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Nor Mohamed and what the RCI showed so far

September 7, 2017

To say that the lessons from the 1986-1993 forex losses helped save billions during the Asian financial crisis later is insulting the intelligence of the RCI.

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By Ali Mohamed

If anyone thought that the Royal Commission of Inquiry (RCI) into Bank Negara Malaysia’s (BNM) multibillion ringgit forex losses would name and shame Dr Mahathir Mohamad and Anwar Ibrahim, then testimony heard this week would surely prove them wrong.

The rock star-like sensation of Nor Mohamed Yakcop’s testimony yesterday made it plain that he had never reported to the then finance minister or prime minister on any issues regarding external reserves management, as that was not in his line of reporting.

“I never discussed the forex trading conducted by BNM from 1986 to 1993, neither with then prime minister Dr Mahathir Mohamad nor finance ministers Daim Zainuddin and Anwar Ibrahim,” he reportedly said.

However, since the RCI itself stated that their purpose was to get to the truth of the forex losses, the truth of the matter could be a useful byproduct of the process.

Most certainly, and now becoming even more clearer, is the fact that Nor Mohamed was directly involved in the fiasco from the beginning till the end.

Prior to his testimony, 16 other witnesses, including former deputy governor Lin See Yan and former attorney-general Tan Sri Ainum Mohamed Saaid, had all named Nor Mohamed as the main official in charge of BNM’s forex trading.

On paper, Nor Mohamed may not have had authority to make all the decisions over BNM’s forex trading, and he may have been required to report to committees and senior managers above him.

But in the lightning fast pace of forex trading involving millions of ringgit, split-second decisions must certainly have been made which could never have been referred to any committee or management meeting.

Forex trading does not work by committee. Nor Mohamed himself said: “I was tasked with implementing the external reserves management policy as determined by the BNM board…”

He also said: “External reserves matters were sometimes discussed” only by the External Reserves Committee (ERC) and sometimes at the Senior Officers’ Meeting.

“Sometimes”, meaning it was discussed infrequently. So he was running the show.

Nor Mohamed has testified that “he did not remember who held the authority to set the limits for forex trading from 1986 to 1993”.

This is a very strange and evasive answer. Even the smallest forex trading room at any commercial bank is regulated by BNM’s strict guidelines. It would be highly reckless and not prudent for BNM not to have designated authority to set forex trading limits.

But just a few paragraphs down of his written statement to the RCI, Nor Mohamed quotes Jaafar Hussein: “The larger deals, beyond the limits given to the forex traders, were to protect the external reserves…”

So there were limits that had been set. And there were larger deals that went beyond those limits.

These are some of the technical issues that should be explored more fully by the RCI. Was there a breach of authority?

In his testimony Nor Mohamed referred to Jaafar extensively, which actually points a finger at Jaafar. Jaafar has since died, so he is not able to defend himself.

The central bank and forex trading

Active forex trading by central banks to manage their foreign reserves is as old as central banking. It is nothing new.

“Executing” a trading order is the job of junior desk traders who merely follow instructions. It is almost a clerical job. They cannot be blamed.

But who made the decisions to enter into the trades, how much, at what price, for how long and more importantly, using what instruments (straightforward forex trades, risky hedging instruments, suicidal derivatives, etc) is neither the job of the External Reserves Committee nor the desk traders at BNM.

And that was where the devil resided.

A huge blank spot in Nor Mohamed’s testimony is exactly how much BNM lost from the forex trading fiasco.

The exact amount of the loss still remains a mystery. Various parties, including former BNM official Abdul Murad Khalid have said that the losses are far higher than what has been reported.

So was it RM31 billion, RM40 billion or more? Nor Mohamed’s silence on the right figure (by pushing the task to BNM’s accounting department) only adds to this mystery.

Will the RCI make it a point to give us a final quantum of the amounts that were lost?

The RCI should also ask if it was Nor Mohamed himself who wrote the speech which the late Jaafar delivered in New Delhi, India on Dec 5, 1988, where the then governor extolled BNM’s active forex trading. Being an auditor Jaafar would have had to depend on Nor Mohamed Yakcop to advise him on forex trading.

In his testimony Nor Mohamed said that “the main thrust of reserves management in Bank Negara was to preserve the value of what we have and the main considerations were safety and liquidity.”

Then he said, “To that, I have added a third and fourth dimension: profit optimisation and market expertise.”

This is gobbledygook – plain and simple. “Profit optimisation” ultimately turned out to become rogue trading, which is what really happened.

Losing over RM31 billion cannot be camouflaged as an attempt at “profit optimisation”.

