Cablegate: Bank Regulators Grapple with Failed Bank Owners

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 ANKARA 001437

SIPDIS

SENSITIVE

STATE FOR E, EB/IFD, AND EUR/SE
TREASURY FOR JLEICHTER AND MMILLS
NSC FOR MBRYZA AND TMCKIBBEN
BUDAPEST FOR WSUDMANN

E.O. 12958: N/A
TAGS: EFIN ECON PGOV TU
SUBJECT: BANK REGULATORS GRAPPLE WITH FAILED BANK OWNERS

REF: A. ANKARA 808
B. ANKARA 953

THIS IS A JOINT EMBASSY ANKARA-CONGEN ISTANBUL CABLE.

1. (Sbu) Summary: The recently-appointed management of the
now-separate bank regulatory agencies are struggling to deal
with a range of issues relating to the failed banks. Having
moved decisively to seize Uzan group companies, the new
Deposit Guarantee Fund Chairman told Econcouns he will try to
sell the companies quickly, and is inclined to sell Telsim
with its debt. He and other bank regulators complain of
wildly inflated public expectations of what could be
collected from intervened banks. Bank regulators
defended--and private analysts criticized--their decision to
allow Cukurova group to pay Yapi Kredi Bank with Turkcell
shares. HSBC's CEO told Econcouns Demir Bank's former owners
had not only sued to overturn bank regulators' seizure of
Demir, but also filed a suit against HSBC (which took over
Demir), which has HSBC's global headquarters quite concerned.
End Summary.

2. (Sbu) In three separate meetings with the new Chairman of
the Savings Deposit Insurance Fund (SDIF), one of his Vice
Presidents and a Bank Regulatory and Supervisory Agency
(BRSA) Vice President, these officials have explained recent
moves to increase pressure on the owners of failed banks in
order to maximize collections. Bio Note: The new Chairman of
the SDIF is Mehmet Erturk, a former tax inspector. More
recently Erturk was a deputy secretary at the industrialists
organization, TUSIAD, and was a member of the Capital Markets
Board at the time of his appointment. Erturk is reportedly
close to AK Party circles, in particular Deputy Prime
Minister Sener. End Bio Note. The other meetings were with
Binnur Berberoglu, an SDIF Vice President in Ankara and a
holdover from the previous management team, and with BRSA
Vice President Ercan Turkan, the only unchanged Vice
President since the arrival of new BRSA Chairman Tevfik
Bilgin.

Going after owners of failed banks:
----------------------------------

3. (Sbu) Erturk told Econcouns that, under the
recently-strengthened banking law, SDIF can go after the
personal assets of owners of failed banks (and their
relatives) if the BRSA reports that there was fraud involved.
Erturk said that there are 3-4 cases where that is not the
case; in all the other intervened banks, there is some fraud.
As to why the SDIF had not taken more forceful action
earlier on, Erturk commented that when BRSA and SDIF were
combined, collecting receivables had only been a "secondary
objective." Thus the reason for separating the two agencies
was to create an organization that had collection as its
primary goal. When the two agencies were separated, the
SDIF was moved to Istanbul to be closer to the banking
industry, though Erturk pointed out this is causing some
"problems in the bureaucracy." Erturk said many of the
failed bank owners are coming to meet with him now (after
strong GOT public pressure). Note: In the wake of the SDIF's
seizure of Uzan group companies (ref b), Prime Minister
Erdogan and other Ministers have publicly called on failed
bank owners to negotiate payment plans with SDIF. End Note.
In the meeting with Berberoglu, she said 15 or 16 banks were
taken over on the basis that they were mismanaged (another 4
were intervened because of financial-crisis induced
weaknesses). Of the 15-16, she said 10 or 11 had negotiated
payment plans but some were not yet finalized.

4. (Sbu) Erturk and BRSA V.P. Turkan, along with former BRSA
V.P. Fikret Sevinc, told econoffs they are concerned that the
PM and others are creating unrealistic expectations by
talking about $40-70 billion in "stolen" money from the
banks. Erturk said the initial losses in the SDIF-intervened
banks were $17 billion, of which about $11 billion involved
loans to the bank owers. With interest, etc. the $17 billion
figure had risen to perhaps $23 billion. However, SDIF at
best would only be able to recover a fraction of that amount.
Turkan used similar numbers but thought that roughly $2
billion might be recoverable. Former State Bank Chairman
Viral Akisik insisted to Econcouns that nearly all of this
money was "lost" and could not be recovered.

5. (Sbu) Berberoglu explained that the payment plans covered
loans owed the failed banks by their former owners' companies
as well as these companies loans to state-owned banks under
the "Istanbul Approach" loan workout process. Loans owed to
privately-owned banks are not included. In other words, the
agreements cover all public claims.

Cukurova Group Maneuvers:
------------------------

6. (U) The controversial Cukurova group, which formerly
controlled both SDIF-intervened Pamuk Bank and
SDIF-administered Yapi Kredi Bank, has suffered two reversals
in recent months, having failed both with regard to its bid
on the Tupras privatization and in its proposal to SDIF to
restructure its payment plan for Yapi Kredi and Pamuk Banks.
Cukurova was back in the news February 26, however, when Yapi
Kredi announced that it had accepted Cukurova's proposal to
provide shares in Turkcell (Cukurova's cell phone joint
venture with Telia Sonera) in lieu of its interest payment.
According to the Yapi Kredi Bank website, the interest
payment of $98,937,601 was due on December 31, 2003 but the
share value was equivalent to this amount plus accrued
interest. Yapi Kredi also provided Cukurova a right to
repurchase the Turkcell shares with interest of Libor plus
3.5 percent.

