Bill Guerin, Jakarta – The Indonesian Bank Restructuring Agency (IBRA) is trying to sell the government's entire 52 percent stake in what was described last year as the "best Indonesian retail bank" by industry magazine The Asian Banker.
With IBRA scheduled to close its doors in February, ostensibly after having cleaned up the country's banking system, the pace of sales in Indonesia's financial institutions is picking up, although the entire exercise seems a disaster. The Economist, in its October 18 issue, points out that recapitalizing the banking system in the six years since the Asian financial crisis began will cost about US$77 billion against sales of institutions of about $2 billion net, perhaps "the most expensive bailout in world history".
The twists and turns in strategy by the founding Riady family to retain control began with the onset of the financial crisis. The fight to escape from ruin and ward off an ownership takeover continues today. The story also neatly illustrates how difficult it is to rescue any institution from insolvency, not only in Indonesia but also across Asia, by taking it away from the original owners and putting it on a sound managerial footing.
The Lippo Group patriarch, Mochtar Riady, now 74, founded the bank as one of the country's first private lending institutions in 1948 and turned it in to one of the top five private banks in the country. Lippo Bank's 353 branches cover 120 towns and cities across Indonesia. The empire expanded rapidly during the 1990s, mainly into property.
Elite housing developments, beach-side condominiums, office complexes and even an Indonesian version of Singapore's Gleneagles Hospital were built as fast as land could be bought up.
Acquisitions in banking and property in Hong Kong, the United States, China and Singapore saw the group with more than 165 affiliated companies in Indonesia, China and the US.
The Riady empire was gaining unlikely international notoriety as well in the mid-1990s. It was the focus of allegations by right-wing forces in the United States that sought to tie former president Bill Clinton's fundraising activities to what they regarded as a spectacular spy scandal. James Riady, Mochtar's son, allegedly was a go-between to pass on American secrets to the Chinese military. The allegations were greeted with derision by most of the rest of the world, although equally spectacular allegations of campaign contributions from the Lippo Group in exchange for favors might have had more mileage. Despite considerable heat and light from congressional Republicans, the spying allegations were ultimately discarded by all but a handful of conservative true believers as nonsense.
Then Lippo's fortunes were hit hard by the 1997 financial crisis.
Annual revenues of the empire fell to $1.5 billion from $5 billion before the onset of the crisis. Anti-Chinese mobs burned down Lippo's Karawaci shopping mall in May 1998, spooking Lippo Bank's customers and causing a rush that almost brought down the bank. In the face of astronomical interest rates and inflation, and with mountains of bad debt, it seemed that Lippo Bank's fate was sealed, and it would be closed down. But James Riady's charisma as a super salesman and his skill at raising funds in the capital markets won over foreign investors who put almost $250 million into a 1998 rights issue to help recapitalize the bank – no mean achievement given that most bankers thought Indonesia's banking system was on the verge of collapse.
By the time the rupiah had depreciated by 80 percent, the Riadys struck a deal with BJ Habibie, the successor to their former patron, Suharto. They convinced Habibie that they could persuade ethnic-Chinese investors to bring back the fortunes they had parked overseas, mainly in Singapore. Habibie went for it.
Not only did he appoint Mochtar's son James as a new business ambassador in January 1999, he also helped bail out Lippo Bank, the first to be recapitalized. The first tranche of recapitalization funds, Rp4.3 trillion, went to 12 banks, only two of them private, but most of the money – Rp3.75 trillion – went to Lippo Bank.
Habibie had simply backdated the new banking decree to give Lippo Bank first run at the recapitalization funds before other ailing banks even knew the funds were available. The Riady interests were left with only 9 percent after recapitalization, but remained dominant in the bank.
Money from the restructuring was widely believed to have gone into propping up Lippo's ambitious real-estate projects. However, the bank then geared up to face a new cycle of growth and streamlined its infrastructure. The IMF had insisted all recapped banks appoint advisers to implement change. Lippo quickly brought in ING-Barings in August 1999, and more than a score of ING's retail-banking experts got down to work.
Working hand-in-hand with Lippo's top banking executives, they streamlined the bank's operations and implemented international best practices throughout the network.
But trouble was brewing. Controversy surrounded many Lippo deals. Lack of transparency made the group, and the family, an easy target for adverse publicity. A furor over an attempted change of core business badly damaged confidence and trust and still affects would-be foreign investors' attitudes toward the bank sell-off.
In 1999 James had sold off 70 percent of Asuransi Jiwa Lippo Life, Indonesia's biggest life-insurance company, to American International Group (AIG), the world's largest insurer, for $205 million. After the sale a change of name to PT Asuransi Lippo e- Net in January 2000 created a stir. The Riadys had unilaterally metamorphosed from an insurance company into an e-commerce company.
