengthening significantly from the BNM policy range of between 2.50 and 2.80 against the US dollar. That would have created major implications for the economy, particularly since it would have reduced the competitiveness of Malaysian export sector.

This was an important consideration for a country which is one of the largest trading nations in the world.

14. In order to maintain the stability of the Ringgit, BNM had to buy the excess US dollars from the banks in Malaysia, in its role as the buyer of last resort for foreign currencies in the domestic market. This activity is termed as BNM’s foreign exchange intervention operations. The US dollars were then used by BNM mainly to purchase US Treasury Notes. The yield on the US Treasury Notes in the early 1990s was on average about 4.5 per cent p.a.

If BNM did nothing after mopping up the US dollars, there would be the issue of a large overhang of excess Ringgit in the system, since BNM would have paid Ringgit for its purchase of the US dollars. This large overhang of excess Ringgit in the system would adversely affect BNM’s monetary policy. It would cause the Ringgit interest rates to fall sharply (based on supply and demand), and create inflationary pressures. Therefore, BNM had to borrow back the Ringgit funds that it had provided to the banking system in its intervention operations. The purpose of BNM borrowing back the Ringgit funds from the banks is to neutralize the effect of the original forex intervention in the domestic money market. This is known as the sterilization operation. The borrowing rate that BNM had to incur (during the early 1990s) for the sterilization operation was about 7.5 % p.a.

Therefore, the combination of the BNM intervention and sterilization operations would cost about 3 % p.a. This is because the cost of borrowing back the Ringgit was higher than the yield of US Treasury Notes. This negative margin would be recorded as a loss in BNM’s books. In BNM’s active external reserves management, one consideration was to mitigate this loss.

The issue of moving into an active mode of external reserves management must also be seen in the context of Allahyarham Tan Sri Jaffar Hussein’s philosophy regarding Bank Negara’s role in national development. I need to elaborate on this point because Allahyarham Tan Sri Jaffar Hussein is no more with us, and it is important that we recognize the wisdom of this great man. The Governor believed that by active management of the external reserves, we will be able to acquire the skills, knowledge and experience required to serve the nation, when required, both in developmental activities as well as to overcome any financial crisis that the nation may face in the future. He termed this as “market expertise”.

Lessons for the 1997/1998 Asian Financial Crisis

Indeed, Allahyarham Tan Sri Jaffar Hussein’s foresight regarding market expertise saved the nation during the 1997/1998 financial crisis. In a strange twist of history, the skills, knowledge and experience acquired in BNM enabled the nation to implement the Unorthodox Measures of September 1998. It provided the nation with the ability to frustrate the foreign currency manipulators, whose intention was to destabilize Malaysia and cause chaos in the socio-economic fabric of the nation.

Unlike Thailand, Indonesia and South Korea, Malaysia was able to overcome the financial crisis of 1997/1998, without borrowing a single cent from the IMF or the World Bank or anyone else. We reset the Nation back on the growth trajectory without outside help. The Unorthodox Measures of September 1998 saved Malaysia from dire consequences, following the worst financial crisis in our history, and restored the sovereignty and dignity of our beloved nation.

In economic terms, the result of the Unorthodox Measures of September 1998 is substantial. Just to illustrate using one of many measures of economic gain, the Unorthodox Measures resulted in the market capitalization of the Malaysian stock market recovering from a low of RM 181.5 billion on September 1, 1998 to RM 579.2 billion on March 24, 1999, a gain of RM397.7 billion. The Stock Market Index jumped from 262.7 (September 1, 1998) to 851.7 (March 24, 1999), a multiple of 3.24 times.

Let me briefly illustrate how the skills, knowledge and experience that we acquired from the forex activities in Bank Negara became critical in formulating the Unorthodox Measures of September 1998:

(i) There was great deal of confusion, during the early days of financial crisis of 1997/1998, on the concept of “Offshore Ringgit”. The initial view was that bags full of cash in Ringgit were taken out to Singapore and Malaysian customs officials at the border were instructed to check thoroughly the bags of Malaysians departing to Singapore. Obviously no big amount of cash was found.

