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Insight : Reforming wealth management (Part 1 of 2)

Cempaka — Sat, 14 May 2011 07:40:00 +0000

The Jakarta Post, Amol Titus, Sat, 05/14/2011

Wealth multiplication is an ingrained motive in the capitalist model which sits at the heart of modern financial markets. And acts of entrepreneurship which result in legitimate wealth multiplication are to be marveled as lessons in good management.

For example, take the profits e-Bay has made on Skype. Some time ago it sold a 70 percent stake in Skype for approximately US$2 billion and earlier this week it will make a similar amount for its balance 30 percent stake sale after it was announced that Microsoft is buying Skype for a whopping $8.5 billion as it tries to keep up with the mega trend of web and device based social connectivity.

Many other examples abound and several Indonesian businessmen have similarly multiplied their wealth through shrewd investment decisions and impressive risk taking over the past decade.

However, illegitimate wealth multiplication through money laundering, fraud, tax evasion and corruption is downright illegal and deserving of criminal prosecution as per regulations.

Like any other criminal activity those accessory to it are also liable for prosecution under the law, both local and international.

As the recent serious fallouts from bank scandals have highlighted there is a seamier side of wealth management that is tarnishing the discipline and reputation of the banking system.

Worse it is obstructing the efforts of anticorruption teams whose hands must be strengthened if a key emerging market like Indonesia is to graduate beyond short term hype as a resource rich play to long term progress as a better governed economy.

To understand the seamier aspects of wealth management begin by asking four questions.

First, is it a core KPI of the seller of financial products to conduct proper due diligence on source of funds.

Second, is it the obligation (both professional and moral) of an overseas branch office of that institution located in a financial tax haven to distinguish legitimate wealth flows from illegitimate flows and stop hiding behind the hypocrisy of “the corruption did not occur in our country so it’s OK so long as funds flowed through some banking channel”.

Third, should the current bonus system of wealth managers which incentivizes leveraged sales of speculative products be reviewed and strictly monitored.

And fourth, should banks stop treating senior wealth managers as untouchable prima donnas and use common sense policies of rotation, codes of conduct and conflict of interest mechanisms.

If you believe the answer to the above four questions is ‘Yes’ then read on as the above issues and practical solutions will be elaborated in this two part series.

Bankers are prone to use the terminology of “smell test” to identify something fishy or suspicious related to banking transactions.

This is good because funds flows through banks are under serious scrutiny by regulators since serious crime invariably has a financial motive and trail.

In practical terms the smell test boils down to due diligence and surprisingly for a discipline as sensitive and prone to manipulation as wealth management, due diligence has tended to get lax and loose.

The main reason for this is that retail banking divisions of most banks now have two principal drivers of revenue and profitability — wealth management and consumer finance.

The wealth management product range has also become more complex as financial derivatives are now increasingly being sold to retail customers.

As margins reduce in sales to sophisticated institutional and corporate clients, treasury departments (the financial engineering labs within banks) are collaborating more with wealth management departments.

But problems arise when unsophisticated customers — individuals and SME business owners — are sold complex products at times with misleading sales pitches that over emphasize gains and downplay the risks which are very real and can come back to painfully bite the clients.

Since most banks have jumped onto the wealth management bandwagon competition is intense and as has been seen with other banking disciplines like credit cards or sub-prime mortgages when a ‘herd’ mentality is adopted standards invariably slip.

What has slipped the most is the quality and effectiveness of due diligence when a customer wants to open a significant wealth management account or make a sizeable transfer.

It is surprising that the same bank which will insist on salary statements, proof of income and assets for a simple credit card will not raise the alarm bell when an account holder is effecting a deposit or transfer that bears little co-relation to his or her salary or sources of income.

Asking for a NPWP (tax) number, sighting the account number of another bank or simply believing the customer under pressure or charm (majority of wealth management meetings take place in luxurious settings in which wealthy clients show off to gullible relationship officers) is incomplete due diligence.

Like with other aspects of banking there need to be firm procedures and systems to differentiate between genuine customers and those which require deeper background checks.

Once illegitimate funds enter the banking system chances of effective laundering are high and the seamier side of wealth management has also enabled conduits to seemingly untraceable tax havens, trusts, front companies and so on.

