The judgement in my appeal against the IMF Loan Commitment confirmed what has long been apparent: that the government is to all intents and purposes above the law. Furthermore, the judiciary are not there to act as a check on the executive (a “red light” in CJ Chan’s parlance) but instead to “green-light”  illegality by preventing citizens bringing actions to have the illegal behaviour stopped.   In a uniquely Singaporean version of jurisprudence, the judiciary is essentially subordinate to the executive. In my response I will deal first with the merits of the argument and then with the issue of locus standi.

“The Appellant has failed to establish a prima facie case of reasonable suspicion”

 The learned judges dismissed my appeal on the arguments on the grounds that:

1. It was clear from the initial draft of Article 144 when the bill was first put before Parliament that the giving of loans was to be excluded from the need for Parliamentary and Presidential scrutiny
2. While admitting that they were ill-placed to comment on the validity of the financial arguments that I put forward to show that a loan commitment was a contingent liability and in nature akin to a guarantee the judges went ahead anyway and dismissed my arguments. In doing so they made some shocking mistakes and misinterpreted an excerpt from a US Federal Deposit Insurance Corporation manual whose meaning should have been abundantly clear. They also argued that, despite the overwhelming evidence I had produced to show that regulators and banks treated loan commitments as contingent liabilities in the leading financial centres of the UK and the US, the accounting treatment might be different in Singapore. If that is the case, the IMF should kindly explain why they selected our Finance Minister to be Chair of the International Financial and Monetary Committee if Singapore differs so markedly from accepted practice in major countries.
3. Though this was only touched on peripherally the judges also reiterated the nonsensical argument that MAS was an entity separate from the government.

 I will deal with the arguments in (a) above first. I argued at the appeal hearing that it was only necessary to look for the original intention behind the legislation if the natural and ordinary meaning of the words was not clear. To any layman, the words “no guarantee or loan should be given or raised” would mean that both nouns could be paired with either verb. The fact that the proposed wording of Article 144 when the Bill was introduced into Parliament suggested that each noun was to be paired with a corresponding verb (the reddendo singular singulis argument) does not mean that we should use that interpretation. The words “debt” and “incurred” had been left out of the Article as enacted by Parliament so the original wording is an unreliable guide. It is equally likely that Parliament wished to have tighter financial controls rather than looser and thus intended both the giving of guarantees and loans to require Parliamentary and Presidential approval.

The Appeal Court judges do not address this issue only saying that they sided with the original judge in his interpretation. They also say that it is not ordinary parlance to speak of “raising” a guarantee and that therefore “raised” in Article 144 must be applied to “loan” only and “given” to “guarantee” only. I fail to follow the judges’ logic here. Just because one noun may not make sense when paired with one of the verbs, it does not follow that therefore we can exclude the other noun from being paired with both verbs if it makes perfect grammatical sense to do so.

In any case I showed that it is common parlance to speak of raising a letter of credit. A guarantee is to all intents and purposes very similar to a letter of credit. Both instruments require the issuer to pay out if the party that is covered by the guarantee or letter of credit fails to do so. The judges say that they are different instruments and serve different purposes.  However as their accounting treatment and risk profile for the issuer would be identical it is difficult to see why the example for letters of credit should not apply to guarantees.

However whilst it may be possible to argue about the meaning of the words the judges completely failed to deal with my main point as set out in (b) above. This is that this is a loan commitment and not a loan. If they were ill-placed to comment on the validity of my arguments, not having seen any written submissions from either me or the AG, then why not call for written submissions from both sides after the hearing was over. Alternatively they could have adjourned the hearing to allow both sides to make written submissions. Counsel for the AG called for my submissions to be stricken from the record on the grounds that they involved complex financial and accounting matters for which she had not prepared. This was disingenuous since counsel also refused my offer of a short postponement to allow her to prepare. It is unfortunate that the judges, despite taking nearly seven months to deliver their verdict, did not allow me more consideration given the gross disparity in the resources available to me as a litigant in person as compared with the government.

I produced evidence from a wide variety of sources, including the US Federal Deposit Insurance Corporation’s Manual, the Bank of England’s Yellow Folder and the last published accounts of J P Morgan, the leading US bank, to show that banks were required to record loan commitments as contingent liabilities on their balance sheet. As the judges mention, I pointed out that the UK Chancellor of the Exchequer himself referred to the UK’s loan commitment to the IMF as a “contingent liability.”

This is reinforced by the fact that the interest rate on loans made to the IMF is virtually zero. It is therefore inexplicable how Singapore’s IMF loan commitment could be considered an asset.  Since the government pays CPF holders 4% to borrow their money the IMF loan, if drawn upon, must be a money-losing proposition from the moment it is drawn down.