I explained to the Prime Minister in 1997 and 1998 that the term “Offshore Ringgit” does not refer to Ringgit physically located outside Malaysia. The bulk of Ringgit will always remain in Malaysia. The term “Offshore Ringgit” refers to Ringgit (in Malaysia) which is owned by foreigners. The currency manipulators borrow the Ringgit, both local Ringgit owned by Malaysians or “Offshore Ringgit” owned by foreigners, to sell the Ringgit for US dollars. This is called short-selling. We knew from our forex trading days that on Black Wednesday (16 September 1992) when Pound Sterling crashed, Soros had borrowed £ 10 billion to short-sell the pound sterling. Therefore, an important aspect of Malaysia’s Unorthodox Measures of September 1998 was to disallow foreigners from borrowing Ringgit to speculate. The concept of “Offshore Ringgit” is very complicated and it took me a few attempts to ensure that the Prime Minister fully understood the term, as you can read from the book.

Image result for nor mohamed yakcop's book on forex trading

Notes to the Prime Minister by Wong Sulong published in 2011. I wrote 5 notes on this subject, namely Note 2 (October 13, 1997), Note 13 (December 12, 1997), Note 25 (May 19, 1998), Note 31 and Note 32 (both on June 29, 1998). Without the knowledge acquired at BNM’s forex desk, we would not have fully understood the concept of “Offshore Ringgit”, which was key to the implementation of the Unorthodox Measures;

(ii). Malaysia initial response during the financial crisis was to increase the interest rate level to stabilize the Ringgit. This created chaos for the many business entities, pushing them to the verge of bankruptcy. We knew from experience that this does not work. During the Black Wednesday incident in United Kingdom, the British Government increased the interest rate from 10% p.a to 12 % p.a. in its desperate attempt to stabilize the pound. But this move was completely ineffective.

Therefore, our Unorthodox Measures involved, among others, bringing the interest rate down, rather than increasing the interest rates, after fixing the exchange rate at RM 3.80 to the dollar, and disallowing foreigners from borrowing the Ringgit for speculative purposes. This significant lowering of the interest rates, as well as our measures of implementing an expansionary monetary and fiscal policy, as part of the Unorthodox Measures, saved many corporations from becoming bankrupt and some banks from becoming insolvent; and

(iii). When we pegged the Ringgit on 2 September 1998, we pegged it at RM 3.80 to the US dollar.

The 3.80 rate was on the weaker side since, based on fundamentals, we could have fixed the rate at 3.50. But we knew that it was better to fix the Ringgit at a slightly weaker rate, anticipating that the market players would feel that, at 3.80, the Ringgit was undervalued and they would therefore buy the Ringgit. We expected that this move would result in large inflow of funds into the country. This is exactly what happened. There were substantial inflows following the peg.

Image result for bank negara malaysia logo

 

There were no outflows, as the market players expected the Ringgit to subsequently strengthen, not weaken. This was something we learned at the forex desk in Bank Negara Malaysia.

In fact, the 45 notes that I wrote to the Prime Minister between October 1997 and August 1998 analysing in detail the 1997/1998 financial crisis and proposing the solution would not have been possible without the market expertise acquired at Bank Negara’s forex desk, thanks to Allahyarham Tan Sri Jaafar Hussein.

I should add that even after Allahyarham Tan Sri Jaafar Hussein and I left BNM, we kept closely in touch meeting regularly for long chats. The last time I met him was in July 1998, a month before he died. We spent two hours discussing about the financial crisis of 1997/1998. I informed Allahyarham that I was working with the Prime Minister to find a solution to the financial crisis, based on the knowledge the he made possible for me to acquire in Bank Negara. He was happy that he had made the right decision on the importance of market expertise and he was confident that we can overcome the crisis. I wrote about this meeting with Allahyarham on 21 August 1998 and it appears as Note 43 in the book “Notes to the Prime Minister” by Wong Sulong. Allahyarham Tan Sri Jaafar Hussein’s contribution to the nation is undoubtedly significant.

My role at BNM in external reserves management in the late 1980s and early 1990s

I was tasked with implementing the external reserves management policy as determined by the BNM’s Board having regard to the considerations I have mentioned above. In so doing, I reported both to the Governor and the External Reserves Committee (ERC). I spoke to the Governor on external reserves management regularly, and certainly whenever there was a large movement in the exchange rates. I also reported to the ERC whenever it met. The membership of the ERC comprised, amongst others, the Governor, Deputy Governor, and the Advisors. Further, there were weekly Senior Officers Meeting, where the external reserves matters were sometimes discussed.

