What were our top officials doing to let HKMEx fail?
Whatever the reason was for the lack of intervention by the government over the past two years, it does not make the administration look good
The scandal surrounding the Hong Kong Mercantile Exchange's failure is a serious blow to the government's reputation.
It is not because of the "partial treatment" the company which operated the ill-fated trading platform received from the regulator, as suggested by local media, but the lack of it.
It is because a government-backed exchange has been allowed to rot to death without any intervention from the authorities in the past two years.
"How could it have happened?" a former regulator asked.
HKMEx's collapse was widely reported in international financial media, with a commentary in the Financial Times headlined "Hong Kong commodities ambitions: backfiring?"
Unpaid rent, bounced cheques, an urgent multimillion-dollar loan and falsified statements: one can't say the foreign press has been too harsh on us.
Let's face it: setting up HKMEx was never a commercial decision.
In 2008, then-chief executive Donald Tsang Yam-kuen was told by a "highly reliable source" that a state leader believed China should have a say in the global oil price and Hong Kong could contribute by setting up a commodities market.
Tsang immediately made this his top priority. When Hong Kong Exchanges and Clearing (HKEx) said no to the "commercially unviable" proposal, he threatened to break its monopoly.
Along came Barry Cheung Chun-yuen, chief executive of a tiny oil trading firm, promising to build a commodities exchange from scratch.
In return, Cheung got a video with Financial Secretary John Tsang pledging support for HKMEx. Cheung's zero experience with exchanges, the limited financial resources and a flimsy board of directors that included a mainland artist and a private developer, did not seem to bother Tsang.
However, the state leader's wishful thinking has never become policy. Instead, opposition from mainland exchanges forced Beijing to bar mainland enterprises from taking part in overseas oil trading, killing any hope of survival for HKMEx.
Face and politics continued to overrule business sense. Not only did Cheung not retreat, he continued an expensive programme of hiring from competitors. Despite negligible turnover, HKMEx has 100 employees, against 1,000 at HKEx.
Soon, insiders began to gossip about HKMEx not paying its rent and Cheung taking out loans despite a start-up capital of more than US$100 million.
Capable government officials would have picked up the straws in the wind, either via their own connections or from reports by the Securities and Futures Commission, the former regulator said.
The Securities and Futures Commission, which had been closely monitoring HKMEx's financial condition, would have reported any anomaly to Hong Kong's financial secretary. It would have done the same in the case of a broker, so it would be unthinkable that it would have done otherwise.
Intervention would have happened at this stage. The financial secretary would have reported it to the chief executive, together with a proposal to fix it. "He would have called up one or two tycoons for some quick cash and paid the bills," the former regulator said. "This could have been done within 30 minutes."
If "friendly" tycoons are difficult to find nowadays, the chief executive would have convinced Beijing of the political significance of the case and got the money.
The management would be reshuffled and tasked either with an orderly winding down of the business if there was no hope of survival, or down-to-the-bone cost cutting for long-term, face-saving life support.
Well, arm-twisting by the government is not unheard of in the history of Hong Kong's exchanges. There were the management and structural reforms at the futures exchange in 1987 amid its financial meltdown, and the listing of the stocks and futures exchanges after the 1997 financial crisis.
Yet, despite the potential political and reputational damage, nothing was done by either the Donald Tsang or Leung Chun-ying administrations.
Instead, Cheung, who was later named an executive councillor with access to all the sensitive information, was left scrambling for cash to prove HKMEx's financial strength to the SFC. He borrowed HK$8 million from former legislator Chim Pui-chung, not known to be a discreet lender. Millions of dollars of falsified bank deposit slips were subsequently found by the SFC.
How could our top officials have allowed all this to happen? Did they underestimate the damage HKMEx's collapse would cause? Would no tycoon return their calls? Did they have no access to Beijing? Or did nobody care to help amid a bitter internal power struggle?
I am not sure which reason is worst.