Who in the government can we trust if then Bank Indonesia governor Boediono and Finance Minister Sri Mulyani Indrawati turn out to have compromised their policy decisions in bailing out Bank Century in late November 2008?
That was one of the great concerns expressed by most businessmen I talked to during an Indonesian-Australian business conference in Yogyakarta last week.
They were worried about all the possible findings or conclusions of the investigation into the medium-size bank’s rescue to be made by the House of Representatives and the Corruption Eradication Commission (KPK), not to mention the political and financial market turbulence arising during the process.
The Supreme Audit Agency (BPK) already issued early last week a very damaging report after an investigative audit that lasted more than three months, blaming the central bank and the now-defunct Financial System Stability Committee, chaired by Mulyani, for negligence and incompetence in deciding on the bailout.
The more devastating impact would be if the upcoming investigation by the House concluded that Boediono (now the Vice President) or Mulyani, or both - though quite a remote possibility - had deliberately compromised their policy decisions for political gain.
Another possible compromise solution would see Boediono and Mulyani made the scapegoats, taking the fall for the sake of political stability but at the risk of causing suspicions about the implication of Yudhoyono and/or members of his family in the bank debacle.
Whatever the final outcome, it will adversely affect the public’s trust and market confidence in the government, especially its economic team.
Many, if not most, remain in great doubt that either technocrat, with such impeccable integrity and high financial competence, would have risked their reputations for financial or political gain by deciding on a bank bailout that was not necessary.
Boediono, in his capacity as chief economics minister and later the BI governor, and Mulyani as the minister of finance, made up the bedrock of President Yudhoyono’s economic management during his first term in office.
They had been perceived nationally and internationally as personalities who had the courage to stand up to even the President when it came to maintaining policy-making credibility.
If the verdict of the House inquiry is policy incompetence, both Boediono and Mulyani - the leaders of the economic reform - must resign for moral and ethical reasons, even though their “honest mistake” was caused by wrong or incomplete input from their subordinates.
There is an inherent risk of an honest mistake being made in a bank bailout, given the time pressures and rapidly worsening problem, even after all the standard procedures for decision making have been fulfilled, as Boediono and Mulyani claim to have done for Bank Century.
That is because different from other businesses, banks may sometimes - often based on nothing more than rumor - face a run. And a bank that faces a run by depositors, lacking the cash to meet their demands, may go bust even if the rumor is false.
Bank runs can also be contagious as depositors at other banks are likely to get nervous too, setting off a chain reaction like that in 1997-1998.
But the caveat of debating now whether Bank Century then (November 2008) posed a systemic risk to the whole banking industry or not is the big difficulty in reconstructing the precise national and international economic and financial condition prevailing when the bailout was decided.
True, Indonesia’s financial sector was rather fragile between September and December last year due to the fallout from the global financial crisis, which was triggered by the bankruptcy of Lehman Brothers investment bank in the US.
Some of the indicators:
• In early October 2008, the capital market management and regulator stopped trading at the Jakarta stock exchange for a few days after the benchmark index, which had fallen steeply since September, crashed to 1,451, losing almost 50 percent of its capitalization from early that year.
• Even when the central bank kept reassuring the people that our banking system was sound and its fundamentals were much stronger than back in 1997, the government decided on Oct. 12 to increase the ceiling amount of bank deposits covered by the Deposit Insurance Agency 20 times, from Rp 100 million (US$10,000) to Rp 2 billion.
• Three days later, the government proposed to the House a regulation-in-lieu-of-law on the establishment of the framework of a financial safety net that would authorize the finance minister to lead the management of a financial crisis, indicating an emergency condition.
• The problem was then made more difficult by the virtual stoppage of inter-bank lending as big banks, awash with liquidity, were reluctant to lend to others on fear that their money would not be repaid.
However Boediono’s and Mulyani’s points of argument for defending the Bank Century rescue were made very weak after the discovery of the massive cost overruns, the questionable massive withdrawal of deposits a few days before and after the bailout, and the discovery of banking crimes by the bank’s owners and management.
All this led critics to suspect that both Boediono and Mulyani had put aside their professional judgment in assessing the systemic risks posed by Bank Century.
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