OT(?)
Mahathir suffers fools and knaves
This is the first in a series of articles that highlight a recurring pattern in Mahathir’s lengthy tour at the helm of government: his readiness to pursue reckless schemes for personal or political enrichment and his talent for cover-ups and stonewalling when these gambits blow up.
The timeline of Mahathir’s rule is pockmarked with these explosions, but only a few minions have ever taken the rap. Even then, they have usually been restored to favored positions after the shortest appropriate period. That fact alone should make clear that they boast the most powerful of patrons – but that fact doesn’t stand alone. For most of these schemes have Mahathir’s fingerprints all over them.
A glutton for harebrained schemes
FreeMalaysia has been remiss for not earlier addressing Prime Minister Mahathir Mohamad's softer, naive, side. Yes, it's there. Consider, for instance, how easily he is taken in by con-artists and schemers. Think about how he so generously takes care of civil and political servants who faithfully guide his misconceived plans to their inevitable doom. And consider how readily he forgives himself and others for frivolously squandering many, many billions of ringgit throughout his 18-year-old regime on an array of harebrained schemes.
In short, Dr. M has been generous to fools and knaves, as long as they remained his fools and knaves.
Mahathir assumed the premiership in 1981 with an energy and zeal that few Malaysians had ever seen from the country's three previous prime ministers. "Clean, Efficient, Trustworthy" was his new administration's slogan and promise of a new form of open and accountable governance. But by the following year, he already was mired in the worst financial scandal in Malaysia's history – loan losses amounting to RM2.5 billion by Bumiputra Malaysia Finance, the Hong Kong subsidiary of state-owned Bank Bumiputra.
BMF - the first big scandal
Dr. M called the episode a "heinous crime." But still he feverishly worked the formidable levers of power to prevent the full disclosure of the bank's dealings with George Tan's Carrian Group and other Hong Kong borrowers, who had promised rich financial returns for Dr. M's political machine and for his United Malays National Organization in return for the property-development loans. Dozens of Bank Bumiputra executives and UMNO officials were instrumental in illegally and imprudently channeling the funds to Hong Kong, and yet not a single one of them was ever charged in Malaysia for the various misdeeds.
If they had been charged and tried, Dr. M's ambitious industrialization and development plans probably never would have gotten off the ground. Indeed, his young administration might not have survived the next mid-1980s general election. But he seized upon a plan to make the sordid Carrian saga go away and to recoup all the lost funds. And with a little luck, it would come together before the Malaysian public even got wind of the bank's loan losses. But it was not to be. The losses eventually caught up with the bank, wiping out its capital and reserves and ushering in a rescue takeover by Petronas, the national oil company, in the institution's first of four government bailouts over the last two decades.
Actually, the plan wasn't Dr. M's. But the moment he heard of the scheme, he embraced it as if it were his own. In his desperate straits, it must have seemed the providential answer to resolving the first serious scandal of his young administration.
The plan, devised by Egyptian tin trader David Zaidner, was a blueprint to corner the world's tin market. No small feat, but then Mahathir was never one to concentrate on the attainable when the grandiose was available.
Zaidner, then working for Swiss-based Marc Rich & Co., first presented the scheme in 1980 to a few well-connected Indonesian officials, according to a story six years later by Raphael Pura in The Asian Wall Street Journal and to a 1985 book by A. Craig Copetas, "Metal Man: Marc Rich and the 10 Billion-Dollar Scam."
Not all were so gullible
The Indonesians, however, told him to take a hike. They had been tipped off by tin industry officials that Zaidner had been implicated in a 1975 scandal. Suspicious executives at Amalgamated Metals Corp., Zaidner's then employer, raided the trader's office and found a number of irregularities, including evidence that Zaidner may have bribed an Indonesian working as the buffer-stock manager at the International Tin Council (ITC). He was fired. But three years later, he was hired by Marc Rich. Both companies were based in Switzerland.
