MEGA CASE LEAVES FINANCIAL REFORM IN LIMBO

C O N F I D E N T I A L AIT TAIPEI 002307

SIPDIS

SIPDIS



DEPT FOR EAP/TC

E.O. 12958: DECL: 07/06/2016
TAGS: EFIN PGOV ECON TW
SUBJECT: MEGA CASE LEAVES FINANCIAL REFORM IN LIMBO

REF: A. 05 TAIPEI 4431


B. 05 TAIPEI 4187

C. TAIPEI 2266

Classified By: AIT Acting Deputy Director Charles E. Bennett, Reasons 1
.4 b/d


1. (C) Summary: In late June, the Taiwan authorities
negotiated a deal with private investors to retain control
of the board of directors of Mega Holdings Co. While Vice
Premier Tsai Ing-wen gained stature in the financial
community and with the opposition by resolving the
conflict, the controversy led to a new Finance Minister and
restrictions on ChinaTrust, the bank that sought to
takeover Mega. Financial sector reform, now stalled for
many months, remains in limbo. End summary.

A Major Financial Asset for the Taiwan Authorities
-------------- --------------


2. (U) Mega Holdings Co. is Taiwan's third largest of its
14 financial holding companies and has assets of NT$ 2.2
trillion (US$ 69 billion). It has five wholly-owned
subsidiaries including the International Commercial Bank of
China (ICBC, Taiwan's top foreign exchange trading bank),
Chiao Tung (Transportation) Bank, Chung Kuo Insurance Co.,
Chung Hsing Bill Financing Co., and Bartis International
Securities Co. The Taiwan authorities are the largest
shareholders with a 22.5 percent stake controlled by the
Ministry of Finance. ICBC and Chiao Tung are both state-
owned banks. ChinaTrust Financial Holding Co., which is
controlled by Taiwan's powerful Koo family, owns 15 percent
of Mega's stock. In recent years, Taiwan has encouraged
foreign institutional investors (FII) to buy into the
island's financial institutions and now FIIs own about the
same amount of Mega stock as do the authorities.

Public Outrage at Agreement to Surrender Control
-------------- ---


3. (U) Ministry of Finance officials met with ChinaTrust
and other shareholders in May to discuss upcoming board
elections. At the meeting, the authorities and private
investors reached an understanding that in board elections
scheduled for June 23, the authorities would chose 7 out of
15 directors and private investors would chose another 7
directors. The last director would be an "independent"
director recommended by FIIs. They also agreed that Mega
Chairman Cheng Shen-chih would be re-elected.


4. (U) The deal generated heavy criticism from the media
and the Pan-Blue opposition. Critics argued that as the
largest shareholder, the authorities should maintain
control of Mega's board. Opposition Pan-Blue legislators,
who have consistently criticized the authorities' financial
sector reform measures (refs A and B),called for Premier
Su Tseng-chang to take responsibility for the flawed deal
and for then Minister of Finance Joseph Lyu to resign. Lin
Chuan, who was Finance Minister before Lyu took office in
January 2006, also criticized the impending loss of
control.

An Unusual Compromise
--------------


5. (U) In response to the criticism, Premier Su decided the
authorities should retain control of the board and
appointed Vice Premier Tsai to handle the situation.
Mega's private investors had already secured the proxy
votes they needed to elect the seats they wanted on the
board. However, the two sides were able to reach a new
agreement.


6. (U) Under the compromise arrangement, 15 directors were
elected on June 23. Private sector candidates and
candidates named by the authorities each took seven seats.
Former Vice Premier Wu Rong-I took the remaining seat as an
independent director. The board re-elected Cheng as
Chairman. However, immediately after the board meeting,
one of the private sector directors, Chieh Hung-wen
(Chairman of Bartis International Securities),and Wu
resigned from the board. This restored control to the
Taiwan authorities with a 7-6 majority on the board.


7. (C) Vice Premier Tsai told AIT/T on June 29 that she

was satisfied with the compromise outcome, though not
pleased with the process. She said certain people were
simply not doing their jobs and it turned out that she had
to go and do their jobs for them. The implication was that
Finance Minister Lyu was at fault. In a 10:30 PM press
conference June 29, Premier Su fired Lyu by reassigning him
and appointing an academic, Ho Chih-chin, from National
Taiwan University as the new finance minister (see ref C).
Ruling party Democratic Progressive Party (DPP) legislators
publicly criticized Su for not consulting with them prior
to the announcement, and for appointing an academic with no
administrative experience in Taiwan.


8. (C) In a major political victory, Tsai also noted that
opposition lawmakers called to congratulate her after the
announcement, saying that in light of this positive result
by the authorities, the opposition would not be pursuing a
no-confidence vote against Premier Su's cabinet at this
time. Tsai was clearly pleased with the gesture from the
opposition, but emphasized the KMT's stance on a no-
confidence vote could be reviewed at any time.

Backlash against ChinaTrust
--------------


9. (U) After the board elections were resolved, Taiwan's
Financial Supervisory Commission (FSC) chastised
ChinaTrust. To reduce the cost of its investment in Mega,
ChinaTrust had purchased in Hong Kong a US$ 390 million
package of securities that were primarily derivatives
linked to Mega stocks prior to increasing its stake in the
firm. Although technically legal, FSC criticized the move
as risky and instructed ChinaTrust to improve its risk
management. FSC suspended its review of ChinaTrust's
applications to set up overseas offices and froze approval
of its investment applications.


10. (C) On July 3, FSC Director of International Affairs
Mr. Andrea Lee told AIT/T that FSC's action should not be
viewed as a punishment for ChinaTrust. He noted that no
fines were imposed or individuals singled out for
punishment. He said FSC merely delayed adjudication of
ChinaTrust applications for overseas offices and for new
investments for an indefinite period. Lee also said the
FSC action was not taken in retaliation for ChinaTrust's
actions in the Mega Director's meetings. He emphasized
that FSC believes ChinaTrust skirted the rules by not
declaring its additional equity holdings in Mega and
therefore FSC needed to assert its regulatory power to
oversee ChinaTrust activities.

Financial Sector Reform Remains in Limbo
--------------


11. (C) Comment: The Mega Financial controversy will
continue to have repercussions for the Chen administration
and financial reform efforts. In the near term, the
authorities have stopped further sales of shares in 12
state-owned financial institutions, further delaying
efforts to privatize state-run banks and reduce the number
of state-run financial holding companies. Such sales may
resume after the Economic Sustainable Development
Conference July 27-28 takes up discussion on financial
issues. More importantly, the controversy gives fuel to
critics who had already been arguing the administration's
financial reform program favors selected Taiwan financial
tycoons with below-market sales of state assets. On the
positive side, observers and analysts also told AIT/T this
episode reaffirms the Vice Premier's high standing on
economic issues. She is viewed as having adroitly handled
a messy financial situation and taken decisive action that
makes the authorities look good. End comment.
YOUNG