Bankers robbed taxpayers

Bankers robbed taxpayers

The Supreme Audit Agency's discovery that the state risks
losing Rp 138.44 trillion (approximately US$16 billion), or 96
percent of the Rp 144.53 trillion in emergency liquidity loans
extended by the central bank to help 48 banks stay afloat, serves
only to validate what has long been suspected by analysts and the
House of Representatives. Separate audits by the Government
Finance Comptroller on other banks that got liquidity loans from
Bank Indonesia also uncovered massive fraud and malfeasance.

The agency's investigative audit of 48 commercial banks and
Bank Indonesia in relation to the extension of liquidity credits
between late 1997, when the financial crisis struck Indonesia,
and Jan. 29, 1999, detailed how Bank Indonesia, in collusion with
bankers, violated almost all prudential rules regarding its role
as the lender of last resort. What this boiled down to was a
daylight robbery of taxpayers, as the loans automatically became
the government's (taxpayers) debt, lest the central bank should
have been liquidated for insolvency.

True, emergency liquidity credits extended within the central
bank's role as the lender of last resort are normally one of two
key elements that make up the financial safety net in most
countries. The other element is a deposit insurance scheme, which
in Indonesia was introduced in January 1998 in the form of a
government blanket guarantee on bank deposits, pending the
establishment of a deposit insurance institution next year.

The central bank's lender-of-last-resort role requires it
promptly to provide temporary support to banks suffering
liquidity problems in order to prevent panics and runs that could
lead sound institutions to financial distress and precipitate
their insolvency. Theoretically, this was what the central bank
did when many banks were hit by massive runs between late 1997,
after the closure of 16 insolvent banks, and early 1999 when the
financial crisis worsened into political and social crises.

However, what the Supreme Audit Agency discovered was massive
and blatant abuse of the liquidity supports by both commercial
banks and the central bank. First, the central bank violated the
basic rule which stipulates liquidity support can be given only
to illiquid, not insolvent, banks, and that loans must be backed
by adequate collateral.

As it turned out, most of the 48 banks that obtained the
liquidity support were eventually closed down because they had
been insolvent in the first place. Moreover, as the auditors
found, many of the loans were not backed by adequate collateral
and, in many cases, the amount of credits greatly exceeded the
total assets of the banks receiving the credits. Many banks also
were found to have misused the loans for financing derivatives
transactions for dollar speculation, opening new branches,
lendings to affiliated enterprises and acquiring fixed assets.

The central bank has often denied any wrongdoing, arguing that
as part of the Cabinet under the authoritarian rule of former
president Soeharto it had no choice but submit to the order from
the president not to close banks, particularly those owned by
Soeharto's cronies, even though their account balances with the
central bank were negative.

Although the central bank became a politically independent
institution only in May 1999, it cannot simply avoid
responsibility for this massive loss to the state. The various
forms of misuse of liquidity support could not have been possible
without the collusion of central bank officials.

Moreover, it is questionable as to how the central bank, as
the sole supervisory authority of the banking industry, could
have been so blind to the true condition of so many banks that it
lent support to them far in excess of the value of their assets.
This smacks of collusion and cannot be written off as an honest
mistake caused by the technical incompetence of supervisors.

Therefore, it is imperative that the attorney general, who
also received a copy of the audit on Friday, immediately launch
criminal investigations of the central bank directors in charge
of the liquidity support and those bankers who misused the loans.
Officials cannot simply disavow responsibility and hide behind
instructions from the president. Violating the law is nothing but
a crime, even if done at the order of the president. How the
Attorney General's Office goes about prosecuting the culprits who
stole such a massive amount of taxpayers' money will go a long
way toward determining whether public trust in law enforcement
and the banking industry can be restored.