These Senior Officers Meetings were chaired by the Governor, and were also attended by the Deputy Governor, Advisors and all Managers. I did not report to either the Finance Minister or the Prime Minister on any issues regarding external reserves management, as that was not my reporting line.

I was not involved in deciding on the accounting treatment of the losses. In fact, I have no knowledge whatsoever of the accounting treatment.

I was also very careful not to execute any trade by myself, although I had the authority to do so. It was always, without any exception, done by the staff. I did this for the purpose of transparency, so that there would always be more than one person aware of every trade.

BNM made significant gains from its trading activities in the 1980s. The loss does not include the gains made in the 1980s. Based on the period of 1985 to 1993, I believe that the total forex losses will be lower. The significant losses that were incurred in 1992 arose from two unexpected events:

(i) The unexpected rejection in the Danish Referendum of 1992 of the Maastricht Treaty; and

(ii). “Black Wednesday” on 16 September 1992, when the pound sterling was forced out of the European Exchange Rate Mechanism.

In the early 1990s, the European currencies started to gather strength on the basis of the then conventional wisdom that, given the potential for European integration, Europe was going to overtake the United States as the strongest economic power in the World. We subscribed to this view and bought the European currencies and the Pound Sterling.

Unfortunately, following the non-ratification of the Maastricht Treaty by Denmark in February 1992, the value of the European currencies crashed. This was compounded in September 1992 when both the Pound Sterling (and Italian Lira which we did not trade) were forced out of the European Exchange Rate Mechanism despite the best efforts of the far more powerful and wealthy European central banks.

As we were ‘long’ in the European currencies, including the Pound Sterling, we suffered significant losses. We were not the only central bank to have suffered significant forex losses as a result of these events.

Whenever we received information of large inflows of US Dollars from investors, both long-term and short-term, we would decide on whether or not to diversify these inflows into other currencies, depending on the anticipated exchange rate movements. If we expected the US Dollar to weaken, we would purchase European currencies forward based on the expected US Dollar inflows. The size of the purchases would correspond to the anticipated size of the US Dollar inflows.

All the external reserves activities, including forex activities, were based on strategic considerations. Admittedly we misread the turn of the market. As staff of a central bank we naturally believed that the Bank of England would win in its fight against Soros. We had confidence in our fellow central banker and bought Pound Sterling. Unfortunately, the Bank of England lost.

Similarly, our best intelligence was that the Maastricht Treaty would be ratified in the referendum in Denmark in 1992, but unfortunately it was rejected.

We learnt a bitter lesson from these incidents. That lesson proved crucial in helping us formulate policies to defend the country against the currency attacks in the 1997/1998 Asian Financial Crisis, saving the nation hundreds of billions of Ringgit that would otherwise have been lost.

Conclusion

The forex losses happened. There is no denying it. There is also no denying my accountability for the forex losses. I accepted my fair share of the accountability for the forex losses and resigned from BNM. At that time, it appeared to me to be a sad end to my 25 years of service to the nation, through Bank Negara Malaysia.

Image result for nor mohamed yakcop deputy chairman, Khazanah Nasional Berhad

Nor Mohamed Yakcop, Deputy Chairman, Khazanah Nasional Berhad: Rewarded by a grateful national leadership (from Mahathir Mohamad, Abdullah Badawi, and Najib Razak) for distinguished services rendered to Malaysia

However, with the Grace of Allah SWT, I was given the opportunity in 1997/1998 to contribute to King and Country during the financial crisis of 1997/1998. The important point is that the experience in the forex unit during those years proved extremely useful later in saving Malaysia from the devastating effects of the financial crisis of 1997/1998, which otherwise would have caused losses worth hundreds of billions of Ringgit for Malaysia and could have resulted in many Malaysian companies becoming bankrupt, with large scale unemployment and poverty spreading throughout the country. The political stability and the socio-economic framework of the nation would have been destroyed. It was an accident waiting to happen. It did not happen because of the Unorthodox Measures of September 1998, which in turn was conceived and implemented based on the knowledge, skills and experience acquired at the forex desk in Bank Negara Malaysia.

I also contributed to the nation during my second tour of duty in Bank Negara (September 1998 to April 2000) as well in my role as the Economic adviser to the Prime Minister (May 2000 to December 2003) and as a Federal Minister (January 2004 to May 2013). The record speaks for itself.

