BANKING: Conflict of Interest
Far Eastern Economic Review
Nov 19, 1998
Banking on Big Names:
Top U.S. investment banks are helping to fix Asia's shattered
economies; but their commercial ventures in the same countries are
raising conflict-of-interest questions
By Michael Vatikiotis in Bangkok and Hong Kong with Salil Tripathi in
Singapore and Jakarta
In the run-up to Asia's financial crisis, they were the harbingers of
bad news, berating Asia for its waste and corruption. They speculated on
Asia's currencies, banking on devaluation while helping to drain
foreign-exchange reserves from central banks in Bangkok, Seoul, and
Jakarta. As champions of the unfettered flow of global capital, they
were blamed in some quarters for bringing on the crisis. Yet today, they
are among the linchpins of recovery, working hand in hand with Asian
financial regulators to rebuild the region's shattered banks.
Who are they? They're among the Who's Who of major U.S. investment
banks: banks like Goldman Sachs, which is advising Thailand and
Indonesia on bond issues and privatization; banks like Lehman Brothers,
consultants to the Financial Restructuring Agency (FRA) that is selling
off assets from Thailand's closed finance companies.
Their selling point for earning big fees as advisers? Lots of
experience reviving sick economies. Their ranks include employees who
played leading roles resolving the U.S. Savings and Loan crisis in the
1980s, the banking crisis in Sweden and the collapse of the Mexican
Yet there are concerns that as well as advising governments on how
rebuild their financial systems, these banks are also pursuing their own
business interests from a position of unfair advantage. "These banks
have an advisory side and a wheeler-dealer commercial side," explains
Thailand's Finance Minister Tarrin Nimmanahaeminda. "They always say
they maintain Chinese walls between them. I rather doubt it. How else
would they be proving to their board that they are maximizing profits?"
A common complaint is that the investment banks do not display
transparency and accountability-practices the banks themselves demand of
the governments they advise. Therefore, even the hint of conflict of
interest could jeopardize the credibility of these banks in the eyes of
the governments that hire them and the companies bearing the brunt of
restructuring. The investment banks, for their part, have shown they are
not entirely deaf to the accusation. Goldman Sachs, in one notable
instance, has pulled out of representing the eventual buyer of a
"They are so high on their horse about transparency and market
forces, they should be careful about the appearance of conflict," says
Manu Bhaskaran, group head of research at SG Securities in Singapore.
Take, for example, the way Lehman Brothers handled a recent sale of
finance-company assets in Thailand. The local media, prodded by howls of
complaint from competing bidders, alleged conflict of interest after
Lehman's Principal Transactions group successfully bid 11.5 billion baht
($314 million) for 17,747 residential mortgages. Lehman Brothers,
critics pointed out, was also an adviser to the FRA, and the concern is
that the bank, in its advisory role, was in a position to know what the
other bids were and could pass on information to its transactions
section. The issue is sensitive because Tarrin believes the opposition
will raise it during the next censure motion against the government in
Answering these allegations, Lehman Brothers' country manager in
Thailand, Kittivilai Charoensommbut-Amorn, strenuously denies having any
input to the bid made by the bank's Principal Transactions group. "They
made their own judgement," she says of the group, which is based at the
firm's New York head office. Adds Stephen Theobold, a Lehman Brothers
managing director who acts as adviser to the FRA: "There is no
communication or sharing of anything. My association with the principal
side of the business is nil." Brian Prince, the Principal Transactions
group's Asia director, acknowledged contact with the Bangkok office in
comments to the local media. But he said that contact had no input in
his group's discussions over the bidding price.
Lehman Brothers, which was appointed adviser to the FRA in March,
argues that irate competitors and angry debtors generated the row over
the bid. "A lot of people have been financially damaged and are angry at
the FRA," contends Kittivilai. The bank also says that in the first
auction of assets held in late June, in which it did not bid, the
majority of assets were sold to GE Capital, a major U.S.
financial-services company. And it points out that its successful bid
for the mortgages in the second auction weighed in at a far higher price
than the nearest competitor -- suggesting strongly a lack of
information, rather than unfair access to data on the value of the
In any case, allegations made by rival banks are common, and given
the intense competition for advisory mandates -- which earn around
$2,000 a day excluding expenses -- perhaps not surprising. But Tarrin
remains concerned about even a whiff of impropriety. Despite assurances
from the FRA board that every bidder had access to the same information,
the allegations, even if proven wrong, have damaged the agency's
credibility, he says.
In Indonesia, where economic recovery is caught up in political
change, the transparency of the recovery process is even more important
because of a growing intolerance of anything that smacks of possible
insider knowledge, corruption or even mildly muddy business ethics. That
explains why opposition leaders are questioning the role of Goldman
Sachs. They point out that Goldman Sachs, while advising the government
on privatization, represented a potential buyer of an about-to-be
privatized company, the state-owned cement maker, Semen Gresik.
The bank also secured assignments to take two other state-owned
companies scheduled for privatization to potential foreign buyers.
Critics note that those assignments were recommended for ministerial
approval by a high-level committee that includes a senior executive of
state-run Bahana Securities, which has a joint operating agreement with
At the centre of the conflict-of-interest controversy is the role
Goldman Sachs played in the acquisition of a strategic stake in Semen
Gresik, Indonesia's biggest cement maker, by Mexican cement maker Cemex.