Reputable global and local financial institutions cannot talk of Good Corporate Governance and then turn a blind eye to the seamier aspects of wealth management practice.

Reform must begin first at home. The price of financial penalties, criminal liability and worse reputation damage is far too high to compromise.

International banks that have large wealth management centers in financial tax havens must also ensure that they have additional screens to detect illegitimate wealth and implement a cast iron policy that they will not become facilitators, wittingly or unwittingly, of corruption related money flows.

The columnist is CEO of international management consulting firm IndonesiaWISE. Prior to become a senior strategy advisor to leading companies and institutions, he spent over 18 years in the international financial sector. The second part of this article will appear in the next edition of Insight.

Economy grows as expected: minister

Cempaka — Mon, 07 Feb 2011 18:25:00 +0000

Antara News, Tue, February 08 2011

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Jakarta (ANTARA News) – Finance Minister Agus Martowardojo said the country`s economic growth at 6.1 percent in 2010 pleased the government as it had exceeded the 5.8 percent assumed in the state budget.

“We hail the outcome. Indeed we had hoped it would surpass six percent and it did, and even reached 6.1 percent. This means that the outcome was higher then the targeted 5.8 percent,” the minister said here on Monday.

He said the growth in 2010 was good and had met expectations thanks to growth in domestic consumption, investment and exports.

“Household consumption growth was high and we also see other factors such as investment and exports. And exports got more support because the prices of several other commodities increased. It seems that this factor played a role in the fourth quarter of 2010,” the minister said.

He said there were several matters that needed to be improved by the government, particularly in the consumption sector such as accelerating the absorption of the budget so that the growth target for 2011 which was set at 6.4 percent could be achieved.

Editor: B Kunto Wibisono

Moody’s upgrades RI rating to one notch below investment grade

Cempaka — Mon, 17 Jan 2011 08:09:00 +0000

The Jakarta Post, Jakarta | Mon, 01/17/2011

Moody’s Investor Services on Monday upgraded Indonesia’s sovereign credit rating to one notch below investment grade, a statement released on Monday shows.

According to the statement, the top rating agency upgraded Indonesia’s rating from Ba2 to Ba1 with a stable outlook, citing economic resilience, macroeconomic balance, an improving government debt position and the central bank’s foreign currency reserve adequacy as well as prospects for foreign direct investment inflows.

“We have upgraded the sovereign credit ratings as momentum in the economy is expected to be sustained by steady domestic demand, a reasonable pace and sequencing of policy and structural reforms, and rising foreign direct investment.

“Furthermore, Indonesia’s debt position and reserve adequacy remain on an improving trajectory relative to most of its ratings peers,” says Aninda Mitra, a vice president at Moody’s and its lead sovereign analyst for Indonesia.

Moody’s, however, still considers key risks to the rating outlook to be mainly embedded in Indonesia’s political system.

“Opposition from coalition partners has slowed the government’s drive to implement far-reaching economic reforms,” the agency says, adding that this opposition has not impacted overall policy management capabilities or near-term economic prospects.

Nonetheless, Moody’s notes that adversarial or obstructionist politics that impede policy making and banking supervision could make investor confidence suffer and financial market pressure could increase.

Earlier, Finance Minister Agus Martowardojo has said he hoped Indonesia would receive achieve investment grade accreditation from top rating agencies this year, following its stellar economic performance in 2010. (est)

Stock index suffers steepest drop since Oct. 2008

Cempaka — Mon, 10 Jan 2011 10:09:00 +0000

The Jakarta Post, Jakarta | Mon, 01/10/2011

The country’s benchmark stock index, the Jakarta Composite Index (JCI), went into freefall at midday, suffering the steepest drop in more than two years since October 2008.

JCI plummeted 4.19 percent, or 146 points, at the bourse’s noon break, sliding back to the 3,400 level at 3,485 amid widespread inflation worries.

Indonesia’s inflation neared 7 percent in 2010, with food prices increasing by almost 18 percent mainly due to climate anomalies that hampered the harvest season in the country, where domestic consumption accounts for more than 60 percent of the economy.