TAN SRI NOR MOHAMED YAKCOP
Wednesday, September 6, 2017

http://www.theedgemarkets.com/article/tan-sri-nors-full-written-statement-rci-hearing-today

Bank Negara Malaysia Forex Loss RCI–Najib Razak’s Political Vendetta


August 24, 2017

Bank Negara Malaysia Forex Loss RCI–Najib Razak’s Political Vendetta

by Alyaa Azhar@www.malaysiakini.com

Image result for nor mohamed yakcop

Bank Negara’s Forex Genius now Deputy Chairman, Khazanah Nasional Berhad. It will be interesting to find out what RCI thinks of his role in this forex fiasco. The late Governor Tan Sri Jaffar Hussein took the hit while the genius got off mildly and was rehabilitated by Prime  Minsister Abdullah Badawi and prospered  under Najib Razak. He claimed to be the man who taught Tun Dr. Mahathir Mohamad about foreign exchange.

A former foreign exchange (forex) dealer with Bank Negara claimed to have handled up to US$800 million a day in trading under the instruction of then Bank Negara Assistant Governor Nor Mohamed Yakcop.

Fizaman Noor Mohammed Nasir, however, said the dealing was done under a management position. Fizaman worked as a forex dealer with Bank Negara’s Banking Department between 1989 and 1998.

At the Royal Commission of Inquiry (RCI) hearing into Bank Negara’s forex losses this afternoon, conducting officer Suhaimi Ibrahim asked Fizaman how he could exceed the forex trading limit.

“The US$30 million limit is for the dealer position. The US$800 million deal was for the management position, under Nor Mohamed’s instructions.

“Without instructions, we, dealers, would play by our own rules,” Fizaman explained. He revealed that under a management position, dealers have no right to refuse to engage in a particular deal.

Suhaimi, meanwhile, pointed out how Fizaman admitted that losses were incurred during the dealings.

“If you knew there were many losses, why were there no discussions (to overcome the problem)?” he asked.

Fizaman replied that a dealer could merely provide his or her views.

“We try to advise through economic sense and on how things can improve.(But) what’s decided after that is not our task. Even if the market view is negative, the ultimate decision is made by Nor Mohamed,” he said.

In his witness statement, Fizaman explained that transactions for the dealer position are recorded on a blotter before they are given to the chief dealer to be signed.

For the management position, transactions are similarly recorded in a blotter and filed under management.

“The blotter is the final report, it is always kept in the dealing room. I don’t know any other reports beyond that,” said Fizaman who was the sixth witness in the proceedings.

Forgetful witness

Earlier, the RCI’s fifth witness, Essah Yusoff, who was a Bank Negara Fund Manager and Secretary of the external reserves committee (ERC), said that she was responsible for preparing the limit for dealers.

Most of the time, however, Essah mainly said she “she could not remember” to the various questions posed by the RCI panel.

Image result for Forex Royal Commission

Tan Sri Mohd Sidek Hassan (Chairman) and Members of Bank Negara Malaysia Forex Royal Commission

RCI chairperson Mohd Sidek Hassan even took a dig at Essah, noting how she “somehow cannot remember”.

Meanwhile, commenting on the matter, former Prime Minister Dr Mahathir Mohamad’s lawyer Mohamed Haniff Khatri Abdulla said this was understandable as it was an event which had occurred almost 30 years ago.

“Do you remember what actually happened three days ago, five years ago?

“They (the witnesses) tried to recall what they could. They couldn’t remember the minor details, even with the report in front. (As such), there couldn’t be a conclusion that there was excessive losses more than what was declared,” Haniff told reporters after today’s proceedings ended.

The RCI is expected to complete its probe within three months from the date of its establishment on August 21 and thereafter submit its report to the Yang di-Pertuan Agong.

It has been tasked with determining the veracity of allegations surrounding the forex losses incurred by Bank Negara and its implications on the national economy, among others.

Mahathir and the opposition have accused Prime Minister Najib Abdul Razak of attempting to exact political revenge against the former premier and deflect attention from 1MDB by dredging up old issues.

