Malaysia Hires Salomon to Raise Funds as Crisis Creates Odd Couple : Asian Silver Lining on Wall Street
International Herald Tribune
September 11, 1998
Thomas Fuller

Worries over the growing pile of bad debt in Asia have sent markets tumbling over the past year, but it has not been bad news for everyone.

Asian governments are turning to Wall Street for their cash needs, striking deals that could translate into hundreds of millions of dollars, if not billions, in fees and commissions for American investment banks.

On Thursday, Malaysia became the latest country in the region to appoint a Wall Street firm as its financial adviser. Salomon Smith Barney Inc., one of the largest American investment banks, is now charged with promoting the country among international investors and raising an undisclosed amount to be used to recapitalize the domestic banking system.

Last month the government of Indonesia awarded Lehman Brothers Inc. and Goldman, Sachs & Co. the mandate to sell stakes in 12 state-owned companies. Earlier this year Thailand took on Goldman as an adviser to its Finance Ministry. And South Korea has sold $3 billion worth of bonds with the help of Salomon and Goldman.

"You have hundreds of billions of dollars of assets to restructure between Tokyo and Jakarta over the next five years," said Kenneth Courtis, chief economist at Deutsche Bank in Tokyo. "That's probably the greatest investment banking opportunity in the world."

In the case of Malaysia, official estimates of the total amount of cash needed to restructure the country's banking system reach $10.8 billion

Assuming Salomon raises the entire amount, the bank could make more than $250 million in commissions, according to Marshall Mays, chief economist at Nikko Securities in Hong Kong.

"This is a way for Wall Street to get back into the action in Asia," said Catherine Mann, senior fellow at the Institute for International Economics in Washington.

The string of deals between Asian governments and Wall Street firms highlights not only the preeminence of U.S. investment banks around the world but also the ambivalence toward them in Asia.

Prime Minister Mahathir bin Mohamad of Malaysia, for one, has been a fierce critic of the financial principles that underpin investment banks such as Salomon. He has blamed uncontrolled flows of investment capital and foreign-exchange speculators for triggering the Asian financial crisis, the very plight his country is now inviting Wall Street to profit from.

Just last week Mr. Mahathir called for people to "take some action which is contrary to the philosophy of the principles of the free market." Mr. Mahathir clamped down on currency trading and told foreign investors in the stock market that they could not take their money out of the country for one year.

Why, then, did he call in Wall Street to raise money?

"It permits a greater degree of control over the national financial system, which has been a priority of the prime minister," said Jomo K.S., a professor of economics at the University of Malaya.

By hiring Salomon to sell and underwrite Malaysian government bonds overseas, he said, Mr. Mahathir avoided turning to international organizations such as the World Bank or the International Monetary Fund for money that would come with strings attached.

Typically in a bond underwriting deal, Salomon would ask for an up-front fee to cover its costs and then take a percentage of the bond sales — perhaps 1.5 percent.

But Salomon's job will be more than just selling bonds. The firm could lend credibility to Malaysia in the eyes of international investors. Already on Thursday, Salomon's top guns were issuing soothing words about Malaysia's somewhat unorthodox plans to combat the economic crisis.

"It is our expectation that the measures that are being taken will promote the strengthening of the economy," said Deryck Maughan, co-chairman of Salomon. "We expect that Malaysia will maintain a sound fiscal position and substantial current account surplus."

Mr. Jomo of the University of Malaya says that smooth words go with the job. "By appointing an American firm as an agent, you are going to basically get them to do PR work, which most governments are very ill-equipped to do," he said.

Up until a few weeks ago, Malaysian officials had said they would raise some of the money on their own. Officials from the Finance Ministry planned a trip to the United States and Europe to promote a $2 billion bond issue. The trip was canceled after two rating agencies downgraded Malaysia's credit status to a few notches above "junk."

For Wall Street, too, there are reasons to go back to Asia: With yields on U.S. Treasuries at historic lows and with the recent volatility in U.S. markets, Asian debt could provide international investors with a higher-yield alternative, Mrs. Mann of the Institute for International Economics said.

Investors "took all their money out," she said. "Now is the time to go back in and be more realistic and differentiate among the borrowing classes."

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