In 1974 the Nixon administration in its final and darkest hour decided to float the US dollar.
A new paradigm in international finance was born.
Out went Bretton Woods and the gold standard along with the fictitious values ascribed to the US dollar which dominated world commerce for decades.
In its place arrived a market value based currency system.
This was the second wave of ‘shocks’ of the post war era.
The first of these being the oil shocks of the 1970’s.
The world financial system changed at a time when it was awash with money – US denominated petro dollars from the oil shocks.
The US having lost its military influence as a global power was now in danger of also losing its economic clout.
Billions of US dollars were now flowing freely out its control into potentially “enemy hands”.
The euro dollar was born.
The euro dollar flowed into the coffers of oil rich (mainly Arab) states, many sworn enemies of the US.
These were parked in the reserve banks of Europe and other places outside the US.
The US Federal Reserve had no control over the euro dollars as it was outside their jurisdiction.
Europe wasn’t complaining because most of these dollars were parked in its banks.
Reserve banks around the major capital cities of the world went desperately looking for quants and financial engineers to create special products that would hedge the stability of their own currencies now threatened by an unstable US dollar.
The Americans being the creative geniuses they are in times of stress had little difficulty meeting this call.
Wall Street traders moved from being benign brokers of equities and debt stocks to now trading currencies as investment products.
The markets now demanded the situation find a new and more realistic driver to reflect the true market values of the yen, deutschmark and the US dollar.
The fix was gone.
Malaysia’s Mahathir Mohamad in a hurry to catch up with the rest of the world and not wanting to be behind Singapore, bought into the trend and hired what he believed to be his “brightest boys” to engage in highly speculative currency trading.
They set up a currency trading facility in parallel with Bank Negara.
They were ably ‘advised’ by local businessmen acting in concert with foreign investment and trading banks and brokerage firms.
In the volatility of the currency markets then, the one eyed as they say is king.
Malaysia was flying totally blind beholden to foreign advisors in the execution of the very lucrative forex trade.
This was very much an exercise of blind faith created in the same mold, character and quality of the failed tin debacle in which the Bank Negara, Bank Bumiputera Petronas were all players.
The sentient minds behind these adventures were none other than Mahathir, Tengku Razaleigh Hamzah and a handful of ‘advisors’ each with a private agenda of their own, none with any ‘skin’ in the game.
A sovereign override over all laws (by a prime ministerial intervention) paved the way for untold riches for those fortunate enough to be invited to the table of a game of financial poker.
It was a riskless gamble for those at the table where the house (Bank Negara) guaranteed everyone else’s risk but their own.
The losses Malaysia suffered in forex trading during the Mahathir era is said to have reached RM30 billion.
Accountability was not an issue as long as the doctor was at the helm.
Oil prices were high as was the misplaced confidence of a government bent on showing the world that its under developed status was solely the making of outsiders.
No one in the doctor’s inner sanctum it seems bothered enough to consider the wisdom that,’ learning to swim is a pre requisite for wading into deep waters’.
With the benefit of the evidence available today on that forex debacle, it is clear that culpability for the losses lay squarely on the government of the day.
Driving this was a combination of poor leadership, a misguided sense of priorities and vanity all rolled into one creating a recipe for certain disaster.
As with the tin debacle, the ‘advisors’ in the forex debacle almost all of them Malaysians had a hand in encouraging Mahathir’s vanity knowing full well the whole adventure would come to grief sooner or later, but not for the advisors.
Malaysian markets and traders had little knowledge or the skills required for operating in the currency markets at the time.
They were out of their depth.
Fewer still knew how the markets were being manipulated by the larger players in London, New York and Tokyo.
It would be a few decades later that the revelations of how international banking was being run by a greedy and deceptive of a cartel of big banks.
Barclays only recently were ordered to pay out a hefty $4 billion in fines for its part in interest rate fixing fraud.
The HKSBC had to fork out much more for its part in the scam and in money laundering and market fixing.
Exposing the Libor scandal meant that the vast majority of high flying bankers in the major financial centers like the city of London in fact knew precious little about the science of interest rates, currency swaps, hedging and arbitrage and their correlation to economic drivers behind it.
They were recruited for their pedigree.
Their computers doing most of the work for them.
How much wiser could the Malaysian traders have been?
The brightest amongst western bankers were digressing along the way to make a quick buck or a billion defrauding the Bank Negaras of this world.
If these ‘highly skilled traders’ of London and New York did in fact know that the market was being rigged (which we say they did not) then those of them on the other side of the trading equation would surely have cottoned onto the fact Libor was a fix.
No one has demanded an investigation into Sibor (the Singapore Inter Bank Offered Rate).
Sibor after all is operated along similar lines to Libor in interconnected and interdependent international financial transactions.
Singapore it would appear has more secrets to disclose about Sibor than it has.
But the facts there are hidden where the dictatorial command economy of the island won’t allow the light of day to shine into.
Much of that money Malaysia lost in the forex gambles of the 1980’s can be recovered inspite of the effluxion of time since that period.
A royal commission will assist in revealing much more than we know of the forex debacle if the terms of reference are wide enough.
If Lim Kit Siang and Mahathir as they appear to indicate, have lost their marbles and are now suffering amnesia over such a seminal earth shattering event, then they ought to stay clear and out of politics and enjoy their retirements in comfort.
Because no nation can afford to suffer senility or amnesia at the head of government.