 

Getting to the Bottom of Bank Negara’s Forex Losses in 1994


July 27, 2017

Getting to the Bottom of Bank Negara’s Forex Losses in 1994

by P Gunasegaram

http://www.malaysiakini.com

QUESTION TIME | The Royal Commission of Inquiry (RCI) if it competently, fairly and independently investigates Bank Negara Malaysia’s foreign exchange losses of an estimated RM31 billion in the early 90s, will unearth many interesting facets of the episode and put a stop to speculation over them, even if it is 25 years too late.

Image result for Mahathir and Noh Mohamed Yakcop

Dr. Mahathir and his Forex Teacher, Noh Mohamed Yakcop (now Deputy Chairman, Khazaanah Nasional Berhad)

Ironically, DAP’s Lim Kit Siang had called for an RCI on the forex losses way back in 1994 when the scandal came to light, only to see it happen now, when the then Prime Minister Dr Mahathir Mohamad, his bitter political foe before, became an ally under Pakatan Harapan.

No doubt that was partly why the RCI came into being – to tarnish Mahathir’s image, and Lim’s and Anwar Ibrahim who was Finance Minister from 1991 to 1998, which covered the period during which the forex trading took place. It will also deflect attention from 1MDB for a while.

Image result for Mahathir and Noh Mohamed Yakcop

Mahathir (and Anwar) subsequently took great pains to conceal the details of the forex losses–P. Gunasegaram

The RCI report will likely be damaging to Mahathir the most, followed by Anwar with some collateral damage on Lim, now allied to Mahathir. Lim, to his credit, was the fiercest critic then against the forex losses and spoke up in Parliament repeatedly, blaming both Mahathir and Anwar.

But what would have been right is to have had an RCI simultaneously on 1MDB as well, where a similar amount of US$7 billion (currently RM30.1 billion) is unaccounted for, according to press reports quoting the auditor-general’s report, which remains hidden under the Official Secrets Act.

These are, after all, the largest losses made to date by Malaysian state-owned institutions and it will be very informative and instructive to find out how these losses happened, and from where the final instruction came which resulted in these institutions losing a combined sum of more than RM60 billion.

In fact, an RCI for 1MDB is even more urgent, considering that this is an ongoing event and a quick investigation can help recover much money, about which evidence very strongly indicates has already been stolen. Establishing early where the money is increases chances of recovery substantially. But that RCI won’t happen now but might in future, at least one hopes so.

Still, the RCI forex investigation is an opportunity to put the facts right. Some key questions: How much was lost? Who was responsible? Who gave the order to engage in forex trading? Is there any written order or was it by word of mouth? The answers to these will finally exorcise the ghosts of the forex losses.

Unfortunately, one of the persons who has all the answers – then Bank Negara Governor Jaffar Hussein – passed on in 1998. The other is then Bank Negara Adviser (now referred to as Assistant Governor) Nor Mohamed Yakcop, currently Deputy Chairperson of Khazanah Nasional Bhd and before that a cabinet minister and special economic adviser to Dr Mahathir Mohamad after the 1998 Asian financial crisis.

Image result for tan sri jaffar hussein

Tan Sri Jaffar Hussien–I never figured out how an otherwise careful and meticulous person could have been so careless.– P.Gunasegaram

I interviewed Jaffar several times during my days as a financial reporter in the 80s, both at Bank Negara and at Malayan Banking where he was CEO. His obvious integrity and knowledge impressed me and if not for that forex loss, the only blight on a distinguished career, he would have retired in glory instead of ignominy. I never figured out how an otherwise careful and meticulous person could have been so careless.

Both of them resigned in 1994 after Bank Negara’s press conference in March to release its annual report for 1993, where the full extent of the central bank’s forex trading losses became clearly apparent for the first time. Even then, the exact figure for the losses was not immediately obvious and is still not certain, although most reliable estimates and sources put it at around RM30-32 billion.

Did Mahathir know?

Others in the know could include then Bank Negara Deputy Governor Dr Lin See Yan and officials who worked in the foreign exchange department of Bank Negara at the time. They, plus records of the central bank, should help the RCI piece the necessary information together quite easily.

The first question that the RCI will probably consider is how much Bank Negara lost from forex trading. This is quite straightforward – just look at the full accounts for the period 1989-94, when the trading and losses were incurred.

Most put the figure at around RM30-32 billion, a figure in line with my own sources. Former Finance Minister Anwar, in an interview with Malaysiakini over a decade ago in 2007, put the figure at RM31.3 billion, after netting off profits.