From Jakarta, Zaidner headed for Kuala Lumpur, where he got a considerably warmer reception from executives at government-owned Malaysian Mining Corp. By the end of 1980, MMC appointed Marc Rich its tin-trading agent. And before long, Malaysia's secret market-cornering operations were in full swing.
The plan consisted largely of clandestinely buying huge amounts of tin futures and tin on the world market through Zaidner and Marc Rich. Those purchases, coupled with Malaysia's own tin reserves and its position as the then world's leading producer and exporter, gave the cornering scheme a reasonable prospect of success in boosting prices by shrinking supply. Or so it seemed to Dr. M and his appointees at MMC.
At the time the operation was launched in July of 1981, the accepted rationale among Malaysians in the know was to boost global tin prices. Between March of 1980 and mid-1981, the tin price had slumped to US$4.33 a pound from US$8.65 and had been widely expected to fall further because of weak demand. For Malaysia's budget planners, already grappling with how to fund Dr. M's unrealistically expansive industrialization agenda, sagging tin prices meant years of yawning deficits and tight financial times.
Months after the cornering scheme was launched, its success took on even greater urgency, with signs that massive loan troubles were afoot at Bank Bumiputra's Hong Kong subsidiary. For Bank Bumiputra was secretly financing the huge tin-stockpiling scheme on behalf of the government.
Maminco is born
There also was an ideological twist to Dr. M's cornering gambit, one that had long shaped his vision of the world and would reappear in other manifestations throughout his reign. In the case of tin, Mahathir maintained that the industrialized nations of the world have persistently victimized the commodity-producing Third World by under-pricing raw and semi-finished goods, while maintaining a hefty profit margin for their finished products. It was after the ITC rejected the tin-producing nations latest demand in July 1981 for higher prices that Dr. M launched his secret effort to corner the market.
Anticipating the rejection, Dr. M instructed MMC to incorporate a Malaysian subsidiary, Maminco Sdn. Bhd., to conduct trading operations. Corporate records indicated at the time that the company's total paid-up capital amounted to the equivalent of 76 US cents, while its authorized capital initially was set at US$76 million. The paucity of cash, however, presented no problem. Bank Bumiputra was ordered to provide all the necessary financing.
For the next five months, Maminco gobbled up tin futures contracts on the London Metal Exchange, sharply driving up their prices. The company also bought physical tin in its home spot market. Dr. M was ecstatic; his risky maneuver was playing out as planned. Despite continued weak demand for tin, the producing nations were getting nearly 7 per cent more for their tin than they were before the Malaysian cornering exercise had begun, and the price of tin on the London exchange shot up to nearly US$7.50 a pound from $4.33. But the good times couldn't last long, as Dr. M should have known from the dismal history of past cornering conspiracies.
Rising tin prices naturally encouraged other producing nations to step up the pace of their own mining. Moreover, U.S. President Ronald Reagan's administration – in an effort to take advantage of the rising price and to help finance its own proposed steep tax cuts – announced that it would begin to sell portions of its own 200,000-ton strategic stockpile. These two factors eventually prompted London metal traders to undermine Malaysia's market-manipulating efforts by betting that tin prices would fall and not rise, as Dr. M had planned.
The plan gets out of hand
Up to this point, Dr. M's cornering scheme was only in mid-phase. It was intended to be, at least at this early stage, more of a price-support skirmish with consumers, rather than an out-and-out war against global metal traders and industrial buyers. But in a characteristically rash and bull-headed decision – one that should have tipped off the world's currency traders in 1997-98 about what to expect from Mahathir – the prime minister issued the battle cry by buying existing tin stocks ... FOR CASH. His earlier price-support tactic was based primarily on buying futures contracts, which cost a fraction of the actual price of physical tin and don't require the contract holder to actually buy the tin when the contract expires.