Neither was “market expertise” an excuse. At that time there were almost 50 commercial banks in Malaysia plus merchant banks and discount houses – most of whom had their licensed forex trading rooms.

Capital controls and forex

Forex trading was nothing new in Malaysia. There was and still is plenty of forex trading expertise in the country.

To say that the experience gained by BNM over the 1986-1993 period later helped to save billions during the Asian financial crisis of 1998-2001 is simply insulting the intelligence of the RCI as well as that of all Malaysians.

In 1986, no one could have predicted any financial crisis 12 years down the road. This is just an empty comment made in hindsight. More camouflage.

Nor Mohamed himself acknowledged: “Central banking by decree and fiat can no longer budge markets, but market skills and influence of market psychology can do the trick.”

Which is what he attempted.

Nor Mohamed wanted to prove that he too “can do the trick”. What was completely wrong was BNM, a central bank, taking positions in the forex market for speculative profit.

Considering that BNM was also the issuer of the Malaysian ringgit currency and could determine ringgit interest rates (and hence ringgit exchange rates), this was a highly unethical stance.

Falling interest rates rarely cause inflation. Inflation is usually triggered by higher interest rates.

The “unorthodox methods” used in 1997/1998 had nothing to do with forex trading per se. They were capital controls.

The ringgit was declared illegal outside the country. That did not mean that importers, exporters, tourists and travellers could not buy and sell ringgit vis-a-vis foreign currencies.

So there was no link between the “expertise gained” between 1986 and 1993, and the financial crisis of 1997-1998.

Nor Mohamed’s comments that he was “very careful not to execute any trade by myself, although I had the authority to do so”, and that “I did this for the purpose of transparency, so that there would always be more than one person aware of every trade”, are quite meaningless.

Managers would certainly have their underlings handle the actual trade. No one expects to see George Soros actually manning his forex trading booths. BNM’s forex trading room is not a commercial operation.

BNM trades forex to stabilise fluctuations in the ringgit and safeguard the value of our reserves. Hence all their trading staff would act upon instructions from their superiors.

When BNM decided to take positions on the sterling, it was a purely speculative move. This is where BNM suffered great losses.

The statement above also raises issues of confidentiality and leakage of information which the RCI should question. With BNM taking extraordinarily huge positions in the forex markets, what were the extra precautions put in place to make sure that there was no leakage of information to outsiders?

Money traders would have certainly tried to second guess BNM’s huge bets in the forex markets.

Things to do for the RCI

The RCI should also question deeper the following statement by Nor Mohamed: “…we would purchase European currencies forward based on the expected US dollar inflows. The size of the purchases would correspond to the anticipated size of the US dollar inflows.”

This implies that the amount of forex losses incurred by BNM (over RM30 billion) must match the size of those expected US dollar investments.

The RCI must determine if this was indeed the case. If not, then it suggests a purely speculative activity by BNM.

The RCI should also investigate foreign media reports at that time which said that BNM was abusing short term credit lines available from other central banks (up to US$50 million each) to fund its forex trading. That would be clearly beyond normal management of “foreign reserves”.

Forex trading and capital controls have no links at all. Korea, Thailand and Indonesia did not have capital controls and they too came out of the financial crisis. China, England and other countries do have capital controls.

Malaysia was saved from the devastating effects of the financial crisis of 1997/1998 largely because the world economy was still healthy and we could still export. If there was a worldwide slowdown, our capital controls would not have helped us much.

As for capital controls, the public also did not know that Nor Mohamed advised the government to peg the ringgit to the yen – instead of pegging it to the US dollar.

Fortunately the government did not follow his advice. The US dollar is our major trading currency, not the yen. Similarly, Petronas did not follow his suggestion to dump their US dollars for the ringgit. This was simple business sense because Petronas trades in US dollars.

Finally, the RCI should determine exactly what were the forex trading instruments that were entered into by BNM which caused those huge losses. They went beyond straightforward currency trades and into hedging and other derivative instruments, all of which were highly speculative.

If the betting was right, the profits would have been multiplied many fold. But if the betting was wrong, the losses would also be multiplied many fold.

The world remembers Nick Leeson, the 28-year-old forex trader who singlehandedly bankrupted Barings Bank in 1995 by making wrong bets on derivatives.

That was what happened to BNM earlier. Barings was the UK’s oldest merchant bank. The term “rogue trader” came into being because just one person could bring down an entire bank.

The BNM forex losses were caused by reckless and speculative behaviour.

Ali Mohamed is an FMT reader.

* The views expressed are those of the authors and do not necessarily reflect those of FMT.


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