Bygone Bank Bailouts: Please Don’t Make It Any Worse, Dear Lawmakers

this article was published by Jakarta Globe on 27 December 2009 ( )

Vice President Boediono and US Federal Reserve Chairman Ben Bernanke share several similarities. During the global economic crisis both held prominent positions as chief of the central bank of their respective countries. During their terms, both made the decision to employ government bailouts in order to save the economy.

Both the Fed and our central bank are independent government agencies that enact and implement monetary policies. Both have immense influence over many monetary issues, such as inflation, unemployment, strength of funds and even the strength of your own wallet.

They also have full authority to control monetary policies in order to safeguard the monetary systems of their countries. Bernanke disbursed a total of $11.6 trillion in bailout money to rescue tottering US financial institutions. Meanwhile Boediono disbursed a $699 million bailout to the ailing Bank Century, now Bank Mutiara. Both men claim to have made their decisions in order to save their countries’ financial systems and avoid bigger crises.

In the case of Indonesia, the reason for providing bailout funds was because it was feared that if Bank Century was not saved, other banks would collapse, triggering a domino effect that would result in an even worse financial situation.

Even though Bank Century was a small bank with marginal assets it was predicted that if the bank were to collapse it would initiate a greater financial crisis. Boediono’s actions would suggest the belief that economic stability does not depend only on “Too Big to Fail” Banks.

However, despite the good intentions of his bailout decision, Boediono is now facing an investigation by a House of Representatives special committee.

The main concern of the committee is whether ailing Bank Century would have actually had a contagion effect on other financial institutions. They are thus questioning the appropriateness of the decision.

Contrary to the controversy in Indonesia, many Americans believe that Bernanke’s bailout plan saved the US economy from recession. The trust of the American people in Bernanke was justified when he was elected during the Obama administration for a second term in the Fed’s top post.

Thus, the question of the day is whether the decision to save Bank Century was wise and appropriate.

Former Vice President Jusuf Kalla believes that the bank’s problems were not caused by the financial crisis but were the result of a criminal act. Therefore, if the bank were to eventually collapse, there would be no threat of a greater regional or even global crisis.

The fact is, the former owners of Bank Century simply ran off with funds belonging to the bank’s customers.

Pradjoto, an expert on banking law, has been quoted as saying that the owners of Century Bank were “lucky” and had chosen the “perfect time” to commit their crime during the global financial crisis. They were not caught and and their bank ironically received a fresh injection of capital from the government.

According to our Central Bank Law, Bank Indonesia and the Ministry of Finance hold the authority to determine the course of action for banking institutions in crisis. Boediono, along with Sri Mulyani as the minister of finance, used their authority and decided to bail out Bank Century while Bernanke decided to spend $11.6 trillion to rescue the US economy. Both bailout plans sparked outcry from the public and lawmakers.

US House Financial Services Committee Chairman Barney Frank, for example, said that in the middle of a global crisis lawmakers did not have enough time to debate the merits of the bailout.

But what we must focus on now is the intention and motivation of our bailout plan, which was to save the economy.

What is happening now is that the House’s committee has been hijacked by a number of political special interest groups whose goals are to attack Boediono and Sri Mulyani.

The actions and inquiries of the House committee are thus at risk of resulting in more harm than good.

What will happen should there be a future financial crisis? Or any other kind of crises for that matter? If the government officials who are given the authority to make decisions are later challenged, ridiculed, and faced with criminal charges, who would then be willing to take charge? Who would want to make decisions in order to save our country?

Yes, a government official must be prudent in making decisions, especially decisions related to the economy, but what happens once those prudent decisions, made with good intentions, turn out not exactly as planned?

Is it fair that decision makers be subjected to ridicule, shame and even criminal charges when they had the country’s best interest at heart?

Halim Alamsyah, director of banking research and regulation at the central bank, was quoted by this paper as saying: “If I were asked to make a decision and I knew it would turn out like this, I would not do it.”

How then should a government official make a decision in times such as the 2008 global crisis? What is the measurement for a “good” and “prudent” decision?

Prof Hikmahanto Juwana, a professor of law at the University of Indonesia, said, “What are the distinctions between bad or good in decision making by public officials? Another official in the same post could have made a different decision.”

Is it appropriate that the debate on whether the bailout decision for Bank Century was a “good” or “bad” course of action take in the first place?

Even though it is true that the bank’s near collapse was caused by a criminal act, the government had to act fast and had to choose between saving the economy and proceeding with criminal actions. The government decided that saving the economy was the first priority, which led to the bailout.

According to law, the Indonesia Deposit Insurance Corporation controls Bank Century for three years. That control can be extended for another two years with the purpose of eventually selling the bank for a profit.

In light of this, I would deem the bailout a form of investment by the government. Thus, in addition to hindering the occurrence of a systemic banking crisis, the government may also generate some profit.

Therefore, allegations of corruption are not plausible at this stage, considering Century Bank’s profit, so far, in September 2009 reach Rp.237.7 Billion

With the House’s committee consistently questioning the case — with questions that many believe are politically motivated due to lack of substantial issues — I believe it will undermine the public’s trust in depositing funds in Bank Mutiara, thereby significantly impacting the bank’s business and the government’s investment.

Is the committee aware of these consequences?

The wise thing to do is to wait for the result of the government’s plan for Bank Century (i.e. a return on its “investment”) while legal enforcers concentrate their efforts on the criminal acts and returning any of the bank’s remaining assets to our country.

In the meantime, questions remain. Only Robert Tantular is in custody right now; where are Dewi Tantular, Rafat Ali Rizi and Hesham al Warraq? Why don’t our lawmakers put their efforts into helping law enforcement agencies pursue the perpetrators of criminal acts?

A lack of answers to questions like these means that the bailout decisions by Boediono and Bernanke have resulted in stories with decidedly different endings.

As Rahmat Waluyo, a Finance Ministry official, has said, “The only difference is that Bernanke has been named Time magazine’s Man of the Year while the former central bank governor and the minister of finance have to defend themselves in the biggest political debate this year.”

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