Indonesian Banking Probe Winding Down

With the deadline nearing for a fractious and politically motivated investigation into a massive and controversial 2008 bank bailout to end, Indonesian President Susilo Bambang Yudhoyono seems to finally be taking the reins and using his influence to bring the proceeding to a middle-ground conclusion.

Political insiders say Yudhoyono is moving to shore up his cabinet and face down a challenge from powerful tycoon and Golkar Party chief Aburizal Bakrie, who has been using the investigation to try and oust reform-minded Finance Minister Sri Mulyani Indrawati.

At stake are the reform credentials of Yudhoyono’s government, which has been nearly paralyzed by the probe into the $700 million rescue of Bank Century. The House of Representatives launched the special investigation in December, shortly after Yudhoyono was inaugurated for a second-five year term.

Critics in the House committee have said that Sri Mulyani and Vice President Boediono, who was central bank governor at the time of the bailout, were guilty of providing the lifeline illegally. The two have stood firm, saying the action was necessary to save the banking system from risk during the global economic crisis.

Century itself, which is now called Bank Mutiara, was looted by crooked owners, some of whom are now in jail on fraud charges while others are in hiding abroad.

On Thursday, Boediono’s spokesman, Yopie Hidayat, said that that he was “optimistic” that the final results of the probe would be “favorable to us.”

“I am sure the president will do whatever he can do to solve this politically,” Yopie said. “Because this is not a legal problem, it is political. And we have confidence in the president.”

The Jakarta Globe reported Thursday that Yudhoyono canceled a trip out of town scheduled for this week and has bunkered with his key advisers and confidantes in Jakarta ahead of the expected release of the committee’s findings next week.

Jakarta sources say that Bakrie may have overplayed his hand when he publicly threatened the president’s political party over the probe. As talk swirled last week of a move by the Democratic Party to oust Golkar from an increasingly frayed ruling coalition, Bakrie grew visibly angry.

“[The Democrats] are not the president,” Bakrie said during a high-profile visit to the House chambers last week. “Every party has an equal position and it was written in the coalition agreement. We can’t threaten each other. I never threaten others, so don’t ever try to threaten me.”

Following Bakrie’s outburst, Golkar lawmakers and their allies on the committee began taking reporters aside and insisting they had hard evidence that Yudhoyono and his party had fraudulently used Bank Century bailout funds to finance last year’s presidential campaign.

But on Tuesday this week, the parties on the House committee all said they could find no such evidence in what they called a “preliminary” finding. The conciliatory language seemed to presage a climb down for all sides.

In reality, of course, there has been no meaningful investigation. The entire House proceeding has been a political tug of war as Golkar and several other parties nominally allied with Yudhoyono sought to push the envelope in hopes of getting the finance minister and the vice president to walk the plank.

Apparently they finally went too far even for Yudhoyono, who is famously both indecisive and patient.

“Bakrie’s threat was too much,” said one seasoned analyst with access to the presidential palace.

With Bakrie’s far-ranging companies dependent on government contracts and constant financial deals subject to regulatory scrutiny, the analyst said, the tycoon is “vulnerable.”

While stopping short of saying that Bakrie has been warned by the president, the analyst said that the tycoon could easily find his financial transactions delayed by financial regulators. Deals the Bakrie Group, which is involved in construction, mining, plantations and numerous other businesses, has for lucrative service contracts with state-owned enterprises “might be put on hold,” the analyst said.

Bakrie is already facing several tax cases that the president has said must be settled. Sri Mulyani oversees tax collections and it is widely believed that her aggressive approach to tax policy is behind Bakrie’s intense desire to get her out of the government.

In the past, Bakrie is presumed to have done many favors for Yudhoyono and to have helped finance his political rise. When he took control of Golkar late last year after the party unsuccessfully challenged the president at the polls, Bakrie brought it back into the ruling fold, perhaps because he thought he could dictate terms to Yudhoyono.

“The president thinks they are now even,” said one source referring to Bakrie. He noted that the government had acted to deflect Bakrie from having to accept responsibility for the 2006 disaster in which a mining accident was followed by a vast mud flow that has destroyed thousands of hectares of land in East Java and displaced thousands of people.

Bakrie’s PT Lapindo Brantas mining company has been blamed for the disaster by some foreign geologists who say the firm’s gas exploration went wrong, triggering the mess. Bakrie’s side says the mud flow was caused by a distant earthquake. The government has dropped legal proceedings against Lapindo that could have resulted in hundreds of millions of dollars in losses for Bakrie, who was Yudhoyono’s minister for human welfare at the time of the disaster.

Also last week, an old rumor resurfaced that Sri Mulyani would be moved to the central bank governorship as a way of mollifying Bakrie. That now is also off the table, a government source says. “She is staying,” he said.

A number of old-line business tycoons also seem to have been quietly supporting Bakrie’s bid to get Sri Mulyani out of the way. “She has a lot of enemies,” said a local observer after a dinner with a gang of pro-Bakrie businessmen. “They want her gone.”

In contrast to those who would like to see the country maintain its opaque ways of doing business, foreign investors see Sri Mulyani and Boediono as leading lights for their efforts to modernize business practices and governance. If either or both of them lose out, it could be seen as a major step backward for Indonesia.

The most likely end game? The House proceeding will conclude that the bailout was not technically illegal and the finance minister and the vice president will stick around, says one insider involved in negotiations for a settlement.

Minor concessions will go to Bakrie, perhaps in the form of banking regulators more to his liking. “But who knows?” said the source. “Anything could happen still.”