Despite the high inflation, the central bank has kept its benchmark interest rate at a record low 6.5 percent for 18 consecutive months.

Analysts have expressed concern that if the rate is not increased, inflation could hamper economic growth, which the government expects to reach 6.4 percent this year.

Blue-chip stocks suffered the most in Monday’s trading, with Astra Internasional, the biggest firm by market capitalization on the nation’s stock exchange, slipping nearly 6 percent to Rp 46,250 a share. (est)

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State firms book net profit of Rp 84.8t in 2010

Cempaka — Fri, 31 Dec 2010 10:11:00 +0000

Nani Afrida, The Jakarta Post, Jakarta | Fri, 12/31/2010

Indonesia’s 141 state firms booked a total of Rp 84.8 trillion (US$ 9.4 billion) in net profits this year, State Owned Enterprises Minister Mustafa Abubakar said in Jakarta on Friday.

“This was excluding profits from 17 state firms listed on the Indonesia Stock Exchange,” Mustafa said, adding that he was pleased with the result. Last year, state firms booked Rp 74 trillion in profit.

According to separate reports, the 17 state firms listed on the Indonesian bourse gained Rp 37.9 trillion in net profits during the third quarter of this year.

State firms concentrating in the energy sector had accounted for the biggest portion of the profits, contributing Rp 33.3 trillion, Mustafa said.

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New Disclosure Rules Needed for Indonesia Media After IPO Scandal: Experts

Cempaka — Fri, 10 Dec 2010 10:43:00 +0000

Jakarta Globe, Ismira Lutfia | December 09, 2010

Jakarta. The full disclosure of business journalists’ stock ownership is essential for anticipating the possibility of bias in their news reporting, a media discussion group has concluded.

Lin Che Wei, a veteran capital market analyst, said on Wednesday that such a disclosure to the journalists’ media outlets and audience was necessary given the absence of protocol to deal with the issue.

“So it should be possible for journalists to own stocks in a company, even in companies whose initial public offerings they cover, as long as they disclose that in their reports and leave the readers to judge,” he said.

He was speaking at a discussion hosted by the Alliance of Independent Journalists (AJI) on lessons learned from the Krakatau Steel IPO shares-for-coverage scandal.

That controversy centered on allegations that four stock market reporters solicited bribes in the form of stock from the IPO, in exchange for positive coverage of the state-owned firm’s Nov. 2 market float.

The Press Council, which handles disputes involving the media, has since ruled there was evidence of ethical breaches and professional misconduct by the journalists in using their positions to obtain Krakatau shares.

Although the council could not determine if the journalists had eventually gotten any shares, council member Agus Sudibyo said the mere attempt to solicit payment for positive coverage was itself an ethical violation.

The journalists in question have since resigned or been fired by their respective media outlets.

Abraham Runga Mali, the online editor of the Bisnis Indonesia daily, acknowledged that no Indonesian media outlets, even the leading ones, had specific rules on journalists owning shares in publicly traded companies or moonlighting as stock brokers.

He agreed there needed to be a system of disclosure, saying journalists should at least inform their editors if they owned shares in certain companies.

“That way, the editor can decide whether the journalist in question should be allowed to report on news about the company, and if so, the editor can carefully monitor the journalist’s writing,” Abraham said.

Abdullah Alamudi, a media expert and panelist at Wednesday’s discussion, said compliance with the journalistic code of ethics should be the rule of thumb whenever there was confusion over what stories a journalist could or could not cover.

However, he said this could prove futile “since a majority of journalists have no grasp of the code of ethics.”

He cited a 2006 survey by the AJI that showed 85 percent of journalists in Indonesia had never read the ethics code handbook.

“No wonder they don’t understand or even abide by it,” Abdullah said, adding that Article 6 of the code, which prohibits journalists from abusing their profession, should be a clear enough reference to resolve any confusion over any possible ethics violations.

He suggested an amendment to the ethics code to better define the extent of journalists’ professional conduct.

“It all comes back to the journalists themselves to be honest to their editors about their family connections to or stock ownership in a company they’re covering.”

Lin said he believed the most effective way to enforce the code of ethics was to make it mandatory for journalists to take an exam on the subject and obtain professional certification.