Bank Negara’s “active management” (read: taking leveraged positions on currencies) of its reserves started in 1989/90 and is unlikely to have taken place without the tacit support and approval of then Prime Minister Mahathir, who frequently hit out at developed countries for influencing currency values.

This is exemplified in a Bernama report (see image below) on November 5, 1990, which is reproduced in verbatim below:

“Kuala Lumpur, Nov 5, (Bernama) – Bank Negara’s currency dealings in the foreign exchange market were aimed at protecting and stabilising the ringgit, Prime Minister Datuk Seri Dr Mahathir Mohamad said today.

“The dealings were not meant to make profits, he added, pointing out that the revaluation and devaluation of foreign currencies had caused Malaysia to suffer huge losses previously.

“Datuk Seri Dr Mahathir Mohamad was commenting on a news report that Bank Negara’s aggressive dealing in pound sterling could cause a diplomatic row between Britain and Malaysia.

“According to the report, Bank Negara was the main spur to London banks setting up an effective cartel in the foreign exchange market which is now under investigation by the Office of Fair Trading.

“It said the central bank had built up a huge position in pound sterling as it appreciated in anticipation of Britain’s entry into the Exchange Rate Mechanism (ERM).

“After the ERM entry, Bank Negara calculated sterling had peaked against the dollar and, on Sept 21, it liquidated its position and a number of banks holding pound sterling, including British clearing banks, got stuck with big losses, it added.

“Speaking to reporters after delivering a keynote address at the 17th Asian Advertising Congress here, Datuk Seri Dr Mahathir said, ‘We are stabilising our own currency.

“‘When they do something it is always alright. We are trying to protect our currency.We have lost a lot of money before, when they revalued their currency like the yen. We lost a lot of money because we borrowed yen, when they devalued their currency we also lost money. ‘So what is wrong with our protecting our own interest, why is it when they can protect their interest and we cannot. I cannot understand this.’”

Sins of the past

This is vintage Mahathir. First, he does not deny the report but the way he responds he indicates he knew about Bank Negara’s actions. And then he says the actions were justified because of forex losses made by Malaysia on its foreign loans, never mind that Malaysia did nothing to hedge the currency exposure.

He was referring to the Plaza Accord of 1985, an agreement between the governments of France, West Germany, Japan, the United States and the United Kingdom, to depreciate the US dollar in relation to the Japanese yen and German deutsche mark by intervening in currency markets.

To him, it did not matter that it was unprecedented and extremely foolhardy for a central bank to act in that manner, putting its reserves under serious risk. Two years later, in 1992, Bank Negara was left holding the wrong end of the stick when it bet for the pound and lost, eventually losing more than RM30 billion as it unwound the positions it had taken.

Anwar in his 2007 interview put the loss at RM33.8 billion in forex speculation from 1989 to 1993. Offset against RM2.5 billion in profit in 1990, the loss eventually worked out to RM31.3 billion, he said, adding that it was based on figures audited by the auditor-general.

While he was Finance Minister from 1991 to 1998, Anwar denied that he was aware of the forex speculation at the time, although Bank Negara comes under the Finance Ministry.

As far as Mahathir is concerned, it is clear from that Bernama report that he condoned and was aware of the Bank Negara actions. The fact that both Jaffar and Nor Mohamed faced no other punishment, beyond resignation, is indication that they did not act on their own accord.

Mahathir (and Anwar) subsequently took great pains to conceal the details of the forex losses, with Lim constantly hounding them in Parliament and elsewhere. Lim even wrote a book titled “The Bank Negara RM30 Billion Forex Losses Scandal” in 1994.

In 2004, when Nor Mohamed was appointed Finance Minister II, Lim had this to say: “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, (in) 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 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 full statement is here.

A quarter of a century later, he has his wish, but he is finding out that his and Pakatan’s association and alliance with Mahathir has great risks – almost as great as the one Bank Negara took.

And there may well be more in store for that forex loss, as we all well know, is only one of Mahathir’s great sins. Anwar and Lim, who suffered perhaps more than anybody else under Mahathir, should have known better than to bring this upon themselves.

One last thing. This RCI is a reminder to Malaysian Prime Ministers that if they have been remiss in the past, it is always possible that the future leadership will allow an RCI to dig up the details. Hopefully, future Prime Ministers will be more careful about what they do.