Bank Century debacle: The investing public lose their shirts

Vincent Lingga , The Jakarta Post , Jakarta Thu, 09/17/2009 2:33 PM Headlines 

The hotly debated, US$670 million bailout of Bank Century last November did at least one big thing right: The move didn't save the bankers and the shareholders. In fact, one of its former major shareholders, Robert Tantular, and its former deputy president, Hermanus Hasan Muslim, have been punished, though very lightly, with four years and three years in jail respectively.

The big problem, though, is that before the bailout of the publicly traded Bank Century, the bank was majority-owned by the investing public, with 57.16 percent equity holding. These shareholders were institutional and individual investors who each held less than 5 percent.
It is a big irony then that while the investing public lost their shirts after the central bank classified Bank Century as an insolvent and failed bank and immediately transferred it to the state-owned Deposit Insurance Agency (LPS), the money of the bank's depositors has remained safe.

Even if the bank had not been bailed out, its depositors would still have gotten back their deposits of up to Rp 2 billion ($200,000) per account - the maximum amount insured by the LPS.

The business rationale is that since the bank's capital equity was already negative (-35 percent) when it failed, the bank's shares automatically became valueless.

Article 40 of Law No. 24/2004 on the LPS also stipulates that once the LPS bails out a failed bank, it automatically wholly owns the bank, and that if the bank's equity capital is already negative when it is taken over by LPS, the old shareholders are not entitled to any proceeds from the eventual sales of the bank after restructuring.

However, this provision is not fair for Bank Century's investing public, especially because more evidence has surfaced indicating that it was largely Bank Indonesia's inadequate supervision and incompetent examiners that let the poorly managed Bank Century remain in operations until last November.

Proper enforcement of banking regulations should have seen Bank Century closed down or at least forced to be acquired or merged with a bigger bank as early as three years ago. Bank Indonesia's decision to let the bank in operations much longer thus amounted to a gross ignorance of toxic assets traded on the stock market.

Preliminary audits found it was major shareholders Robert Tantular and his relatives, with 22.13 percent, and two other individual investors - one from Saudi Arabia and the other one from the UK, with 20.70 percent - who controlled the bank management and allegedly robbed the bank. The two major foreign shareholders remain at large.

Simply put, the central bank's incompetent supervision put the investing public in the dark about the real condition of the bank. Had Bank Indonesia's examiners and the stock market watchdog (Bapepam) done their job properly, the investing public could have salvaged their investment or at least cut their losses by unloading their shares on the market long before the bank was put by the central bank under its special oversight on Nov. 6, 2008, or about two weeks before it went belly-up.

True, as the Companies Act stipulates, in the case of a company going bankrupt and eventually being liquidated, shareholders are the last entitled to make claims on any proceeds from the eventual sales of the bankrupt firm's carcass.

But since Bank Century has not been liquidated, the question then is, is it fair to let Bank Century's investing public lose every cent of their investment in the bank?
It is most urgent and imperative for the government to resolve this issue. Otherwise, no investors will again touch shares in mid-size banks on the stock market.

If this problem is not resolved once and for all, Bank Century will face a big risk of an endless string of lawsuits from investors, messy litigation that will adversely affect the restructuring of the bank and the LPS's plan to divest of its investment in the bank within three to five years, as required by law.

Bank Century, which had been beleaguered by negative publicity over the past weeks due to the controversy of its bailout last November, cannot bear another wave of bad news, let alone another bout of litigation.

Because Bank Century is already mired in lawsuits brought by several of its big depositors in relation to their purchases of Antaboga discretionary funds worth Rp 1.3 trillion ($130 million), which were marketed through the bank. The depositors have not been able to redeem Antaboga funds - issued by PT Antaboga Delta Securitas, formerly one of Bank Century's major shareholders, with a 7.50 percent holding - because the funds had allegedly defaulted.

It was in fact the default of the Antaboga funds that triggered the massive deposit withdrawals and precipitated Bank Century's severe liquidity crisis in early November, which eventually led to its insolvency on Nov. 20.

