The Bank Bali fiasco

The Bank Bali fiasco

Several analysts and members of the House of Representatives
have welcomed Standard Chartered Plc.'s withdrawal from its Bank
Bali investment deal. They argued that the move would open up
opportunities for new investors to buy stakes in the bank after
its rights issue between Jan. 6 and Jan 12. But the Indonesian
Bank Restructuring Agency (IBRA), foreign analysts, and most
other officials are greatly worried that Standard Chartered's
decision will spook foreign investors intending to acquire
Indonesian assets.

After Standard Chartered's withdrawal, the politically charged
scandal, an employee revolt, negative publicity over the past
five months and a lawsuit pending at the State Administrative
Court, can the Bank Bali name remain attractive as an investment
proposition? What is the value of a bank that lacks public trust
and cooperative employees?.

These questions are certainly looming in the Bank Bali rights
issue, in which it is hoped that about Rp 4.03 trillion (US$560
million) in recapitalization funds will be raised to elevate the
bank's capital adequacy ratio (CAR) to the minimum 4 percent.

The Standard Chartered move marks the latest, but surely not
the last, episode in the eight-month Bank Bali saga. The saga
began in late April as a landmark deal by the first foreign
investor willing to stake funds in Indonesia's crippled banking
industry. But the deal later developed into a politically charged
scandal which implicated several ministers, senior officials and
Golkar party leaders.

It is true that until the monetary crisis hit Indonesia in
August 1997 Bank Bali was rated as one of the best-managed banks
in the country, and the only major bank that was not part of a
widely diversified conglomerate. But as their capital became
negative, the economic woes drove all major private and state
banks, including Bank Bali, into technical bankruptcy.

It is no wonder that when the majority owner -- the Rudy Ramli
family -- experienced difficulties in raising capital to meet the
minimum CAR level, six foreign investors, including ABN AMRO, GE
Capital and Citibank, expressed an interest in holding a stake in
the bank and started negotiations in September, 1998.

Standard Chartered, which only joined the negotiations with
Bank Bali in late March, was unexpectedly successful in clinching
a deal with Rudy Ramli. On April 23 this year, the two signed an
agreement that would allow the British bank to have a 20 percent
stake in the bank. Negotiations progressed smoothly until
Standard Chartered cried foul in July after uncovering during a
three-month due diligence, an "improper" Rp 546 billion payment
made in early June by Bank Bali. The payment was made to a
politically well-connected company as a commission to recover Rp
904 billion in interbank claims from IBRA.

The fund scandal immediately escalated into a political
scandal and prompted IBRA to pit Bank Bali-embroiled Rudy on one
side and IBRA and Standard Chartered on the other in a public-
opinion war. Both leveled accusations of improper conduct at each
other. More information and documents were leaked regarding the
implication of officials and politicians in the scandal, the
takeover and the investment and management agreements between
IBRA and Standard Chartered.

Over time, Rudy built up a broader sympathy base and was
perceived by the public as the victim of a high-level political
conspiracy. Most employees who were sympathetic to Rudy revolted
in October. In early November, they booted out the Standard
Chartered managers from the bank's headquarters.

But with Standard Chartered now out of the game, the coast is
far from clear for Bank Bali's recapitalization. The bank still
carries a potential "land mine" which will deter new foreign
investors from buying stocks. The mystery buyer, which
accumulated between May and early August through German clearing
house Deutsche Boerse almost 40 percent of Bank Bali's shares,
remains unidentified, even after the scandal's revelation.

The securities commission, Bapepam, which is supposed to
conduct an insider trading investigation into the mystery buyer
has yet to come up with conclusive results. In a highly
questionable statement, the commission recently announced that
the 40 percent stockholding was owned by about 1,200 small,
independent investors.

If the mystery investors and the Rudy Ramli family, which
still owns more than 18 percent of the bank, exercise their
preemptive rights, IBRA, as a standby buyer of the rights shares,
may find it difficult to quickly sell its shares as planned
because new investors will not be assured of management control.

Given this uncertainty and Bank Bali's battered condition, we
would not be surprised if the next episode of the Bank Bali saga
ends with the bank's wholesale nationalization -- at the
taxpayers' expense.