Andi Haswidi, Jakarta – Praises for achievements made by Indonesia's financial sector in 2009, which include surviving an unprecedented global liquidity crisis, seem to be overshadowed by confusion over what to make of the series of events in the final quarter of last year that led to the Bank Century bailout.

Did such a move save the country from a financial meltdown, or was it part of an orchestrated effort to misuse state funds?

An investigative audit into the bailout by the Supreme Audit Agency (BPK) has unveiled several facts that have placed the government and Bank Indonesia (BI) in the hot seat. The facts suggest that the legal status of the government body that commissioned the bailout, the Coordinating Committee (KK), comes with a big question mark.

According to the law on BI and the law on the Deposit Insurance Agency (LPS), the KK is a government body with responsibility to evaluate the systemic risk presented by an insolvent bank and to decide on necessary measures to prevent any systemic threat to the banking system.

A provision in the law on LPS says the KK must be established by a law, or by a memorandum of understanding (MoU) between the finance minister and BI governor until such a law is in place. Finance Minister Sri Mulyani Indrawati and then BI governor Boediono signed the MoU in early 2004.

A provision in the MoU says the KK became effective from Feb. 27, 2004, until the law on the financial safety net (JPSK) was to come into in place. Its members were the BI governor and the LPS president commissioner, with the finance minister as chairman.

Years later, when the government and the House of Representatives were still in the process of discussing the bill on the JPSK in the final quarter of 2008, the country's financial sector was already caught up in the worst period of the global financial crisis.

The impact of the crisis was clearly visible through several key indicators in 2008: the Indonesia Stock Exchange (IDX) composite index plummeted by 50 percent in October in comparison to the start of the year, the rupiah breached 11,500 to a dollar within the same month, while the country's credit default swap (CDS) spread deteriorated to 980 basis points (bps) in November from 250 bps several months earlier.

Another indicator, the Banking Pressure Index, issued by Danareksa Securities, shows a bank liquidity picture that was eerily similar to that of the Asian financial crisis in 1997-1998. The index touched 0.9 in October, already above the 0.5 in March 1997 when the Asian financial crisis started.

The Financial Stability Index also showed that within the given period the banking sector was already in a situation worse than that of the so called "mini crisis" in 2005 that was prompted by massive panic redemption of government bonds.

Given such domestic realities, the government deemed that the financial market was teetering on the edge of a potential meltdown, thus an emergency response was required. The government's first move was to raise the guarantee on individual savings to Rp 2 billion per account, up by 20 fold from Rp 100 million earlier.

The move was made in early October after Malaysia and Singapore notified the government that they would give a full guarantee on all bank savings as they feared a massive pullout of capital due to the liquidity crisis in the US and Europe.

To further ease pressure on the banking sector, the government also allowed banks to use lending assets as collateral for short-term loans from the central bank. Previously, banks could only use the highly liquid government bonds or central bank certificates (SBI) as collateral.

Finally, the government took a drastic step by issuing a government regulation in lieu of law (Perppu) on JPSK on Oct. 15, 2008, bypassing all the processes pertinent to the bill on the JPSK at the House. With reference to the MoU on the KK, the issuance of the Perppu was supposed to automatically replace the KK as defined by the MoU with a KK as defined by the Perppu.

Instead, the Perppu introduced a new term for a body that functions almost entirely in the same way as intended with the KK, that is, the Financial System Stability Committee (KSSK).

The difference in terminology later became problematic when KSSK decided during a four hour meeting that lasted until dawn on Nov. 21, 2008, to salvage Bank Century by using the LPS as the means to do so. LPS, however, was bound by law to take orders specifically from the KK, not from the KSSK.

At 5.30 a.m. On the same day, then Finance Minister Mulyani and then governor Boediono summoned a KK meeting, ordering LPS to take over the publicly listed bank from all shareholders and to inject funds to resuscitate it to avoid a systemic threat to the banking and financial system.

Regardless of the questionable legal grounds underlying the implementation of the bailout, it was clear to the decision makers that in a crisis situation such as shown by all the indicators above, it was better to resort to a preventive measure as there was no way of being sure that no damage would occur to the banking sector if they closed the bank instead of saving it.

Unfortunately, the regulatory issue is not the only challenge the decision makers have to answer for. The decision making was also based on data from BI that was later found to be insufficient to identify the precise nature of the liquidity problem faced by the bank, thus affecting the responses.

A good portion of assets held by the bank were in fact bogus and related to fraudulent activities carried out by previous shareholders and executives. This was also coupled with the failure of LPS to prevent Century account holders linked to shareholders from withdrawing funds after the first tranche of bailout funds was injected.

The final tranche of capital injections was carried out on July 24 this year, concluding injection transactions totaling Rp 6.76 trillion (US$716.56 million) of bailout funds, more than 10 times the initial cost estimated by BI.

Key findings in the BPK investigative audit

• Century's insolvency was a direct result of poor implementation of BI supervision ever since the bank was established as the result of a merger of Bank CIC, Bank Danpac and Bank Pikko in 2004.
• BI's analysis of the systemic threat posed by the Century collapse was based on outdated information on the bank's capital adequacy ratio (CAR), thus affecting the judgment of the Financial System Stability Committee (KSSK).
• The Coordinating Committee (KK) no longer provided a legal basis for the bailout after the Perppu and JPSK had been introduced, resulting in the legality of the bailout being questionable, due to a gap in the legal provisions.
• Accounts held by persons with links with Century shareholders withdrew Rp 938.6 billion after the bank received the Short Term Liquidity Assistance (FPJP) from BI on Nov. 14 and the bailout funds from LPS on Nov. 24.
• The withdrawal of funds by affiliated parties, forbidden in such circumstances under existing banking regulations, exacerbated within a short period of time the bank's already dire liquidity problems.
• Losses from the misappropriation of customer funds worth US$18 million, which entirely belonged to tycoon Boedi Sampoerna, by Century shareholders – Robert and Dewi Tantoelar – were recorded as the bank's liability and later covered by the bailout funds.
• Of the total bailout funds, Rp 5.87 trillion was spent to cover the depreciation of assets tied to illegal and imprudent activities carried out by Century's shareholders and executives.