A Doctor in The House: A Memoir of Tun Dr Mahathir Mohamad (70 page)

This defensive reaction by the British did not endear them to us. When governments or their agencies can change market mechanisms at will, the market cannot be regarded as free. Our experience with the London Metal Exchange, which permitted British speculators to renege on their undertakings, makes nonsense of the claims of impartiality and fairness of the market mechanism. The so-called free market is not free at all. The time would come, in 1997-1998, when I would be ready to break market rules and employ unconventional methods in dealing with international institutions and mechanisms. By then I had learnt that the market’s rules and international financial structures were not devised to achieve fair trade. They were concocted to lend dubious legitimacy to the rich countries and their giant corporations in their efforts to grasp the wealth of the poor and to re-establish their old economic hegemony.

The Dawn Raid greatly strengthened our confidence and we were no longer treated as people of no consequence. We had proven ourselves to be resourceful players. While the new five per cent rule barred us from buying more companies in the same way, acquiring major strategic corporations was something we would continue to do.

The private sector also entered the fray. The late Tan Sri Lim Goh Tong, a self-made billionaire and one of Malaysia’s richest men, decided to buy an old British plantation company, Harrisons and Crosfield.
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 He was a remarkable man. He had come to Malaysia as a penniless 20-year-old from China but went on to transform Genting Highlands into a successful mountain-top casino resort just outside of Kuala Lumpur. At the time of his death in 2007, he owned Resorts World, a fleet of cruise ships, plantations and other major assets. When he went to London to complete his purchase of the plantation company, he caused quite
a sensation.
 

Reporters, photographers and TV cameras buzzed around him, ready to record his statements and answers regarding his acquisition of Golden Hope and Harrisons and Crosfield, both large companies set up early during British rule in Malaya. But Lim could only reply to their questions through his interpreter. He only spoke Chinese and bazaar Malay and did not look like a corporate raider. Yet he was able to outwit the best brains in the business.

In the mid-1960s Malaysian students used to fly back and forth from Britain on chartered flights operated by the British. Seeing the opportunity to make money, some Malaysian businessmen bought a Boeing 707, intending to charter it out for Malaysian students. Malaysia had freely given landing rights to British charter flights but Britain now refused to allow the Malaysian charters to land in the UK. While Malaysia did not then have its own international airline flying between Malaysia and the UK, the British Overseas Airways Corporation
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 flew into Kuala Lumpur as it pleased. But when the Malaysian Airlines System (MAS) was set up, no satisfactory reciprocal arrangements could be struck and only a limited number of MAS flights could fly into London.
 

When I was studying in the English-medium school during the British colonial period, I was always taught about sportsmanship, that noble sense of fair play that was supposedly characteristic of the British. In this spirit, they would never take advantage of an opponent’s misfortune and would ensure that competition would always be fair and just. I was impressed by this idea and decided to display that same noble quality in my own actions. But my belief in the British sense of fair play had by now almost vanished. The people I had put on a pedestal, the people I had regarded as my role models, had proven to be far less than what I had imagined.

Despite all this, we managed to repatriate Malaysia’s foreign-owned industries and even to acquire high-profile British companies such as Laura Ashley, Lotus, and Crabtree and Evelyn. Today many British retail companies are owned by Malaysians. However, we would also learn many other hard lessons about the management of our assets and finances. In the 1960s, as a producer of raw materials, we suffered from the instability of market prices and the continual relative lowering of commodity prices against the cost of the manufactured goods we had to buy. We were essentially trapped in a downward spiral, and kept having to sell more and more tin and rubber at ever lower prices in order to buy fewer and fewer of the manufactured goods we needed. Even when commodity prices went up our earnings could not compensate for the increases in the prices of the manufactured goods we needed.

Internationally, the prices of tin and rubber were not allowed to be dictated by market forces. The United States, for example, held huge stockpiles of these commodities. They would release their stock into the market, causing available supply to outstrip immediate demand. Prices would then fall, even plummet. In this way, they could buy our raw materials on the cheap, produce manufactured goods, and sell them back to us at high prices.

When I was Member of Parliament in 1965, I argued with James D. Bell, the US Ambassador to Malaysia at that time, about how their General Services Administration
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 stockpile was being used. It was not fair, I said, for the US to depress tin prices, which Malaysia’s economy depended on so heavily. He replied that it was important for the US economy to keep commodity prices low. He maintained that the strategic use of their commodities stockpiles was legitimate, and that we just had to accept it. That the US did not depend on tin the way Malaysia did, left him unmoved.
 

At one stage as Prime Minister, I had to send an unofficial team consisting of Tun Daim Zainuddin,
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 who held no Government position at the time, and Tan Sri Alex Lee
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 to
intercede with the stockpile managers. They warned the Americans that our unemployed tin mine labourers would join the communist guerrillas if they had no income. This strategy succeeded in stopping the stockpile managers from releasing the tin into the market. It was a small but important coup, one that could not be publicised at that time.
 

Then we had to contend with the tin market in London, which, of course, was not managed by Malaysians. On the London Metal Exchange (LME), where tin was bought and sold, prices were fixed by the buyers and sellers. Malaysia had no say whatsoever. The LME allowed speculation and short selling, which gave rise to gambling and deliberate manipulation. Those entering into such contracts had the incentive to make or help the commodity’s price to fall or rise. The advance selling of non-existent tin—of virtual or hypothetical or prospective supplies, rather than physical tin already held in hand—for future delivery is harmless enough in itself. But heavy, aggressive forward selling to push the price down creates a notional surplus without producing any tangible extra tin. This fictional surplus of tin in the market forces the price down. This affected the earnings from tin in tin-producing countries like Malaysia.