He added that because stock market journalists in particular were privy to “materials of non-public information,” they were in a unique position to benefit from such information, which could count as an ethical violation.

“[Stock market] researchers, writers and analysts must use reasonable care and judgement to achieve and maintain their independence and objectivity.”

Lin, founder of the consulting firm Independent Research & Advisory, said ultimately stock market reporters should play it safe when they found themselves in a “gray area” such as this, in which their reputation was on the line.

When is a bank really trading with its money?

Cempaka — Fri, 26 Nov 2010 08:35:00 +0000

The Jakarta Post, Jesse Eisinger, International Herald Tribune, New York | Fri, 11/26/2010

The regulatory overhaul of the U.S. financial system that passed last summer scored a big victory: It barred investment banks from wagering with their own capital. Some cynics expect Wall Street to find a way around these rules. By ‘‘some,’’ I conservatively estimate 99 percent of people who do not work on Wall Street and 100 percent of those who do.

Yes, banks like Goldman Sachs, JPMorgan Chase and Morgan Stanley have been jettisoning hedge funds and other “proprietary traders’’ to comply with the new edict, called the Volcker Rule.

But there is not a clear and bright line here. Defining proprietary trading is extremely difficult because it is almost impossible to distinguish from making markets. Goldman gets most of its profits from trading businesses, but it says that the majority of such trading is for clients. Regulators are struggling to define this, and investment banks are pouring their lobbying muscle into educating them.

To understand why this task is so hard, it is worth going through an obscure transaction that Goldman Sachs completed in London this year. The story starts in summer 2008. Bear Stearns had collapsed. The housing bubble was bursting. So was another bubble, in loans to high-risk companies. Banks, which had doled out overly generous loans to high-risk corporations,

would get stuck with losses on many of them.

During this period, Goldman Sachs bundled a bunch of these loans into a special concoction called CELF Partnership— or CELF-interested.

Of the ¤1.5 billion deal, worth about $2 billion today, ¤1.2 billion came from Goldman’s own balance sheet. Goldman whipped the deal out the door in July 2008.

Just two months later, the financial crisis roared to a boil and the assets backing the CELF bonds, like all such investments, wilted. Those who had bought into the CELF deal were sitting on paper losses.

The CELF deal got interesting this year. The big investor in the deal, a Dutch pension fund, wanted out. It owned the AAA-rated portion of the CELF deal.

The investor went back to the underwriter, Goldman, and after an auction, the firm bought the bond from its client. Because the market had declined, the investor took a loss.

In addition to buying the AAA position, Goldman also bought some of the equity, or the bottom part of the deal. The equity carried ownership rights. Goldman bought enough equity to become the majority holder of the deal.

By controlling such a deal, an owner can ‘‘call’’ a deal, or unwind the transaction. When that happens, the assets are sold and the owners are paid in sequence, by their seniority. In other words, the AAA holder gets paid in full first, and so on, down to the equity. We know that Goldman took control of the deal because it issued an obscure notice to the Irish Stock Exchange, saying that it now owned a majority of the equity of the fund. That notice listed the Goldman executive who was responsible for the position: Norman Hardie.

So who is Norman Hardie? Does he run a hedge fund that Goldman is booting out the door? Is he a Goldman proprietary trader? No. At the time, he was in charge of a part of Goldman’s structured finance business. Supposedly, that is a division that serves clients. Yet here he was snapping up big pieces of complex deals, putting his firm’s capital at risk.

Goldman made a bundle on the trade. Even though the CELF assets are not worth today what they were in 2008, therewas enough money that in unwinding the trade, all the debt holders — including Goldman — got paid off in full.

The holders of the equity were left with cents on the dollar. For Goldman, the trickwas that it was worth a small losson the equity to make a big gain on the debt. So Goldman made money and some of its clients took losses. At this point, few would be surprised by that.

Still, as the underwriter, Goldman sure seemed to have been in a unique position to profit. Goldman had a thorough knowledge of the CELF assets and knew all the original investors. But was there anything wrong with what it did?

No.

The important point is that this is a big way that Goldman makes money. Yet Goldman says its CELF trade was not proprietary trading at all. It was all done to help its client. What is more, it paid that client above-market rates.