The only way that Dr. M's countermove could have worked in his favor was if he managed to financially shoulder his price support scheme long enough to either force traders to accept physical delivery of the tin at the higher price at the end of the contract or to push them into costly and embarrassing contract defaults. Mahathir's strategy placed Bank Bumiputra under sharply increased risk and financial strain. The institution was ordered to fully finance Maminco's tin buying, to bear the company's interest and carrying costs, and to cover its insurance expenses. The AWSJ reported that at the peak of Malaysia's cornering attempt, Bank Bumiputra and others had shoveled out US$570 million in various forms of credit.
Having amassed as much as 50,000 tons of tin, Dr. M planned to hold much of it in reserve. Though that in itself can be quite expensive, Mahathir had hoped to sell off batches of the mineral to cover the carrying costs – purchase price plus interest on loans plus storage plus insurance – of his operation. Here's when his understanding of economic fundamentals proved to be hopelessly unrealistic.
Economically pressed producers in other parts of the world, none of whom were clued in on the cornering effort or cajoled into joining, continued to churn our more tin to take advantage of the considerably more lucrative market. Thus, Malaysia would have had to acquire increasing amounts of tin on the spot market to support the world price of the mineral as supply mounted against still low demand.
More of those interfering foreigners
The London exchange made a hasty and controversial decision, which in hindsight probably saved Dr. M from committing Malaysia to the basket-case status of many Latin American countries of that decade. The exchange's officials, alarmed by the potential financial collapse of some of its biggest members who couldn't possibly cover the costs of their maturing tin contracts without wiping out their capital, gave those members an escape route. The exchange ruled that those who couldn't comply with the terms of their expired contracts could instead pay a per-ton modest fine for every day that a contract remained unfulfilled. This meant that those traders who sold tin contracts in the anticipation of falling prices, or shorted tin, were no longer obliged to buy physical tin on the Malaysian-controlled market at a hefty premium to cover their contracts.
Dr. M was obviously outraged, though at the time he couldn't vent his anger publicly. Malaysia had never admitted that it was the mystery buyer of the world's tin stockpiles. But the market knew better. Four years later, Dr. M finally fessed up, just before Malaysia's political opposition leader intended to air his findings in Parliament. And characteristically, he blamed "massive cheating in the London Metal Exchange" for killing the cornering scheme, which he said was intended to save the beleaguered tin industry.
Perhaps, but not likely. Sooner or later, Malaysia's financial resources would have been stretched to a breaking point, as the country shelled out more and more funds to acquire the rising tin production that was coming onto the market. This bind, ultimately, is what undermines most cornering operations. And even in the unlikely prospect that Dr. M's gamble succeeded, it easily could have crushed the London exchange, thus killing off the world's existing, relatively efficient and workable metal trading mechanism.
If you can't trust your co-conspirators ...
There also was another factor Dr. M hadn't taken into his calculations: the disreputable tin trader, David Zaidner. He was piggybacking onto Maminco's buys. The more tin Malaysia bought, the more he bought, taking advantage of the sharp price increases for his personal trading account.
Echoing Zaidner's earlier misadventure at Amalgamated Metals, Marc Rich executives became suspicious of his activity and decided to have a look at their trader's books. Alarmed by the magnitude of the company's exposure, the executives shut down Zainder's operations and immediately began dumping its tin holdings. By early March 1982, world tin prices had collapsed by more than 22 per cent. The trader was sacked. Dr. M's attempt to corner the market had crumbled. And by 1985, tin prices slumped to records lows.
Estimates of Malaysia's trading losses over this period range from US$80 million to as high as US$190 million. Dr. M's government has never cited an exact figure. To disguise the losses and to repay Bank Bumiputra, the government transferred corresponding sums to the country's then-ballooning budget deficit at the end of 1984.
Daim steps in for the clean-up ...