After they had forced the price down, the sellers would buy tin to be delivered at the higher, contracted price at which they had agreed to sell, when prices had been higher. Traders obviously stood to make great profits by this dubious practice, but depressing the price of tin in this way hurt Malaysia badly. Needing money from the sale of our tin, we had to sell what we produced at the prevailing, manipulated market prices. The lesson here was that the market is not an impartial and impersonal, price-setting mechanism but an arena for strategic, even covert and illicit action, and furtive manipulation by those powerful and devious enough to get away with it.

I had only just become Prime Minister when tin prices tumbled. I knew little about the tin market and about short selling and was resigned to see Malaysia’s economy experience low growth. Then a friend, H.M. Shah, a businessman from Malacca, brought a Swiss metal trader named Marc Rich to meet me. He told me that he could reverse the downward trend in tin prices by buying up the tin being sold in the market. He explained all about short selling and convinced me that if the sellers had no tin they would be unable to deliver when the time came. If Malaysia had physical tin and others didn’t, they would have to come to us to get it, on our terms, when the time came for them to deliver. They would have contracts to fulfil, and meeting a contract is a sacred obligation to businessmen, whatever the cost since the price of a ruined reputation is always greater. It would become at that time a seller’s market. If Malaysia refused to sell them the physical tin or they refused to pay the price asked, the sellers would not be able to fulfil their contracts and would be in serious trouble.

If Malaysia also bought up tin for sale once the short sellers had pushed prices down, they would be in even greater trouble. We would be in a position to hold back the physical tin and demand whatever price we liked. We would be able to name a price higher than the depressed buying price we had paid and so profit both ways, as both seller and buyer. We would sell at a high price the tin delivered to us at the lower contracted price. At one stroke, we would make a considerable profit. As a result of our new ability to sell at a price set by us, tin prices would rise and eventually settle at fairer, more realistic levels.

It sounded like a good and practical idea to me. We were not going to corner the market, which is a practice that is frowned upon by the international community. We would not be trying to buy up all the tin or create an artificial scarcity that would drive the price up. We already had the physical tin. It was ours—we produced it and owned it. Yet the speculators’ price manipulation operation was killing our major source of income.

The agreement we made with Rich was that he would make only limited purchases on our behalf. Any buying that goes beyond the agreed amount to be spent would require approval from our Treasury. Unfortunately, Rich did not abide by this agreement and he bought huge quantities for future delivery without our permission. When we learned of his excesses we became alarmed and tried to stop him. But by then, he had committed us to big purchases. Still, we felt we were on firm ground. Since we actually had the physical tin, the people who sold tin to Rich and others would have to buy tin from us when they needed to deliver. We could demand a good price from the short sellers. But when the time came for the sellers to deliver the physical tin, they accused us of trying to corner the market. The LME sided with the commodity traders and ruled that the sellers could renege on their contracts and had no obligation to deliver.

This blatantly unjust ruling by the LME ensured that tin prices would remain unduly low. It was a decision in favour of manipulated, not fair, prices. We could not do anything to Rich either, and we later learnt that we were not the only ones he cheated, as he had also managed to con the US Government’s Inland Revenue. We lost some RM600 million on the exercise, a huge sum in those days.

We came in for much criticism from both the foreign and local Press, who accused us of trying to corner the tin market. The Opposition also attacked us for misusing government funds. The LME was the British institution for buying and selling tin and other metals and our contracts under that system were legitimate and properly concluded. But it would have cost them a bomb in terms of money, power and reputation—so they ruled against us simply to save their market players.

Next to the tin debacle, our foreign exchange trading was the second mistake we made in the management of the country’s finances. In September 1985, the Organisation for Economic Cooperation and Development (OECD)
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 countries met in secret at the Plaza Hotel in New York to correct the huge trade imbalance between Japan and the United States. They decided to revalue the yen and the European currencies against the US dollar. That agreement became known as the Plaza Accord. But the strong yen caused consternation among developing countries. Malaysia had sizeable borrowings in yen because of the low Japanese interest rates and the accord meant that the value of that debt in Malaysian ringgit would almost treble.
 

Had we held our reserves in yen, there would have been few problems. Bank Negara, our central bank responsible for managing our reserves, accordingly decided that it could not be caught holding devalued currencies, particularly the US dollar. It therefore set up foreign currency trading operations which traded only in the currencies of developed countries, principally the US dollar, German Deutsche mark, Swiss franc, the yen and pound sterling. The bank also set up currency trading offices in London and New York, manning them with experienced personnel who worked in shifts round the clock. They did quite well, making good profits. Every central bank is involved to some extent in this kind of currency trading to protect its reserves. This is one way to manage the country’s currency and protect its value against the uncertainties of the world monetary system.

In the early 1990s many believed that, because of European integration, Europe was soon going to overtake the US as the strongest economic power. Everyone expected the US dollar to crash again, as it did following the Plaza Accord. But Denmark refused to ratify the Maastricht Treaty
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 and the European currencies faltered. Our currency traders had large holdings in several European currencies and we lost money. We were not alone as many currency traders, individuals and companies, had wagered on the European currencies appreciating after Maastricht.
 

Anwar, our Finance Minister then, faced a barrage of questions from the DAP. Tan Sri Jaafar Hussein and Tan Sri Nor Mohamed Yakcop, Governor and Deputy Governor of Bank Negara respectively, took the blame and resigned. That was simply the honourable thing to do, not an admission of guilt or wrongdoing. They had not acted improperly—they had simply taken a risk and lost. It took us about 10 years to recover from those losses. Our attempt to trade in foreign exchange may have proven to be an expensive failure, but as always, we were able to mine a valuable lesson that would help us a few short years later, when the ringgit came under international assault.