Goldman Sachs is accused of having too many fingers in too many pies at
the same time. The investment bank counters that not only is it innocent
of wrongdoing, it has also paid fastidious attention to the niceties of
banking ethics throughout.
A potted history of its dealings in Indonesia over the past year
does, however, show that for at least two months Goldman Sachs was
adviser both to the seller -- the government -- and the would-be buyer,
Cemex. (Goldman Sachs did not respond to questions about simultaneous
representation.) Meanwhile, its Indonesian partner since the early
1990s, Bahana, was representing Semen Gresik, the company being sold.
Early this year, Cemex appointed Goldman Sachs to find a company in
Indonesia in which the Mexicans could take a strategic stake. The search
was narrowed down to Semen Gresik well before the government
privatization programme was launched. But in May, the investment bank
was appointed the government's adviser on privatization along with
Lehman Brothers; by June, local bankers and articles in the press were
showing strong signs of discontent over possible conflict of interest.
The loud grumbling turned into a public outcry by mid-July and
Goldman Sachs resigned as Cemex's adviser. Sofyan Djalil, special
assistant to the Minister of State Enterprises, says: "Goldman Sachs
decided to withdraw in the interest of transparency. We didn't think
there was anything illegal in what Goldman Sachs was doing." The bank
simply wanted to avoid further public debate over its role, he adds.
Nobody has accused Goldman Sachs of any wrongdoing, but other
investment bankers say such multiple roles are unusual. "This doesn't
pass the sniff test," says an American investment banker in Hong Kong
familiar with Indonesia. Indeed, it was the comparative rarity of the
bank's dual healer and dealer roles that caused the stir in local
financial circles. Says a leading Jakarta-based broker: "When the market
knew the facts, that was big news, because you cannot be on both sides."
Defending their role, Goldman Sachs officials say there was no
conflict of interest; they point out that they decided not to bid for
the appointment of adviser to Semen Gresik since they were already
representing Cemex. Richard Ong, managing director at Goldman Sachs who
oversees the firm's operations in Indonesia, says: "Never did we want to
compromise our objective and mission, which was to maintain our
But Laksamana Sukardi, a respected former commercial-bank executive
and now an economic adviser to popular opposition politician Megawati
Sukarnoputri, remains concerned about both the award of government
contracts to investment bankers in general and Goldman Sachs in
particular. "There is lack of transparency in the way the mandates are
awarded in the privatization process," he says. "There is also conflict
of interest because advisers to the government are also bidding for
business from the government. Firms like Goldman Sachs must be seen to
be impartial and above board. There should not be any suggestion of
conflict of interest." In fact, Goldman Sachs should "follow the highest
standards" and that means that it should refrain from bidding on
projects that are related to privatization.
The investment bank's appointment as selling agent for the satellite
operator Indosat and port-operator Pelindo -- two of the 12 state-owned
companies up for privatization -- is causing further concern. Many
Jakarta-based equity analysts believe the satellite operator to be among
the most promising state assets. And they suggest that Goldman Sachs'
position as adviser to the government on privatization may have given it
an unfair advantage in the bidding.
Timothy Dattels, managing director of investment banking at Goldman
Sachs in Hong Kong, agrees Indosat is a company of international class.
But he denies any conflict of interest in the case of either Indosat or
Pelindo since they are state owned. That means that in both instances
his firm is representing the same client -- the Indonesian government.
"We are not in a conflict position and we are not representing any
buyers or potential acquirers of the assets being sold in the Indonesian
privatization programme," Dattels says.
But Laksamana sees the situation differently. "Indosat is a company
with good prospects and is probably the best of the lot of the companies
being privatized," he says. "Goldman Sachs may have deserved the mandate
but, because the process was not transparent, the people have the right
to question the selection procedure."
That's a legitimate right, given what Goldman Sachs calls its joint
operating agreement with Bahana -- a seat holder on the powerful
committee that recommended Goldman Sachs for the assignment. The
committee is made up of three ministers, senior officials, and
executives from Bahana and another state-run brokerage, Danareksa
Securities. Rival investment bankers are piqued about Goldman Sachs
relationship with Bahana. Privately, they grumble about the selection
process. One investment banker says: "There is nothing secret in
Indonesia. A well-connected firm can easily use those connections to get
access to information which is not available to others." Arguably,
that's a case of sour grapes. Goldman Sachs' competitors are probably
complaining because they don't have Goldman Sachs' contacts in Jakarta
and have lost deals they had coveted.
Goldman Sachs officials don't deny their relationship with Bahana
under which each firm has the right to work with the other in deals in
which they are interested. "It is a joint operating agreement and there
is no current cross-ownership," Dattels explains.
Does such an agreement between the bank and Bahana create a conflict
of interest? Yes, according to an academic in the United States who has
researched conflict-of-interest issues involving investment banks. Siva
Nathan, assistant professor at Georgia State University says: "There is
clearly a conflict of interest as Goldman Sachs clearly has an advantage
over other competing firms. The problem with this is that because of
these relationships, Indonesia may not get the best deal."
The point seems to be not whether the activities of these banks
actually bend rules, but that they appear to be in a position to exploit
the situation by making commercial deals while preaching financial
purity. As a senior official with a multilateral financial institution
in Jakarta says: "Indonesians cannot be accused of cynicism if they say
that these investment banks are guilty of the same kind of collusion and
nepotism which brought down the Suharto regime."