THE foreign exchange (forex) market is the largest market in the world as currency changes hands given the huge global trade in goods and services.
The sheer size of the forex transactions also provides arbitrage opportunities for currency speculators as the value of the currency moves by the minute.
These currency speculators sometimes take a big position and they can either make a huge profit or — when things go wrong — a huge loss.
Here is an example of one of the greatest currency trades ever made:
In 1987, Andy Krieger, a 32-year-old currency trader at Bankers Trust New York, was carefully watching the currencies that were rallying against the dollar following the Black Monday crash.
As investors and companies rushed out of the US dollar and into other currencies that had suffered less damage in the market crash, there were bound to be some currencies that would become fundamentally overvalued, creating a good opportunity for arbitrage.
The currency Krieger targeted was the New Zealand dollar, also known as the kiwi.
Using the relatively new techniques afforded by options, Krieger took up a short position against the kiwi worth hundreds of millions of dollars.
In fact, his sell orders were said to exceed the money supply of New Zealand.
The selling pressure combined with the lack of currency in circulation caused the kiwi to drop sharply. It fluctuated between a three and five per cent loss while Krieger made millions for his employers.
A worried New Zealand government official called up Krieger’s bosses and threatened Bankers Trust to try to get Krieger out of the kiwi. Krieger later left Bankers Trust to go work for George Soros.
Around the same time in Malaysia, Bank Negara’s chief trader would be rubbing shoulders with bankers and currency dealers, visiting banks in Hong Kong and Europe in the late 1980s to build relationships.
A gossip column in The Wall Street Journal then claimed that the Bank Negara trader was seen at a Paris sidewalk café with Krieger.
Tan Sri Nor Mohamed Yakcop, then an “encik”, was at the time helming Bank Negara’s intervention operation in the foreign exchange market.
Former forex dealers recalled that Bank Negara’s reserve management became so active between 1991 and 1993 that it resembled a day trading operation.
One of them said the difference in being a bank’s “day traders” was that day traders would buy and sell in “dollars”, but Bank Negara would buy in “yards”.
A dollar to currency dealers is US$1 million, while a yard is US$1 billion.
That Bank Negara made reasonable profits during the years before 1992-93 could have been the incentive for them to “go into the forex market in a major way”.
Then came the European currency crisis and the sterling bombed. Soros made US$1.7 billion. Bank Negara lost US$5.5 billion.
If one were to lose US$5.5 billion, the exposure would have been typically five to six times that amount.
That was three times Malaysia’s GDP or more than five times Malaysia’s foreign reserves in 1992. Even the entire Bank Negara assets were valued at only US$20.7 billion in 1992.
Luck ran out as the market got wind that Bank Negara was hiding its losing trades.
Former Bank Negara officials had even at the recent Royal Commission of Inquiry (RCI) hearings claimed that the losses were “schematically understated”, hidden through revaluation of the bank’s gold holding and revaluation of quoted investments.
What was clear from the testimonies at the RCI was the losses were far larger than that what was initially reported by the central bank — RM32.01 billion as against RM5.7 billion.
As revealed by RCI’s conducting officers, Bank Negara’s forex losses amounted to RM12.35 billion in 1992, RM15.29 billion in 1993 and RM3.86 billion in 1994.
But only RM5.7 billion was disguised as “deferred expenditure” in 1993.
The then finance minister Datuk Seri Anwar Ibrahim told the RCI that he was aware of the anomaly of the 1993 figures but said he was bound by Bank Negara’s 1993 audited accounts which showed losses of RM5.7 billion.
What is less clear to the RCI is that who gave the orders to stick to the RM5.7 billion loss figure?
Post-RCI, investigators will have to determine if there are criminal elements in the forex scandal. These include negligence, abuse of power, falsification of accounts and breach of trust.
The RCI also exposed glaring gaps in terms of accountability, a point which commission members noted.
They expressed several times that the prime minister (then Tun Dr Mahathir Mohamad) and finance minister (then Anwar) are to manage the country and economy, and it seems there was “no one taking accountability or ownership from minister upwards”.
In fact, there had been attempts to cover up the scandal with the government quietly transferring shares in utility firms Tenaga Nasional and Telekom Malaysia to Bank Negara at par value, to be sold into the market for profit to help cover the losses.
The share transfers, too, would not have happened without prior approval by the finance minister or the prime minister, or both. Dr Mahathir was prime minister for 22 years from 1981.
Dr Mahathir, speaking at the RCI, said he was told of Bank Negara’s forex losses in 1993, after it first reported such amounts in its annual financial report.
But he said the losses amounted to only “around RM5 billion or RM5.7 billion”, and not the larger figures cited by other witnesses.
The then secretary-general of the Treasury, (Tan Sri) Clifford Herbert, had told the inquiry that he and Anwar told Dr Mahathir in the latter’s office that the losses amounted to RM30 billion.
Nor Mohamed, who had resigned as adviser to the central bank in 1994 but later went on to become cabinet minister, said he also shared the blame for the losses.
Former Bank Negara deputy governor Tan Sri Lin See Yan told the RCI there was no question of the bank covering up the massive losses.
“As the central bank, we can’t just go on declaring losses. It is public knowledge that we began (forex) trading sometime in 1985. It was good at first, but then, we began making losses in 1991,” he said.
“The loss at that point could still be absorbed by the bank, by way of the Other Reserve. That was also the same treatment with losses in 1992, but by the time 1993 came, the losses were too big for the Other Reserve and we had to put it down as ‘deferred expenditure’.”
It was at this point that RCI member Datuk Wira Kamaludin Md Said chimed in.
“Going with that, it was a cover-up, wasn’t it?” Kamaludin asked Lin.
After a pause, Lin responded; “You can call it whatever you want, but yes it was.”
MACC VS PAUL LOW
IT was no surprise that the MACC boss had come out strongly against Datuk Paul Low’s idea of setting up another watchdog body on integrity and governance.
Malaysian Anti-Corruption Commission (MACC) Chief Commissioner Tan Sri Dzulkifli Ahmad said he objected to the minister in the Prime Minister’s Department’s initiative to set up the National Integrity and Good Governance Department (JITN).
Dzulkifli had said the JITN would erode the autonomy of MACC and could be a waste of public money.
In a press conference in Pe-nang, he asked who “is this minister? Who is the minister to control how we investigate cases?” — in an apparent reference to Low, whose portfolio is integrity and corruption.
He said the minister should be asking for a bigger budget for MACC to increase its assets and workforce, and improve staff welfare, instead of forming a new agency.
“We are supposed to be independent. If the excuse of forming the JITN is to monitor MACC, why should I report to him?”
Dzulkifli questioned why there was an urgent need to set up the agency when budgets for most departments and agencies have been trimmed.
The MACC boss is right to question the setting up of JITN, especially when there is a greater need to strengthen the work of MACC and avoid unnecessary duplication.
A Jalil Hamid feels in a digital world, the winner does not always take all. He can be reached via jalil@nstp.com.my