In support of the argument that the loan commitment was a liability not an asset I cited US Statement of Financial Accounting Standards 133.  This requires that loan commitments be treated as options on bank balance sheets and marked to market. A loan commitment is in the nature of a call option granted to a potential borrower that gives them the freedom to draw on the money at a time of their choosing. An option cannot be worth less than zero and should normally have a positive value while the writer of the option would have to record a corresponding liability. The option could not be worth less than the present value of the difference between what it would cost the IMF to borrow in the open market and the interest rate that it would pay on the loan if drawn down (effectively zero).

Yet the judges chose to misunderstand my point and claim that they were surprised that as an economist I did not understand the difference between a loan commitment and an option. There may be a legal difference but clearly in economic terms a loan commitment is an option because the borrower has the right to draw down the loan but is not obliged to do so. It is the learned judges who demonstrate their basic ignorance of modern finance theory.

The judges made other basic errors. The judges said that I had quoted Christine Lagarde as calling the new lending commitments by IMF members a “fireball”. In fact what I had said was that The IMF (actually our Finance Minister Tharman) had called the new loan commitment a “firewall”. In Tharman’s own words:

“We all agreed that it was absolutely essential to have the firewall built up at this time. It’s not a day too early to be building up the firewall,” 

I pointed out that the commonly understood definition of a firewall was to construct a scorched earth perimeter around a fire to stop it spreading. This was precisely what the new loan commitments were supposed to do, i.e. they were resources to be sacrificed to save the world financial system. To quote Christine Lagarde (see here):

“These resources are being made available for crisis prevention and resolution and to meet the potential financing needs of all IMF members,” Lagarde stated. “They will be drawn only if they are needed, and if drawn, will be refunded with interest.”

The judges said that the sheer risk inherent in an asset could not turn it into a liability. However they misconstrued my argument. I was arguing that the commitment to make a loan to the IMF was a liability. If properly accounted for, it would have a negative value on the government’s (including MAS’s) balance sheet not only because there was likely to be a negative spread between the cost of funding that loan and the zero interest that would be earned on it but also because of the risk that by the time the IMF drew down the loan both the creditworthiness of the IMF as well as global credit conditions could have substantially worsened.

The judges went on to misinterpret the first sentence of the passage from the FDIC manual that I quoted, which states “In reviewing individual credit lines, all of a customer’s borrowing arrangements with the bank (e.g. direct loans, letters of credit and loan commitments) should be considered” as referring to the customer’s contingent liability.  Yet clearly the examiners are referring to the contingent liability of the bank and not the customer. This can be seen further on in the passage which states “Additionally, many of the factors analysed in evaluating a direct loan…are also applicable to the evaluation of such contingent liabilities as letters of credit and loan commitments. When analysing these off-balance sheet lending activities, examiners should evaluate the probability of draws under the arrangements and whether an allowance adequately reflects the risks inherent in off-balance sheet lending activities”. Clearly from the context the manual is talking about the contingent liability of the bank making these loan commitments and whether the allowance that should be made adequately covers the risks. The allowance would appear on the liability side of the bank’s balance sheet and reflect the possibility of loss if the loan is drawn down.

That the judges get wrong something so basic here undermines their claim that their selective interpretation of Article 144 is correct.

To conclude, while the judges accuse me of trying to draw a tenuous connection between a loan commitment and a guarantee, it is the judges who have tried any stratagem, no matter how tenuous and lacking in logic, to avoid having to deal with my arguments. To claim that Singapore follows a different set of accounting standards from the rest of the world will make Singapore a laughing stock globally. Furthermore the fact that the Finance Minister has only survived this court challenge by relying on such a perverse refutation of generally accepted accounting principles makes it clear that Euromoney made an egregious mistake in naming him Finance Minister of the Year 2013.  Tharman should be grateful that the judgement was not announced till November 2013, just after the Euromoney award.

In addition the government has had since 1997, when the government’s ability to make loans without getting Parliamentary and Presidential approval was first questioned, to amend Article 144 so that the meaning supports their interpretation. They have failed to so. This is because having ambiguously worded legislation or very widely drawn powers without any checks and balances, as is the case with the Broadcasting Act, suits their purposes and gives them the widest possible leeway in interpretation.  However such ambiguity and wide discretion given to Ministers without the possibility of appeal to an independent party is incompatible with the rule of law.

“The Appellant does not have the locus standi to challenge Art 144″

I am not a lawyer so I will make my remarks here brief. The ruling on locus standi effectively puts the government beyond the law except for the most “egregious” breaches. This nevertheless marks a slight advance on the original judge’s ruling that Singaporeans had no right to sue the government unless their private rights had been breached.

Let us leave aside for the moment the question of whether I had suffered damage as a result of my public rights being violated. I argued that as a CPF holder and taxpayer I have suffered damage as a result of the government making a loss-making loan commitment to the IMF.

