I met an old friend in the lobby of a swank hotel recently. He is a senior banker with a very prestigious U.S. investment house that is currently advising the Malaysian government on economic issues.

He was in town to attend the one of the very many economic forums and seminars, organised to tell and remind the whole world yet again, how successful our capital controls have been, how well the Malaysian economy has performed, how successful our economists and politicians have been in rescuing the country from ruin, and so on.

As we have not met for some time, he had called and arranged for us to meet for dinner and perhaps for some cappuccino after that. It had been a long day for him with the mandatory seminar and meetings and was he glad to see me. Two other close friends of his from other financial institutions joined us for an informal Malaysian dinner.

As the night wore on, our conversation became more relaxed and friendly and they were more candid with their thoughts and views.

Finally, at some point in the evening, a layman like me had to ask the inevitable questions, "Is the Malaysian economy as rosy as what our leaders tell us?" and "Would you put your money in Malaysia?"

"Nope" was the quick response! I was stunned for a moment, as I had not expected this blunt reply. I had expected something more diplomatic and perhaps positive. But the "Nope" was very emphatic and decisive.

"But what about the very many positive and glowing reports that your analysts churned out?" I enquired, not to mention the very many speeches and statements your senior officials made, singing praises for the Malaysian government?

"Oh, we have to say something nice" was the reply. " We can’t say nasty things and then come here looking for business. It just won’t do. We have to be kind. Even if we have nasty things to say, we tone them down a lot and qualify them with assumptions and the like. We say these are our expectations and forecasts. We highlight and emphasise the positive and play down the negative. Most of the time we play it by ear and take the cue from the statements made by your economic and political leaders. You know us. We can talk, twist and turn, and flow with the tide". A round of laughter.

As to whether they all had investments in Malaysia, the answer was positive. "Well, we all have to have some investments to show our sincerity and commitment, but these have been hedged", whatever that meant. "We also don’t make long commitments. Our interest is in the bottom line and rosy pictures to our management and shareholders. So fees and commissions are very important to us. Otherwise, many of us will not last past the next financial year."

"What then is the real situation in Malaysia?" I asked.

"Well, to be honest," my friend said, "you still have a lot of work to do. Things to patch up. Your banks are really insolvent but they have been bailed out. I am not saying that they should not be saved but that they are really in a bad shape. They don’t stand a chance in the international arena. Look at all the mega bank mergers going on overseas. Even these big banks have to merge and rationalise their operations to survive!! And yet your government allows puny banks to survive because of political and other reasons.

I have met some of the owners and senior officials and frankly, I sure am not impressed with their abilities and yet they are allowed to continue on. Your PM is brave to call them "primitive". What they are doing can hardly be called "banking" at all in other places. They are really carrying on a charade. They all believe they have turned around and have become very cocky, but given time, you will see how wrong they are. Just wait. Your central bank must be vigilant"

"The same can be said of your corporate sector. Very badly managed with no focus, generally bankrupt of talent and with lots of liabilities, but yet allowed to carry on. We have had hard times trying to straighten out the mess they got themselves into. We really have had to crack our heads to restructure their loans and commitments and then get all the creditors to agree. Well, the creditors did agree in most cases but then they really didn’t have much of a choice. They are all just hoping that things will work out right and hope to cash out as soon as possible.

"A lot depends on the borrowers now, whether they can keep to the terms of the restructured facilities. I understand that several restructured deals have gone into trouble already and are being restructured again. The borrowers are just not out of the woods yet and their businesses are really still struggling. Some, I understand just can’t get new financing from the banks. Once bitten, twice shy, I suppose.

And you still have a huge overhang of about RM 45 billion in bad loans in Danaharta. Many may have been restructured but only time will tell how good they will be and how strong the borrowers are. Don’t forget many of the borrowers still have accounts and facilities with the banks. Another crisis will see both the banks and Danaharta hit badly".

"Are you all seeing another crisis?" I asked.

"The stock market isn’t doing very well although your Ministers continue to harp that it’s about 800 now compared to 260 previously. But the 260 was two years ago. Even today at 800, it is 20% down from just three months or so ago. This is more current and relevant information. See how we manipulate and interpret figures? And this is after Malaysia’s admission into the Morgan Stanley Indices.

Investors are just not convinced or impressed with Malaysia. Period. They have gone elsewhere but your government puts up a bold face and say, ‘Hot Money Not Welcomed’. But they are certainly welcomed elsewhere especially in places where there is free money flow. You are all missing out on a lot.

"Volume in your stock market is so miserable that I understand some brokers are finding it hard to make ends meet. How are they going to survive? How long can they survive? Investors are generally selling out. Don’t forget many CLOB shares are beginning to be of marketable lots and by early November (20 weeks from early July times 50 shares per week), many small investors should be able to sell their shares. If this happens in large amounts in a weak market, we should see the index go below 700 pretty quickly and this will definitely lead to other problems".

"Such as?" I asked.

"If the index keeps falling, there could be a snowball effect leading to a major decline. Then you will have the banks, brokers and possibly even Danaharta calling clients up for additional cash margin and collateral, which most don’t have. And this is going to put a huge strain on their new and existing businesses and facilities that could go into default as well, thereby compounding the situation

"What do you do then? Restructure all the loans again to meet the new changed circumstances? Another round of rescues when even the current ones have yet to be resolved? How will all the banks fare then noting that they are all still essentially weak? Will there be new major corporate failures?"

"Are you all going to tighten capital controls and re-introduce regulations to prevent outflows? A second ‘stroke’ will probably kill you, definitely. There will be further dumping of Malaysian shares and securities and your borrowing costs will sky rocket this time around. Country downgrade. And your friends who have lent you money aren’t going to lend you any more. Talk about déjà vu. Boy, will you all be in bigger trouble!!

"Also don’t forget, the political situation in the country has taken a turn for the worse recently what with your PM now calling certain people "communists". I read his speech and that’s a very strong allegation he is making in the Malaysian context, and with race relations between the Malays and the Chinese worsening, the world will be watching very closely. I would not be surprised if some independent researchers and analysts express some concerns soon.

"You sure paint a frightening picture", I said.

"Frightening but possible. Remember what I said about assumptions, scenarios, expectations and the like?" my friend reminded me.

With that we all adjourned for cappuccino at the Coffee House. Mine was "shaken, not stirred".