Read full post »

Resolving worrisome questions around Bank Century's bailout

Vincent Lingga , The Jakarta Post , Jakarta Wed, 09/02/2009 1:11 PM Headlines

 

The Finance Ministry and Bank Indonesia, responsible for the bailout of Bank Century last November, steadfastly defended the urgency and legitimacy of the rescue, citing the financial uncertainty, severe liquidity problems at 23 other mid-size banks and weakening rupiah at the time.

They kept saying they had no choice, as though a gun had been pointed at their heads. Without the bailout, things would have been much worse in the banking industry and losses to the economy could have been more devastating.

The Indonesian financial system during the last quarter of last year indeed faced adversity from the impact of the global financial crisis since September, and letting the financially distressed Bank Century go down could have triggered a massive run on many other banks.

True, a panic was prevented within the banking industry. But the argument about the systemic risk is now heatedly debated, even though such debate now seems a no-brainer because it is impossible now to reconstruct the kind of vulnerable conditions our banking industry was mired in last November for counter analysis.

As details about the bailout were revealed to the public and the cost of the rescue turned out to be many times more than the preliminary assessment, we cannot help but cry out the fault. The move simply threw out two of the basic principles of a bailout program: transparency, and least cost to the taxpayer.

True, banks differ from other commercial firms. The failure of a bank results in particular hardship to depositors and can lead to broader problems in the economy through multiple transactions.

These are among the reasons the government has provided deposit insurance through the Deposit Insurance Agency (LPS). But this means that when a bank fails, as Bank Century did on Nov. 21, the government comes in to pick up the pieces.

However, past experience has taught us that when banks are at risk of failure, their managers and shareholders often engage in behavior that risks losing even more taxpayer money.
This, we think, was what may have happened at Bank Century between November and December 2008, when the bank lost Rp 5.6 trillion (US$560 million) in deposit withdrawals.

Bank Indonesia had injected a Rp 700 billion emergency liquidity loan into Bank Century around mid-November and put it under its intensive and then special surveillance, before deciding to throw in the towel and ask the government (the Finance Ministry) and the LPS to take over.

But the developments, which followed what was then hailed as a strategic decision to maintain stability within the financial sector, left behind several worrisome questions about the integrity and competence of the central bank's supervision and the auditors of the publicly listed Bank Century, and the enforcement of disclosure requirements by the stock market watchdog (Bapepam) upon publicly listed companies.

How could a bank with total assets of Rp 15.2 trillion ($1.2 billion), net nonperforming loans of only 2.71 percent - lower than the average 3.90 percent within the industry - and capital adequacy ratio of 14.76 percent - much higher than the minimum 8 percent - as of September 2008 flirted with bankruptcy just six weeks later?

How could the value of Bank Century's assets have fallen so steeply within such a short time so as to have eroded its capital standard far below the minimum 8 percent?

Why did the preliminary agreement signed by Bank Sinar Mas Multi Artha, a subsidiary of the big Sinar Mas conglomerate, on Nov. 16 to acquire 70 percent of Bank Century fail to restore confidence in the problem bank?

Was the Sinar Mas Group able to sneeze time bombs of toxic assets in Bank Century, which Bank Indonesia examiners failed to detect?

How could we have been kept in the dark about a publicly listed bank that is supposed to be subject to stringent disclosure requirements?

These questions, we think, are some of the worrisome puzzles the Supreme Audit Agency should answer through its investigative audit in order to resolve once and for all the problems surrounding the bailout of Bank Century.

A forensic audit would be able to find more evidence of banking fraud, either by shareholders, management or big depositors.

This could have been the main reason why the capital injection by the LPS to rescue the bank ultimately ballooned to Rp 6.76 trillion, almost three times the central bank's preliminary assessment. The new wave of bad publicity will certainly make it much more difficult for the LPS to restructure the bank.

But it is much better now to raise and resolve all the questions, so that when the LPS eventually divests Bank Century within the next three to five years, as required by the law, the potential buyer will not uncover a time bomb, as encountered by Standard Chartered during a due diligence of Bank Bali in 1999, in light of a planned acquisition.

Standard Chartered uncovered that Bank Bali had paid about $78 million in bribes to brokers to have its inter-bank claims settled by the then Indonesian Bank Restructuring Agency under the deposit insurance scheme.

Read full post »