However the fact that this case involved an alleged unlawful loan commitment of $5 billion and a breach of the Constitution begs the question of what would the judges would define as a breach of the law of sufficient gravity to allow a citizen to sue. The basis of rule of law is that it does not leave discretion in the hands of bureaucrats. By leaving it to the judges to decide on a case-by-case basis what is a flagrant breach of the law surely seems to be admitting that the judiciary are susceptible to political pressure. Will a flagrant breach be different for a PAP government from a future Opposition one? And citing former CJ Chan Sek Kheong’s “green-light” theory of administrative law reduces the judiciary to being merely an arm of the executive, there to facilitate executive decisions rather than act as a check on the executive.

It is a pity that our judges believe that following the way English administrative law has developed since 1977 and applying the “sufficient interest” test would “seriously curtail the efficiency of the executive in practising good governance”. They even go beyond CJ Chan who leaves an avenue for the courts to intervene when the state breaks the law by saying that “the courts can play their role in promoting the public interest by applying a more discriminating test of locus standi to balance the rights of the individual and the rights of the state in the implementation of sound policies in a lawful manner”. Now the appeal judges are saying has to be “extremely exceptional instances of very grave and serious breaches of legality” to warrant allowing an action by an individual in the public interest. Yet the example they cite, of a Cabinet Minister’s abuse of his powers as opposed to the actions of a low-level government officer, is surely engaged here.  Even in the case where a low-level government officer breached the Constitution, the Auditor-General considered the issue of sufficient seriousness to make the Ministry of Finance go back and get the President’s approval for the issue of promissory notes in the relatively insignificant amount of US$16 million to the International Development Agency!

The judges also devoted a lot of paragraphs to precedents from the UK about how the courts there have not allowed judicial reviews of the discretion applied by government agencies such as the Inland Revenue in how they deal with classes of taxpayers. However that is irrelevant to the current action, which is concerned with a breach of the Constitution by the Finance Minister. It seems that the judges were clutching at straws in an effort to make their stance on locus standi seem not too far out of step with the UK.

The judges’ argument that Parliament or the President would have intervened if there was a serious breach of legality rather begs the question of how Parliament is meant to intervene in cases in which the Minister is alleged to have broken the constitution by bypassing Parliament.  And where the ruling Party has over 90% of the seats despite only winning 60% of the votes and until 2011 won a walkover at every election it is difficult to understand how Parliament can be an effective check on the executive.

As for the President, he failed to intervene in the case of the IDA promissory notes until the Auditor-General pointed out that MOF had breached the Constitution.  The judges say that the President could have used Article 100 of the Constitution to convene an advisory tribunal of three judges to consider this question and the fact that he did not choose to do so supports their contention that I should be denied standing. However JBJ requested that the then President convene a tribunal in 1997 to decide the same question and he declined to do so. If the government chooses to bypass getting Presidential approval then the President is unlikely to make a fuss. We are all aware of what happened to Ong Teng Cheong and his decision not to run for a second term after his requests for greater transparency were rebuffed.

My aim in bringing this case was to ensure that we had tighter financial controls over what the government does with our money and to prevent it squandering the huge surpluses it has extracted from the people through bad investments, influence-buying exercises and excessive compensation for the managers. This is a government that would rather give away your money to foreigners than see it spent on your welfare. Ironically the President’s only financial controls are to prevent spending from the reserves on Singaporeans. On the basis of this ruling there is nothing he can do to prevent the money being given away in the form of loans. In a climate where the PAP government is already under scrutiny for banking secrecy, a ruling that we have no ways of controlling a rogue government that breaches the Constitution shows that we have no standards of governance and no rule of law. It is inexplicable how Singapore can be rated one of the most transparent and least corrupt countries when there are such glaring loopholes in financial controls.  The judges say that allowances should be made for the cases of the most serious illegality. However in practice, given the award of costs to the AG, this judgement will have a chilling effect on the willingness of citizens to act as watchdogs of the public interest and gives a “green light” to government illegality.

Published by kjeyaretnam

I'm a Singaporean economist who became an opposition activist. I blog to provide an alternative to the porkies that the Pinkies tell. It just so happens that my alternative is the truth. That's why I've never been sued in any civil or criminal court no matter how hard hitting my criticism. I'm quoted and interviewed and asked to speak across the world but largely censored in Singapore in an effort to silence my political opinions. The left hate me because they think I split their vote and because I eschew their outmoded economic models. Models that don't work. The Right and the Conservatives hate me because I'm a liberal. I'm not sure what the middle think of me. I don't think there are more than a handful of people in the middle, here in Singapore. I'm a Singaporean born and bred, dual heritage, my parents Singaporean established here before the State of Singapore was created. I'm not Eurasian. I read economics at Cambridge and could be broadly described as from the Keynesian school but I believe in interventions. I was formerly a successful hedge fund manager. After economics and politics my greatest interests are history, film and Makan. I run but I run so I can eat like a Singaporean. View all posts by kjeyaretnam