THE Financial Institutions Development Fund (FIDF) will immediately lose Bt6.51 billion
from its venture to bail out the troubled Bangkok Metropolitan Bank (BMB) following a
write-down of BMB's equity by a staggering Bt23.21 billion to clean up its messy loan
books.
As usual, nobody is going to question how or why the FIDF, the government's bail-out
arm, threw money at BMB in the first place.
The bank, controlled by the Tejaphaibul family, was suffering from insolvency rather
than a liquidity crisis. Giving money to an insolvent bank is like trying to fill a well
with a spoonful of sand. It will never be enough.
The FIDF, which has blood in its eyes in the wake of the banking distress, has extended
between Bt60 billion and Bt70 billion in short-term loans to BMB, which suffered from a
deposit run. Since it is impossible to rehabilitate BMB -- with 43 per cent in
non-performing loans (or about Bt88.9 billion) from its total risk assets of 196.33
billion -- the FIDF has decided to act like Santa Claus. It will convert Bt25 billion of
its loans to the bank into equity.
Even after writing down BMB's total equity of Bt16.70 billion, the bank will still post
a negative equity of minus Bt6.51 billion. But this negative equity will be wholly assumed
by the FIDF, which will suffer an immediate loss of Bt6.51 billion in the equity
conversion process.
A question can be conveniently posed as to what kind of authority, or judgement, the
board of directors of the FIDF has exercised in its discriminatory, ill-conceived practice
of helping out a very bad bank. Are the bail-out figures based on the liquidation value or
the ongoing value of BMB? If the figures are based on the ongoing value, the FIDF will
lose more money down the road.
The banking regulators would like to lead the public into believing that its drastic
action to write down BMB's shares to the bone represents a departing point in dealing with
the systemic risk of the financial system. They might also want to drive the message home
that the equity write-down marks a good start to cleaning up the bank's bad debts.
And finally, the recapitalisation of BMB, which will post new equity of Bt18.48 billion
or a capital adequacy ratio of 9.42 per cent, will put the bank back on track -- albeit
via the socialist method of nationalisation -- so that five or six years down the road the
FIDF will reap a capital gain once the banking system becomes healthier.
That's an old story.
By converting its loans into equity in BMB the FIDF has blocked its exit from the bank.
It has lately been borrowing at 18 per cent by issuing bonds and lending the money out at,
say, 24 per cent to the troubled bank. The FIDF will lose the chance to earn from the
interest spread after the equity conversion. In the end, the FIDF will have to service the
18 per cent interest on its borrowings.
Where will the money come from? Since the International Monetary Fund will not permit
the Bank of Thailand to print money for the FIDF, the alternative is to get money from the
budget at a time when tax revenue is shrinking and the government is facing an uphill
battle balancing its books. The burden of helping BMB and other bad banks will be borne by
the Thai public in this generation and next.
There have been recommendations that instead of trying to change the insolvent banks'
equity, which is not the way to solve the problem, the banking regulators should rather
tackle the quality of their assets. The concept of the Asset Management Corp is fine since
it is mandated to separate the good and bad assets so that full attention can be focused
on tackling the bad assets and the financial institutions will have cleaner balance
sheets.
With several other banks facing problems similar to BMB, it remains to be seen how much
more money the FIDF will throw at them.
BY THANONG KHANTHONG and VATCHARA CHAROONSANTIKUL