Taiwan financial scandal sparks crisis of confidence in leadership

The worst financial scandal in Taiwan's history has spread dramatically in recent weeks and is now weakening the senior levels of President Chiang Ching-kuo's administration. The government recently appointed a new finance minister after Loh Jen-kong, who held the post for just a year, was forced to resign. Mr. Loh was the second Cabinet minister to step down since March.

Immediately in question was the political vulnerability of Premier Yu Kuo-hwa, who has maintained a strong grip on financial policy for more than a decade. Mr. Yu is also prominent in the ruling Kuomintang (KMT, or Nationalist Party) and has been widely expected to play a major political role after President Chiang, who is 75 years old, leaves the scene.

The government's crisis stems from the collapse last February of the Tenth Credit Cooperative -- Taiwan's largest savings and loan institution -- and later disclosures that government officials tolerated some $190 million in improper loans by the cooperative to companies affiliated with it. The cooperative's demise has since become part of a crisis of public confidence in both the economy and the KMT. It has also exposed chronic weaknesses in Taiwan's underdeveloped financial system that threaten to ret ard the island's economic growth.

Charged with cleaning up the crisis is Finance Minister Robert Chien, a former deputy governor of the central bank and a long-time aide of Premier Yu's. In reforming Taiwan's financial system, Chien faces a daunting task. The island's corporations have long suffered from slipshod management practices and low accounting standards. Statutory regulations have not been modernized, and enforcement of existing law has been notoriously lax.

Responsibility for the Tenth Credit affair widened recently with the release of three government reports on it -- one each by the executive branch, the Justice Ministry, and the Control Yuan, Taiwan's highest regulatory authority. In addition to Loh, two other senior Finance Ministry officials resigned after the reports were made public. Three senior government auditors were dismissed for providing Tenth Credit with advance warning of official financial examinations, and a dozen other officials have bee n reprimanded.

The government's investigations, which lasted several months, were clearly intended to be a final reckoning. But they were followed by revelations that five national legislators had accepted $35 million in ``loans'' from a Tenth Credit affiliate in return for votes against regulations. Tenth Credit's Chairman, Tsai Chen-chou, was elected a KMT legislator during the same period in 1983.

There is now growing suspicion here that blame for the Tenth Credit case still has not been properly assigned. Among other things, the suspicions are further isolating Taiwan's aging political leaders and are likely to damage the KMT's performance in local elections in November. ``We wanted to see a strong sense of official responsibility,'' a younger member of the party says privately. ``But there is no sign of it -- either on a political or moral level.''

Premier Yu's political future is now in doubt because both the ministers so far implicated in the Tenth Credit case have long been considered his prot'eg'es. The Control Yuan has also linked Yu with a decision two years ago not to discipline Tenth Credit's management, even though irregularities had been reported to him.

To improve the party's image, some KMT members have apparently argued for Yu's removal before the November elections. But party analysts say he is more likely to relinquish his post in a Cabinet shuffle expected early next year.

There is little question that Yu's political career has suffered permanent damage, according to KMT members. But these sources say he still enjoys President Chiang's support, which has until now protected him from dissident party factions. Yu also has an ally in Finance Minister Chien, who has been a close aide of his for more than 20 years.

One weakness in the financial system is seen in government control of most domestic banks. Such control has made them inefficient conduits of capital for Taiwan's industry. As a result, some 35 percent of the private sector's credit needs is met through private transactions in an unregulated ``curb market,'' as it is known locally.

Tenth Credit's Chairman, Mr. Tsai, borrowed some $150 million in the curb-market fashion. But that market has dried up since Tsai's downfall -- one factor in a recent spate of bankruptcies here.

There is now widespread support for significant reforms in Taiwan's financial system. ``We will have to be more drastic in our regulatory practices,'' a Finance Ministry official says. ``There is no middle way to solve our problems.''

It remains unclear, however, how Chien will respond to this challenge in his clean-up effort. Recent pronouncements have stressed continuity in his policies, not dramatic departures.

Tenth Credit was owned by one of Taiwan's largest corporate empires, the Cathay group, which had assets last year of at least $2.5 billion spread through nearly 100 subsidiaries. Tsai's debts total some $325 million.

Most of Tenth Credit's improper loans were channeled to the Cathay Plastics company, Tsai's flagship, which has also collapsed. An associated financial institution, the Cathay Investment & Trust Company, has estimated debts of $500 million and is now in government control.

Tsai is now serving five 15-year sentences for fraud and related crimes. With nearly 100 other Cathay executives, he is still on trial for other charges.

After releasing its report, the Control Yuan indicated that it would begin impeachment proceedings against officials who have recently resigned to prevent their reassignment within Yu's administration. But KMT sources say senior party officials blocked the agency's plans.