7. (Sbu) The deal has raised eyebrows. A visiting Merrill
Lynch equity analyst told econoff he suspected political
pressure on Yapi Kredi--otherwise why would a bank take
payment in shares without overcollateralizing (i.e taking
shares worth more than 100 percent of the payment due). This
analyst also pointed out that Cukurova's right to repurchase
is essentially an unpriced option. Huseyin Kelezoglu, an
analyst at HC Istanbul, told Econcouns that the original
Cukurova-BRSA/SDIF agreement allowed Cukurova to make
payments to YPK in the form of liquid securities, so in
principle there was nothing wrong with payment via Turkcell
shares. However, he also claimed that there were some
around Erdogan who were pushing BRSA/SDIF to accept a deal to
restructure Cukurova's debt to SDIF/YPK and to let
Karamehmet--Cukurova's owner--back into the banking business.
BRSA/SDIF, he argued, should insist that Karamehmet identify
the people behind North Way Production, the company
Karamehmet had put forward as the financiers of his earlier
payment plan restructuring proposal. Kelezoglu said the
people behind North Way need to be credible, transparent
players. However, according to Kelezoglu, Karamehmet had
refused to identify them, saying he could not because they
represented U.S. Treasury "black money."

8. (Sbu) SDIF Chairman Erturk noted that it was up to BRSA,
not SDIF, to accept (or not accept) Cukurova's use of
Turkcell shares to make its recent $100 million payment to
Yapi Kredi. BRSA V.P. Turkan confirmed that BRSA had
authorized the deal, not seeing why they should object to a
payment in shares as opposed to cash.

Demir Bank:
----------

9. (Sbu) Erturk said Demir Bank's former owners were suing
SDIF not to get the bank back from HSBC, but to gain
compensation. Note: The SDIF took over Demir Bank after the
crisis and later sold it to HSBC. The Court of Accounts
recently overturned SDIF's takeover of Demir. End Note.
Saying it was hard to imagine what compensation would be
appropriate for the loss of a bankrupt bank, Erturk said the
former owners are really after a new banking license, echoing
a similar comment by BRSA Chairman Bilgin (ref A). HC's
Kelezoglu passed on a rumor that the SDIF agreement on the
takeover of Demir Bank included a clause giving the former
owners a golden share, with the right to manage the bank for
12 years. HSBC CEO Piraye Antika told Econcouns that was
"absolute rubbish," and that the former owners were spreading
that rumor to undermine HSBC. She added that her concern was
not with Demir Bank's suit against BDDK, but rather with a
separate suit filed by the former owners against HSBC, again
alleging that they were entitled to a golden share and to
management rights. She dismissed the suit as ridiculous, but
said the uncertainty it was creating already was hurting the
bank. For example, Gillette had backed out of negotiations
to use HSBC as its payments bank, citing uncertainty. Antika
said the judge hearing the case had asked to see the
agreement, and she was confident that -- upon reading it --
he would rule in the bank's favor. However, she stressed
that HSBC headquarters was already concerned about its Turkey
operations, and would be inclined to pull out of the country
if even an initial decision went against it.
SDIF Sale of Seized Assets:
--------------------------

10. (Sbu) Erturk agreed the valuation of assets posed a major
problem in SDIF's efforts to sell them. More broadly, he
thinks the only way forward is to launch a PR campaign to
lower public expectations about what can be expected from
these assets, and from the owners of failed banks. IMF ResRep
Odd Per Brekk told econcouns the Fund Mission had raised the
issue with Minister Babacan, who had agreed to make a
television appearance to try to reduce expectations.

Uzans:
------

11. (Sbu) Erturk confirmed that SDIF wants to sell the
Group's assets quickly. They should be able to sell the
cement factories quickly and easily. The media assets are
more complicated: TV/radio assets can be sold, but the
newspapers are money-losers. Telsim is the most complicated
because it owes money to Motorola/Nokia and to the tax
authorities. Berberoglu also cited the complexity of the
Telsim sale, both because Telsim's shares had been pledged to
Motorola and Nokia, and because of the legal proceedings in
other countries. Erturk said his inclination at this point
is to sell Telsim to a private buyer with its debt (i.e., the
buyer would take over the assets and the debt). For this to
work, the would-be buyer would probably need to work out a
deal with Motorola/Nokia ahead of time. (Note: This would
be more favorable for Motorola than having SDIF take over the
debt, as SDIF will face great pressure to use whatever money
it makes from the sale of Telsim to pay back the public.)

12. (Sbu) Erturk told Econcouns last week that Uzan Group
representatives would be meeting with him. On March 9, Deputy
Prime Minister Sener confirmed press reports that the Uzan
Group had proposed a payment plan to SDIF for Imar Bank.
Sener would not be drawn, however, on how the GOT would
handle the proposal or on its contents. Comment: It is
difficult to see how the GOT or SDIF could justify
negotiating with the Uzans. By all accounts, unlike the other
failed bank owners, the Uzans committed a massive fraud. End
Comment.

Comment:
-------

13. (Sbu) Over the next few months, how the new team of
regulators at SDIF and BRSA handle issues relating to the
failed bank owners will be a singular test of their
competence and independence. Though arguably beholden to the
political leadership that appointed them, the new regulators'
political backing may enable them to follow through on their
initial forceful actions and statements. Separately, the GOT
leadership, by creating unrealistic expectations in the
public mind about how much could be collected, may be
undermining their newly-appointed bank regulators, as the
public will be disappointed at the small amounts ultimately
collected.

EDELMAN

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