‘‘Our client decided to sell its investment,’’ the firm said in a statement. ‘‘It took independent advice and ran a competitive sale process. We offered the highest price. This is a good example of helping a client achieve its objective, and underscores the critical importance banks play in using their capital to facilitate transactions on behalf of clients.’’ That is very similar to the arguments that the financial industry’s lobbyists will be making to complicate things for the definers of the Volcker Rule.

In the CELF transaction, Goldman took a big risk with its own money. The problem, exemplified by the financial crisis, was that when banks make those bets, they take their big winnings to the Hamptons but saddle American taxpayers with the losses.

There is a new law to curtail this kind of behavior. Because of the way Wall Street does business these days, it is fair to question whether it will work.

Jesse Eisinger is a reporter for ProPublica, an independent, nonprofit newsroom that produces investigative journalism in the public interest.

Finance Minister tells regulators to stay away from market players

Cempaka — Wed, 10 Nov 2010 07:11:00 +0000

Esther Samboh, The Jakarta Post, Jakarta | Wed, 11/10/2010 1:06 PM

Finance Minister Agus Martowardojo told capital market regulators on Wednesday to stay away from market players to maintain objectivity.

“Regulators must maintain their objectivity. [Capital market regulators] should stay away from players,” Agus told hundreds of participants at the Investor Summit and Capital Market Expo at the Ritz-Carlton Hotel Pacific Place in Jakarta.

Agus spoke before officials of the Capital Market and Financial Institution Supervisory Agency (Bapepam-LK) and the Indonesia stock exchange (IDX) in hopes for the capital market to better improve.

He added the market had shown stellar performance, with the composite index scoring all time highs and overall market capitalization surpassing Rp 3,100 trillion (US$ 340 billion)

“Average daily transaction on the stock exchange reaches Rp 4.5 trillion. That’s impressive,” Agus said.

Indonesian Stocks Up After Global Rally, Rupiah Again Powers Ahead

Cempaka — Fri, 03 Sep 2010 13:31:00 +0000

Bloomberg & JG | September 03, 2010

Jakarta. The benchmark Indonesian stock index joined a global rally and posted a solid gain on Friday, after US reports showed an unexpected increase in pending home sales and improved retail sales.

The Jakarta Composite Index rose 42.13 points, or 1.4 percent, to 3,164.28, closing at a record high. The index gained 1.9 percent for the week.

Volume was strong, with 4.8 billion shares worth Rp 4.1 trillion ($455.1 million) changing hands. Gainers outnumbered decliners 119 to 67.

Adaro Energy, the country’s second-biggest coal producer, rose 2.8 percent, ending a six-day slide. The miner is currently in talks with Bhakti Energi Persada to buy a stake in the smaller rival, director Andre J Mamuaya said, confirming a news report on Friday by Kontan.

Indosat, the country’s second-biggest telephone company, jumped 7.1 percent, its biggest gain since Jan. 15, after the stock was upgraded to “hold” from “sell” by Deutsche Bank analyst Raymond Kosasih. Indosat said on Friday that it expected revenue growth of as much as 10 percent for 2010, while revenue for its cellular unit would rise up to 17 percent. The company also expects to have as many as 42 million subscribers by year-end.

Tambang Batubara Bukit Asam, the state-owned coal producer, rose 2.3 percent. The miner said it might increase coal supplies to state power utility Perusahaan Listrik Negara to 15 million tons next year from six million tons this year, said Nur Pamudji, PLN’s director of primary energy.

The rupiah had its biggest weekly gain since July as Bank Indonesia increased lender’s primary-reserve requirements after inflation climbed to a 16-month high in August.

The central bank on Friday kept borrowing costs unchanged while ordering lenders to set aside 8 percent of their deposits as primary reserves, up from 5 percent previously. A government report this week showed inflation accelerated to 6.4 percent last month from 6.22 percent in July.

“Indonesia’s economic picture is still intact,” said Enrico Tanuwidjaja, an economist at OSK-DMG Group in Singapore.

“Going for a more prudent measure instead of a rate hike for liquidity management means investors will not immediately” sell the nation’s assets, he added.

