VZCZCXRO1999
RR RUEHLMC
DE RUEHUM #0847/01 3340223
ZNR UUUUU ZZH
R 300223Z NOV 06
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC 0567
INFO RUEHUL/AMEMBASSY SEOUL 2543
RUEHBJ/AMEMBASSY BEIJING 5314
RUEHKO/AMEMBASSY TOKYO 2301
RUEHMO/AMEMBASSY MOSCOW 1630
RUEHLO/AMEMBASSY LONDON 0068
RUEHML/AMEMBASSY MANILA 1269
RUEHOT/AMEMBASSY OTTAWA 0360
RUEHSH/AMCONSUL SHENYANG 0231
RUCPODC/USDOC WASHDC 1131
RUEATRS/DEPT OF TREASURY WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0405
RUEKJCS/SECDEF WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 03 ULAANBAATAR 000847 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM, EB/IFD AND EB/TPP 
USDOC FOR ZHEN-GONG CROSS 
TREASURY PASS USEDS TO IMF AND WORLD BANK 
MANILA FOR USED TO ADB 
LONDON FOR USED TO EBRD 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV MG
SUBJECT: Mongolia's Savings and Loan Crisis Contained? 
 
 
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION. 
 
¶1. (SBU) SUMMARY:  Last spring, 27 of Mongolia's largest Savings and 
Loans (S&L) cooperatives (among 900) collapsed in rapid succession 
under the weight of bad loans, abysmal management practices and 
swirling rumors of corruption.  Quadrupling in size over the past 
two years Mongolia's dodgy S&L industry flourished because of an 
inadequate legal system and a legacy of lax supervision by banking 
authorities. High deposit interest rates supported by extremely high 
 lending rates enticed many Mongolians to entrust their life savings 
to  the cooperatives.  The industry grew too big too fast, according 
to local analysts; and, flush with funds, the largest overextended 
themselves with risky loans and bad investments. Some are also 
suspected of dabbling in corruption and cronyism, pilfering deposits 
for personal use or interest free loans to friends. When the end 
finally came, over 10,000 mostly middle class depositors had 
reportedly lost a total of US$55.6 million, or approximately 
US$5,000 per depositor.  To date, there have been modest protests by 
depositors and countless, and improbable calls for the Government of 
Mongolia to make good on their losses.  END SUMMARY. 
 
It's the Government's Fault 
--------------------------- 
 
¶2. (SBU) Although investigation results are still pending, many 
Mongolians have apparently convinced themselves that Mongolia's 
politicians used the S&L coops as their personal piggybanks and 
profited from the misfortune of others. Public perception of their 
complicity in the S&L collapse is quickly becoming a political 
reality. 
 
¶3. (SBU) To drive the point home, several female victims of the 
failed S&Ls began staging a public hunger strike recently in 
Ulaanbaatar's Sukhtbaatar Square. They demand that the GOM, 
especially Parliament and the Bank of Mongolia, be held accountable 
for the bankruptcy of all savings and credit unions; and that the 
GOM immediately reimburse all victims for the full value of their 
lost savings. They accuse both Parliament of negligence for allowing 
S&Ls to grow under weak legislation and particularly the Central 
Bank for failing to properly monitor and supervise S&L financial 
dealings. 
 
¶4. (SBU) Smelling blood, the minority Democratic Party recently 
tried to hold up a parliamentary vote on a new Central Bank 
Governor, demanding first that the outgoing governor's tenure 
undergo a thorough review, particularly his actions, or lack 
thereof, surrounding the S&L collapse.  Ruling MPRP leaders managed 
to stop it, but came out looking like a party with something to 
hide. 
 
The President "Feels Their Pain" 
-------------------------------- 
 
¶5. (SBU)  In what appeared to be an impromptu statement, President 
Enkhbayar remarked in his speech at the opening of parliament in 
early October that S&L victims should be compensated for money lost 
through no fault of their own.  The President's comments blindsided 
many in the GOM, who have since quietly insisted that the 
President's wishes in this case in no way represented official GOM 
policy.  Facing budget constraints, budget planners have branded as 
unworkable any plan to financially reimburse victims as budget 
outlays have already increased for social welfare expenditures; and 
there is the expectation of revenue shortfalls due to new tax cuts. 
Politicians are also feeling pushback from their constituents who 
object to using public tax monies to compensate depositors. 
 
