Take A Good Close Look At This Malaysian Cleanup

Its new finance system is the old one in thin disguise

At first glance, it looks like a textbook example of how a country should clean up a financial debacle. Over the past year, Malaysia has set up three different government agencies to seize the assets of deadbeat borrowers and restructure some $8.5 billion in debts owed by insolvent conglomerates. Two big bank mergers have been executed, with another in the works, and eight finance firms have been folded into stronger companies. "We have done our part," says Finance Minister Daim Zainuddin with a smile. In no time, officials say, foreign lenders should be flocking back.

But on closer inspection, what Malaysia presents as a new, improved financial system is the old buddy system in thin disguise. Rather than putting out of business the people and institutions responsible for the reckless lending binge of the early 1990s, Malaysia's debt workout has mainly served to prop them up. The chief beneficiaries are the friends, political allies, and family of Daim and Prime Minister Mahathir Mohamad. Malaysian taxpayers, who must foot the bill for billions of dollars in dud loans, are the losers. "This is just another chapter in a shell game," says a Singapore-based foreign banker who does business in Malaysia.

WIPED OUT. Foreign bankers say the rescues of infrastructure giant Renong Berhad and its affiliate United Engineers Malaysia illustrate how connected insiders have been bailed out on painless terms. Both companies accumulated too much debt during the boom under the management of Halim Saad, a protege of Daim. By the end of June, UEM will raise some $2.2 billion in a new bond offering to refinance $2.4 billion that Renong and UEM owe their creditors. The Corporate Debt Restructuring Committee (CDRC), a government agency that advises indebted companies, persuaded the banks not to call any of Renong's loans, giving the company time to work on its bailout.

No problem there: That's how workouts go. But when such rescues are arranged in the West, the equity of the company's owners is usually wiped out, and management is replaced. But Saad will remain in control of both companies. The CDRC can't mount a boardroom coup. "We have no enforcement powers," explains CDRC Chairman C. Rajandran. "We rely on moral suasion." The CDRC also arranged a debt workout for Tongkah Holdings, a hospital-equipment company run by one of Mahathir's sons, Mokhzani.

Other agencies charged with cleaning up the mess of Malaysia's go-go years are just as accommodating. Take the case of Kuala Lumpur's Capitalcorp Securities, which filed for bankruptcy in late 1997 with $34 million in unpayable debts after the stock market crashed. In January, $8 million of Capitalcorp's debt was assumed by Pengurusan Danaharta Nasional, a state resolution trust company with sweeping powers to buy loans at steep discounts from banks and to seize debtors' assets.

DUD LOANS. Some managers were ousted--but were replaced with insiders from Capitalcorp's parent, Kumpulan Fima. Mahathir himself was a director of Kumpulan, stepping down in 1981. Now called Fima Securities, the firm plans to swap its debt for preference shares that creditors, Danaharta included, can convert into equity. "We proved there is light at the end of the tunnel," boasts Fima Securities Director Ahmad Riza Basir, who also is an executive with Kumpulan Fima.

These deals would probably not go over well in U.S. bankruptcy court. But they're legal in Malaysia--and local branches of Western auditors sign off on them. Malaysians insist their deals are sound. "We are able to force politically-connected borrowers to agree to firm but fair terms," says Danaharta Managing Director Azman Yahya. "Danaharta uses its powers without fear or favor." Also, since the government entered the crisis with little public-sector debt, it could cover the dud loans of private companies by issuing ringgit bonds to local financial institutions. "We have enough cash here," says Daim.

Even if the big debt cleanup does not meet international standards, Malaysia may still be able to clear away enough bad loans to enable its banks to start lending again. The big hope in Kuala Lumpur is that Malaysia's finances will appear sound enough to foreign institutions that they will resume lending as well. Given the way banks threw money at Asia in the bubble years, some just may--as long as they don't ask too many hard questions.

Before it's here, it's on the Bloomberg Terminal.