Increasing the reserve requirements “was already expected by the market,” said Dino Nunuhitu, vice president at Indo Premier Securities in Jakarta. “There won’t be selling of Indonesian assets by offshore investors.”

The rupiah climbed 0.4 percent this week, the most since the five-day period ended July 30, to 9,003 per dollar as of the stock market’s close in Jakarta on Friday. The currency was little changed on the day.

The currency has gained 4.2 percent this year, the third-best performance among Asia’s 10 most-actively traded currencies excluding the yen.

Overseas funds have pumped $1.6 billion into Indonesian stocks this year and raised holdings of debt by 66 percent to Rp 178.8 trillion as the benchmark interest rate of 6.5 percent, which compares with a maximum of 0.5 percent in the United States, Britain and Japan, gives the currency a yield advantage.

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Jakarta Composite Index Breaks Another Record As Rupiah Hits 3-Year High

Cempaka — Thu, 29 Jul 2010 18:53:00 +0000

Jakarta Globe, Bloomberg, Reuters & JG | July 29, 2010

Investors keeping an eye on a screen showing their rising fortunes at the Indonesia Stock Exchange (IDX) in Jakarta. The JCI rose 39.34 points, or 1.3 percent, to close at 3,096.82, a record high for a third-straight day. Analysts say they expect they expect the index to keep heading up. (EPA Photo)

Jakarta. The market bulls on Thursday, pushed the benchmark stock index to a record high for a third-straight day and sent the rupiah surging to its highest level in three years as the strong economy and relatively high interest rates continued to attract funds from abroad.

The Jakarta Composite Index posted the biggest gain among major Asian stock markets on the day as some of the biggest companies reported healthy earnings, despite discouraging economic news from the United States on Wednesday.

The JCI rose 39.34 points, or 1.3 percent, to close at 3,096.82. Volume was unusually heavy, with 6.7 billion shares worth Rp 6.76 trillion changing hands. Gainers trounced losers 147 to 72.

The index has risen 22.2 percent this year, making it the best performer among Asia’s 10 biggest markets.

Meanwhile, the rupiah rose to its highest level since July 2007, trading at 8,973 to the US dollar as of the stock market’s close. The currency has appreciated 4.7 percent this year, after gaining 16 percent in 2009.

Brian Jackson, a Hong Kong-based senior emerging-markets strategist at Royal Bank of Canada, said he expected the exchange rate to reach 8,800 by the end of the year.

“Foreign investors are very positive toward Indonesia and they like the medium- to long-term growth story,” he said. “Inflation is picking up and we expect the central bank to raise rates by 50 basis points in the second half. The higher yield should further support the rupiah.”

Among outperformers on the stock market, PT Astra International, the country’s biggest listed company, climbed 3 percent, hitting a record Rp 52,800 after its first-half net profit rose 50 percent due to surging auto sales and higher coal prices.

Astra, controlled by Singapore’s Jardine Cycle & Carriage, reported a net profit of Rp 6.44 trillion ($715) in the first half. This compares with a net profit of Rp 4.24 trillion in the same period last year. Analysts forecast a full-year result of Rp 12.5 trillion.

Consumer goods firm PT Unilever Indonesia rose 3.6 percent and instant noodle maker PT Indofood Sukses Makmur gained 5 percent as the consumer sector entered a period of high earnings in the July-September quarter, dealers said.

PT Bank Central Asia, the country’s biggest lender by market value, said its first-half profit rose 20 percent as strong domestic demand lifted its loan growth.

BCA, controlled by conglomerate Djarum Group, said it earned Rp 3.9 trillion in the first half, which compared with a net profit of Rp 3.3 trillion for the same period last year.

BCA’s shares closed up 3.3 percent at Rp 6,200 before the company released its results. Its shares rose 23 percent in the first half, outperforming a 15 percent jump in the JCI, but underperforming the 28 percent rally for the biggest state lender, PT Bank Mandiri, in the same period.

Investors have pumped $414 million into local stocks this month, lifting net purchases for the year to $1.27 billion.

The government predicts the economy will expand 6 percent in the second half, after growth of 5.8 percent in the first six months, and economists surveyed by Bloomberg estimated that inflation reached 5.8 percent in July.

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