¶6. (SBU) Despite this, President Enkhbayar continues to argue for 
helping victims, but he now says that reimbursements should come in 
the form of various financial support projects, such as free 
scholarships to affected students to complete their post-graduate 
degrees;opportunities for land ownership; ownership of shares in 
 
ULAANBAATA 00000847  002 OF 003 
 
 
certain state-run enterprises; helping victims  migrate to foreign 
countries to work there; andlong-term home mortgage loans. He has 
urged parliament to include such programs in the current budget 
debate. (NOTE:  A disgruntled group of S&L depositors sent a letter 
to the Ambassador seeking "asylum" in the U.S. from the GOM, which 
they argued "failed to protect them" and their livelihoods.  Post's 
response noted there are no such provisions in U.S. immigration 
laws.) 
 
¶7. (SBU) Many suggest that the President is simply employing the 
well worn tactic of appearing to address protestors concerns while 
intending to do little or nothing after they abandon the streets, 
and hoping the demands will slowly recede from memory. 
 
FRC Crackdown Draws Blood-Unfortunately Its Own 
--------------------------------------------- -- 
 
¶8. (SBU) Prosecutors continue to investigate; but could not say if 
or when charges might be brought, which has only fanned public 
suspicions of a cover up.  Meanwhile, Mongolia's independent 
Financial Regulatory Commission (FRC), just created in January this 
year, is making up lost ground by working to shut down failing 
cooperatives, forcing all coops to seek new operating licenses to 
weed out those that are failing or corrupt, trying to detect hidden 
assets and force cooperatives to repay deposits that have been 
misused.  Regulators are drawing legislation setting out rules for 
the savings and credit cooperatives that Parliament will discussin 
the fall session. The law would close many of the loopholes that 
allowed fund managers to misuse investor monies.  Currently, 
regulation of S&Ls falls under a more general law from 1998 
regulating all kinds of cooperatives.  Regulators told Econoff that 
they have based their draft on a model provided by the World Council 
of Credit Unions. 
 
¶9. (SBU) FRC actions have drawn strong, even violent reaction.  In 
June, the FRCs first Chairman, D. Badraa was stabbed to death 
outside his office six months after being appointed, murdered by the 
director of construction firm involved in one of the coops he had 
been investigating. 
 
S&Ls-We Still Love You 
---------------------- 
 
¶10. (SBU) FRC members argue that the S&L cooperatives that failed 
were exceptions rather than the rule, and that overall the industry 
is relatively healthy filling an important place in the country's 
financial sector.  Only 27 of the over 900 coops in Mongolia failed 
(albeit the largest ones), and regulators believe that many of the 
remaining coops are more or less properly managed.  D. Bayarsaikhan, 
Badraa's replacement as Chairman of the FRC, believes that S&L 
coops' short term, low rate loans,  provide a valuable source of 
microcredit in Mongolia. Even so, of the 300 or so of the coops that 
have reapplied for licenses, as required under new regulations, only 
26 have been approved. Bank of Mongolia officials have assured 
Emboffs that there is no risk of a "run on the S&Ls"that might 
undermine Mongolia's financial system. 
 
COMMENT:  The Silver Lining? 
---------------------------- 
 
¶11. (SBU) The big winner in the S&L crisis may be Mongolia's formal 
banking sector.  As investors reconsider the inherent risks of 
investing in badly managed and opaque S&Ls, more and more Mongolians 
appear to be choosing to entrust savings in the better-known, 
respected banks that have been operating under a much tougher 
regulatory regime.  Mongolia's largest bank Khan Bank, for example, 
has reported a 35% increase in savings deposits over the first six 
months of this year, much of that credited to fallout from the S&L 
collapse.  A recent poll found that Khan Bank was the number one 
trusted bank in Mongolia, effectively allowing them to pay 2% less 
interest to depositors over competitors.  Other major banks have 
 
ULAANBAATA 00000847  003 OF 003 
 
 
reported similar increases in deposits.  So maybe this time the 
"good guys" (or at least the "better guys") will win.  On the 
political side, the demand by S&L depositors that the GOM make them 
whole has recent precedents.  A fire earlier this year at a local 
market left several hundred small vendors and merchants destitute. 
A small group staged a protest in the central square demanding the 
GOM compensate them for losses.  The GOM reportedly "leaned" on the 
market's owner to liquidate their company's holdings to compensate 
the "victims."   END COMMENT. 
 
MINTON