BANK REGULATORS GRAPPLE WITH FAILED BANK OWNERS

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 �A;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