OCT 27 — Last week it seemed like Malaysia was dusting off its playbook for the 1997 Asian financial crisis, starting with a proposed RM5 billion stock market injection. It seems par for the course that the government would borrow the money from the Employees Provident Fund to finance the investment through government agency Valuecap Sdn Bhd.
This time, there would be no tut-ting from Western governments, who are busy shoring up their own tottering financial systems, or global investors, who are reeling from the depth and speed of the current financial crisis. Since the contagion has also affected the Malaysian and other Asian stock markets, the gloating from this side of the world has been discernible but muted.
So what's the difference between what Valuecap will attempt to do, and what the Federal Reserve and European counterparts are doing to save their collapsing banks?
Simple. The American and European bailouts are pouring much-needed fresh capital directly into the banks, and not buying shares in the open market. The central banks' stakes consist of new shares, some with preferential terms to protect the taxpayers who are ultimately footing the bailout bill. Existing shareholders are diluted, while share prices continue to be determined by market forces, driven by either greed or fear as conditions dictate.
In contrast, Valuecap will be trying to boost stock prices by buying up shares from investors and stockholders eager to get out of the market because they are basically betting prices will continue falling.
It is not just investors who would benefit from such largesse. Take what happened with KNM Group Bhd, one of the most heavily traded stocks earlier this month. Now it appears a lender was selling shares owned by a company director and pledged as collateral for a loan.
The unnamed lender sold more than 72 million shares on Oct 16, when KNM was the top volume stock with 342 million shares traded. Anyone who bought the shares that day, in hindsight, may feel hard done by, as the stock has fallen almost 30 per cent since then to 50 sen a share.
Would Valuecap end up in this position, buying shares and easing the exit of a lender? Would its operations perhaps even help maintain share prices above critical levels, preventing margin calls? Would taxpayers and EPF contributors be told whose shares were bought?
And how will Valuecap exit from its positions in the future? Set up in 2003 to help buffer the stock market against any fallout from a looming war in Iraq, the state investment company in some aspects appears to be modelled on Hong Kong's August 1998 stock market intervention fund.
Within two months, Hong Kong had released details of the US$15 billion portfolio of stocks it had bought, and by March 1999, formulated a plan to cut down these holdings by 80 per cent. The government eventually created the Tracker Fund, an open-ended unit trust which gradually released the rest of the shares back into the market.
Valuecap may have taken the first step in that direction, through a spin-off fund management company, I-VCAP Management Sdn Bhd which earlier this year launched a RM840 million Islamic exchange traded fund seeded with shares supplied by Valuecap, its shareholders as well as Lembaga Tabung Angkatan Tentera and Lembaga Tabung Haji. The fund has already lost about half its value.
These concerns are at the heart of protests against the loan and the stock market injections. Too little is known about Valuecap itself, which has been described as "highly secretive", and about its activities.
There have been repeated assurances that Valuecap's investments would be viable, and profitable for its shareholders, namely Khazanah, the Kumpulan Wang Amanah Pencen and Permodalan Nasional Bhd.
Yet it was reported to have extended the lifespan of RM10 billion in bonds due in 2006 by another three years. The new deadline is this coming February. Was it because it lacked a good enough exit plan, no one can say at this point.
What can be said is a market meltdown is well beyond the control of a fund with RM5 billion at its disposal. Such a sum would be much better used injected directly into the economy itself, via tax breaks for small and medium sized enterprises, or short-term loans for exporters to help smooth over the rocky road ahead.
Anything else would really be throwing good money after bad. -- MI
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