Bangladesh hacker heist: The perfect crimes
of Asian central banks
“..they’d swallow a big lie and choke on a
little fib” from
the Terry Pratchett novel ‘Maskerade’
*All references to “Asia” in this article pertain to the geographic mass
viz. Far East Asian countries, South East Asian nations, South Asia and the
Middle East
A spelling mistake on the word “foundation” helped to prevent the New
York Fed from making a $1 billion transfer out of the account of the Bangladesh
central bank, as widely reported this week. When hackers seized control of the
Bangladesh Bank accounts, they stole credentials of key officers and using
these, directed the New York Fed where the Bangladesh Bank had some of its
foreign exchange reserve accounts, to make some transfers.
While the bigger heist of $1 billion was prevented due to the spelling
mistake, the hackers still got away with $101 million in illegal transfers of
which $20 million that went to Sri Lanka was recovered while the balance, sent
to banks in the Philippines, is as yet unaccounted for. Officials in the
Bangladesh Bank have threatened to sue the New York Fed if the monies aren’t
recovered.
The above is a summary of varied news articles on this subject for the
past 24 hours. Looking through it though, I couldn’t help but think of a more
obvious question – namely, why are Asian central banks so upset about a bunch
of hackers when they are losing far more money on their core investment
holdings?
Think of the numbers – Asia has about $5 trillion (that’s the number 5
followed by a ridiculous 12 zeros) invested in the highest quality US and
European securities adjusted for maturity profiles, average returns are close
to -0.5% to -1% (while much of the US treasury curve remains positive yielding,
the same isn’t true of most other countries ranging from Japan to UK). That’s
$25 billion to $50 billion lost by these central banks annually. By the way,
the returns are before currency volatility – if measured in USD terms, returns
on holdings of European securities would lose more than 1% given the sharp
decline in the EUR over the past 2 years. If I were to consider the activities
of various sovereign wealth funds whose investments (and therefore losses) go
into other assets including stocks and commodities, these numbers would be
significantly worse.
Mull that number for a second – you are losing $50 BILLION (that’s the
number 5 followed by 10 zeros) across the region, and someone makes a fuss
about losing a mere $101 million. Here’s the better story – no one has even
complained about Asian central banks as a group effectively transferring this
level of wealth to the US and Europe.
If anyone in Asia ran on an election platform wherein they promised to
remit that kind of money to the US and Europe, I certainly missed that. Alright
– perhaps that sentence was too cute. Central bankers around the world are
unelected, and as we can see above, have incurred terrifying investment losses
without a whole lot of public scrutiny around the region.
I am well aware of the reasons Asian central banks take that kind of
pain on their reserve holdings:
- Need to maintain
reserves to pay for reasonable trade flows
- Avoid significant
short-term currency appreciation due to investment flows
- Cushion for foreign currency
denominated liabilities being racked up local banks and companies
- Strategic priorities
(more applicable for tottering Arab monarchies)
Even so, the costs of these objectives must be dynamically measured;
instead of Asian policymakers simply assuming that goals and objectives remain
fixed forever. What would you do, when confronted with the following dilemmas
- Certainty of losing of
5% on your investments versus a similar appreciation in your currency that
may cause a small change in your competitive position
- Now add a game theory
angle – viz., if you are the biggest holder of these assets (like the
Chinese central bank), do you act first or last in an investment trend?
For the Far Eastern export powerhouses (Japan, China, Taiwan, South
Korea) the second part of the question is a pressing preoccupation, essentially
placing the group into a classic ‘prisoners’ dilemma’. Instead of figuring out
innovative solutions (or actually talking to each other – Wow! how novel
would that be), this preoccupation with game theory has been the key
stumbling block for this group to undertake any action at all. In other words,
inaction has been justified by the often unjustified fear of what other bankers
would do, thereby ensuring investment losses for all regional central banks. As
a longer shot and given their relationship as key suppliers to Korea, China and
Japan the Southeast Asian countries have tended to follow the practices of the
Far Eastern bloc.
At least the interests of South Asian and Middle Eastern central banks
aren’t entirely aligned with those of the central banks of the Far East. But
you wouldn’t know that by looking at their policies either, as every one of
them – the aforementioned Bangladesh Bank included – follows the policy of
maximum reserve allocation even in the face of guaranteed investment losses.
Wall
Street’s nightmare
Given recent restrictions on trading book liquidity and the deleterious
effects of the negative interest rate environment, perhaps one of the biggest
nightmares for any bond trading desk on Wall Street goes as follows:
Caller “Hi, this is xxx from YYY (Asian central bank)”
Trader “yes sir good morning”
Caller “what do you price the 5 year German government bond”
Trader “-0.275%”
Caller “Okay, €50 billion yours”
Trader faints
Many of the most recent episodes of market meltdown have centred on the
lack of liquidity for trading desks thanks to new rules imposed on global banks
(ironically by regulatory arms of the very same central banks that will now
need these very trading desks to exit their very sticky positions). Add to this
the angst of trading losses that is forcing many investment banks to shut down
their trading desks in various locations and the overdependence of whoever
remains is not just apparent, but also suggesting that remaining desks will
simply not have the ability to close these trades.
Thus, even if Asian central banks – separately or together – signalled
an intention to change their investment strategies, it is unlikely that actions
can be undertaken in the context of currently available market liquidity.
Summary
So you have the perfect crime here – no one really knows that the crime
is being committed viz. that $50 billion maybe pilfered from Asian central
banks every year without anyone taking a second glance at this number. Without
public scrutiny, Asian central banks do not have an impetus to change their
strategy; and in any event can use the “fear of the neighbour” to justify
continuation of the current strategy.
Nice job if you can get it.
By Chan Akya for Asia Times
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