Years later, Daim Zainuddin, Dr. M's longtime friend and confidante, was surprisingly frank in discussing and criticizing the Maminco affair. First as an adviser and later as Finance Minister, Daim had been given the onerous task by Mahathir of trying to sort out the financial mess left in the failed scheme's wake.
Quoted by Malaysian authors Cheong Mei Sui and Adibah Amin in "Daim: The Man Behind the Enigma," Daim said:
"Little did I realize that it was not the end of our tin problem. When I became Finance Minister, I had to handle the loss of millions of ringgit in the Maminco tin fiasco. The lesson to be learnt is that a producer must never also be a purchaser. It would not work. Never try to corner the market. The role of the producer is to produce. Let others market."
The remark, though certainly true, is typical of Daim. He often cynically casts aspersions on others' foolish investment misadventures, while glossing over his own colossal flops. For while Dr. M and Daim were mopping up after the Carrian and tin fiascoes, Daim was barreling into yet another market mishap, which came to be known as the Makuwasa affair and was directly linked to the Maminco failure.
Mounting economic and political uncertainty had been taking its toll on Dr. M's administration in 1985-86. UMNO opponents were plotting to oust him and his cronies. And the lengthening array of scandals was fueling the opposition's efforts to drum up public outrage against Mahathir and Daim.
Daim's patented answer whenever such troubles are afoot is to artificially boost the market, hoping that a rally on the Kuala Lumpur Stock Exchange will lull the public back into complacency and forgiveness. Sound familiar? That's precisely why Dr. M brought Daim back from retirement to replace his sacked deputy and political rival, Anwar Ibrahim, as Finance Minister.
... which only makes more of a mess
Malaysian fund managers and executives from a number of government-owned institutions, including the Employee Provident Fund (EPF), were summoned by Daim in mid-1985 and told that Dr. M had decided to pump prime the market through a secret RM150 million "common fund." Appointed to administer the fund were three Mahathir-Daim cronies, Thong Yaw Hong, former secretary-general of the Treasury; Basir Ismail, the newly appointed chairman of the just-rescued Bank Bumiputra; and Chan Chin Cheung, acting general manger of Bank Simpanan.
The market-manipulating strategy proved an utter failure. Any hope of success was fatally bludgeoned after the November 1985 collapse of Singapore-based Pan-Electric Industries, which sent the Singapore and Kuala Lumpur exchanges into a tailspin and the economies of both countries into a recession.
The market crash also proved fatal to another Daim operation running in parallel to the common-fund scheme. That was Makuwasa Securities Sdn. Bhd., a two-ringgit company set up in mid-1984 to acquire 70 percent of the EPF's allotment of newly issued public shares. Effectively, Makuwasa was dipping into the retirement savings of all Malaysians to make quick profits. Makuwasa acquired those shares from the EPF at par value, which was considerably lower than the prevailing market price and normally would have guaranteed instant profits from the sale of these shares into a buoyant market environment. But these were not normal times.
Makuwasa, too, was financially trounced by the plummeting market. In September of 1986, Dr. M publicly admitted that Makuwasa was created to recoup the government's losses from the Maminco debacle and to repay its loans to Bank Bumiputra.
Past becomes prologue
As noted in the prologue to this new freeMalaysia series on Mahathir's impetuous schemes and their aftermath, this account of the Maminco and Makuwasa scandals is only the first of many during Dr. M's reign. The only thing that has spared Malaysia recently from similar recklessness and flights of fancy has been the Asian financial crisis.
These days, we hard-pressed Malaysians might not perceive the crisis as a blessing. Someday, however, we might – especially if Mahathir is forced to delay his megalomaniacal agenda long enough so that it disappears with the fading away of his regime. For if he recovers from this crisis, so will his scheming be revived. If that's the case, freeMalaysia shudders to think of what he then will concoct for the country in the remaining years of his administration.
For more details on the players in the Maminco scandal, see freeMalaysia's study on "The Fox in Dr. M's hen house".
21 February 1999
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