Lippo e-Net's shares surged on news that the Capital Market Supervisory Agency (Bapepam) later said "lacked details" about the company's business plans. Bapepam said the releases had "created public controversy", were not supported by facts and had the potential to mislead readers. It said that Lippo's stockbrokerage unit, Lippo Securities, was actively trading Lippo e-Net shares at the time. Eventually, in August 2000, Lippo was fined Rp5.5 billion($625,000) for circulating misleading market information and allegedly artificially inflating the stock price of Lippo e-net. This was one of the largest penalties ever meted out by Bapepam for securities-trading violations.
In all, Bapepam fined the Lippo Group four times between 2000 and 2003 after investigating four cases of share trading and transparency violations relating to seven members of the group.
The most damaging controversy stemmed from an astonishing 2002 financial report amendment in which Lippo Bank claimed a net profit of Rp98 billion ($11.2 million). The report was so specious that immediately the share price dropped from Rp350 per share to Rp260. The group had to release a second financial report a month later, telling the Jakarta Stock Exchange (JSX) that the earlier report was all a mistake and that they had, in fact, posted a loss of Rp1.27 trillion.
The contradictory reports caused the bank's stock price to plunge some 50 percent between November and the end of January, though during the same period the JSX overall composite index rose 4.7 percent.
The bank's equity stood at Rp2.3 trillion as of December 2002, so the government's 52 percent share would be expected to net proceeds of Rp1.2 trillion if sold at par. By February 5, the share price reached its lowest level, Rp210, a drop of 53 percent compared to three months earlier, and at a time when share prices of most other banks were rising. In March, Bapepam imposed an administrative sanction on the bank's board of directors to the tune of Rp2.5 billion ($280,000) over misleading statements in the first financial report.
Another controversial issue is that of the already transferred assets, known as the AYDA assets. These were recorded on Lippo Bank's balance sheet as of December 31, 2002, as being worth Rp2.4 trillion, having been transferred as surety to cover debts of several companies that are still connected to the Lippo Group. The assets were to change hands just before the end of 2002, but IBRA cancelled the sale amid adverse publicity that they were being offered at only 16 percent of their value.
Three different auditors had audited the assets. The result of the first valuation showed an extraordinary decrease in value amounting to some Rp1.3 trillion. When this raised eyebrows, Lippo was forced to have another valuation carried out. This second one apparently revealed a much smaller decrease of only around Rp300 billion.
The Riadys were thus seen to have been playing two roles, one as potential buyers and one as sellers. Thus, it was claimed, they could adjust the value of the assets in line with their own interests.
Lippo Bank had to prepare provisionary reserves amounting to Rp1.4 trillion. As a result, its capital adequacy ratio plummeted from 24 percent to a little above 4 percent.
In January, IBRA stated that the value of the government's 52 percent of Lippo Bank had fallen to Rp614 billion because of the decrease in the price of the bank's shares at the stock exchange and worsening performance.
At a general meeting of the bank's shareholders held in January, Mochtar was appointed chief commissioner. During a shareholders' meeting that same month, the Riady family placed five of its nominees on the board of directors and another five on the board of commissioners.
Though these individuals stood down in May, analysts say the Riadys have done everything they could to pave the road for an eventual return to majority ownership. Some 40 percent of savings deposits at Lippo Bank are still said to be connected to the former owners. IBRA has admitted that there is no legal reason for Mochtar Riady to be barred from buying back into his bank. Despite the financial scandals involving Lippo Bank, his name is not on Bank Indonesia's blacklist. IBRA's own oversight committee warned in January: "The urgent thing that should be done by IBRA is to recover the public trust to Lippo Bank, and that has to be started by bringing in new faces in the top-level management of Lippo Bank who are truly professional, with accountable track records, and to cut any connection with the old management of Lippo Bank."
With the Riadys apparently genetically wired into controversy, this would appear to be sound advice. The sale appears likely to go ahead anyway, regardless of the possibility that the former owner allegedly attempted to reduce the book value with an eye on its acquisition through the divestment by IBRA.
On Monday IBRA boss Syafruddin Temenggung said the short- listed bidders had improved the structure of their bids, adding that IBRA will now meet with the government to decide whether to go ahead with the sale.
Though Lippo Bank may not have been pillaged and plundered as much as other banks that have changed hands, a damning World Bank report also issued on Monday warned that the current blanket guarantee of banks' liabilities creates significant problems of moral hazards. The liability cover causes private banks to adopt high-risk strategies, favor clients who provide "commissions", and leaves the government to bail out depositors if the risk materializes, the World Bank alleges.
The proposed sale is part of an auction of three, as Jakarta is also offering majority stakes in its sixth-largest lender PT Bank International Indonesia and Bank Rakyat Indonesia.
The proceeds from all three banks are expected to reach some $1 billion, which would go toward reducing a projected 2003 budget deficit on the part of the Indonesian government of Rp34.4 trillion ($4 billion). However, IBRA boss Syafruddin said he is far from satisfied with early offers and even hinted he might pull the planned divestment.
Nonetheless, some believe Lippo Bank is being sold off in a rush because IBRA has targets to meet and will shortly have to close its books ready for its imminent closure. Caveat emptor indeed