So, the Malaysian government will set up a royal commission of inquiry into the massive forex trading losses suffered by the central bank during the Mahathir Mohamad years. What are the chances that the inquiry will find its intended target?
It’s not easy to say.
However, by stirring skeletons thought to have been buried a quarter-century ago, it will certainly embarrass the grand old man of Malaysian politics in the twilight of his long and remarkable life.
According to Datuk Abdul Murad Khalid, a Bank Negara assistant governor of the time who emerged from retirement to give dramatic interviews to Malaysian media this year, the actual trading losses suffered were far more than reported at the time and could be as much as US$10 billion, or RM40 billion (S$13 billion) at current exchange rates. There is talk of a massive cover-up at the highest levels, involving people dead and alive.
To know what happened at the time, a dive into history is useful.
It is 1992 and Tun Dr Mahathir is at the height of his power, frequently tilting at the West for daring to preach to the successful countries of East Asia, whether on human rights or state-backed speculative trading in world markets.
The Danish and French referendums on Maastricht in September that year had challenged the certainty that the European Economic and Monetary Union – when member countries would start using the common euro currency – would happen by the turn of the century.
Several European currencies, including pound sterling, the Italian lira and the Swedish krona, were considered overvalued, given the strength of their underlying economies. The speculation was that their central banks could not possibly support these currencies at their existing levels.
Even as Britain’s Chancellor of the Exchequer vowed to defend the pound at its floor level of roughly 2.8 deutschemark, hedge fund speculators such as Mr George Soros, Mr Julian Robertson and Mr Michael Steinhardt were betting that Britain would have to buckle. Indeed, Mr Soros bet US$10 billion on a sterling devaluation, buying German marks at 2.79 to the pound, then scooping up profits as the British currency settled at about 2.5 marks at the end of September after the devaluation.
In the process, Mr Soros not only became richer by a billion dollars, he also came to earn fame as the Man Who Broke the Bank of England. It was said that his profit from that trade alone was the equivalent of taking £12 from every British person. From his short and long positions in French franc, lira and mark (who remembers those currencies now!), he would earn another billion dollars.
What has all that to do with Bank Negara?
Well, it was speculating heavily in the global currency markets then and betting spectacularly wrong.
Under Tan Sri Jaffar Hussein, a brilliant accountant and banker who took charge of Bank Negara in June 1985, and his key deputies such as Tan Sri Nor Mohamed Yakcop, the Malaysian central bank had acquired the reputation of a feared foreign exchange operator.
By some accounts, it had clout enough to move currency values by up to 5 per cent, often choosing times of relatively thin trading to drive a currency in one direction and then taking profit as markets followed.
In early 1992, Global Finance magazine took note of this. Bank Negara, Global Finance said, had become notorious as a “renegade, even vengeful operator – a kind of killer shark of world currency markets apt to strike at any moment. Much of the reputation is no doubt fanciful, but a great deal is warranted.” That fearsome reputation would collapse on Sept 17. That was the day, later to be labelled Black Wednesday, that sterling was devalued.
Black Wednesday would not only dent Bank Negara’s reputation, but also its war chest. For 1992, it would record a forex trading loss of RM9 billion. In the following year, as it unwound more of its trades, it would report another RM5.7 billion loss.
“In hindsight, it is apparent that we made the wrong decisions, but we had to act the way we did,” Mr Jaffar would say later. “If not, the loss might have been even more.”
Henceforth, he declared, Bank Negara would deal in foreign exchange only at spot prices.
A quarter-century later, it is not easy to say what went wrong – perhaps some scribbled notes of conversations between London and Kuala Lumpur still exist. Dr Mahathir stayed in office for another decade and surely he would not have much interest in preserving what clearly was a blot on his government. One plausible explanation is that Bank Negara had excessive confidence in its ability to read the markets.
Perhaps, access also had something to do with it. A 1997 biography of Mr Soros by Mr Robert Slater suggested that before he placed his massive bets, Mr Soros had got off the phone with the head of the Bundesbank. Maybe Mr Soros had detected a certain tremor in that man’s voice that told him it was time to bet big against sterling because the German central bank would no longer support it.
What officials of the time will have difficulty living down – Mr Jaffar is dead but many others are around – was that they had been forewarned.
Three years earlier, in 1989, the US Federal Reserve had advised Bank Negara to curtail its foreign exchange punts, which often exceeded US$1 billion a day. The Fed told Bank Negara it was out of proportion to Malaysia’s then forex reserves of about US$7 billion.
The warning was ignored because Bank Negara had a track record of big wins, contributing to a doubling of Malaysia’s foreign reserves between 1985 and 1991- a fact, no doubt, that the royal commission will be asked to consider by those under scrutiny today.
In fact, Dr Mahathir and Mr Jaffar defended Malaysia’s right to play the markets, calling it “active reserves management”. At a year-end press conference in 1989, Dr Mahathir also bristled at “huge countries like the US” with its own huge deficits commenting on Malaysia buying and selling currency.
Group of Seven countries, he complained, rarely consulted nations such as his when making their own big moves, such as when they decided to double the value of the Japanese yen under the Plaza Accord in 1985. That event had hurt Malaysia, which, at the time, had a significant proportion of yen-denominated foreign debt, making repayment in home currency more costly.
“Nobody complained except us, but we were a voice in the wilderness,” Dr Mahathir said at the time, adding that Malaysia would stop moving its reserves when the big economies stopped fiddling with their currencies.
How much of all this will stick, ultimately, depends on the people sitting in judgment. Mr Jaffar died in 1998, weeks before Dr Mahathir’s dramatic decision to wall in his currency to fend off speculators during the Asian financial crisis.
Mr Nor Mohamed’s career did not appear to have suffered under successive Umno regimes. Indeed, he later served as finance minister, and was even a minister in Prime Minister Najib Razak’s office.
What is fair to say is that those were different times and the rakish Bank Negara was not the only central bank in the speculation game.
Bank of England, too, had been criticised for trying to profit from its forex portfolio, as had the central banks of Spain, Portugal and the erstwhile Soviet Union.
If no mala fide existed, what’s left is embarrassment for the lion in winter to be forced to publicly relive some painful battle losses that can never be quite licked away.
Indeed, those wounds led Dr Mahathir, confronting currency speculators at the height of the Asian financial crisis, to lash out at Mr Soros, calling him a “moron”. In turn, he suffered the indignity of the famed investor describing him as a “menace to his own country”.
Were it not for the inquiry commission, Dr Mahathir would probably respond with his characteristic soft chuckle if asked about those days. But given his strident opposition to the man he helped elevate after toppling Tun Abdullah Badawi – making him an implacable foe of Datuk Seri Najib’s – it may be more than a laughing matter and the stakes way higher than they were in 1992.