US embassy cable - 05ISTANBUL2003

C O N F I D E N T I A L SECTION 01 OF 03 ISTANBUL 002003 
 
SIPDIS 
 
TREASURY FOR INTERNATIONAL AFFAIRS - CPLANTIER 
NSC FOR MERKEL AND MCKIBBEN 
 
E.O. 12958: DECL: 11/15/2015 
TAGS: ECON, EFIN, EINV, PGOV, TU, Istanbul 
SUBJECT: SINNED AGAINST OR SINNING?  OWNERS OF FAILED 
TURKISH BANKS SPEAK OUT 
 
REF: A. ISTANBUL 1577 
 
     B. ISTANBUL 346 
 
Classified By: Consul General Deborah K. Jones.  Reasons 1.4 (b,d). 
 
This message was coordinated with Embassy Ankara. 
 
1. (C) Summary: In recent months, a number of owners of 
failed Turkish banks have begun to speak out to condemn the 
Turkish government for pursuing a "vendetta" against them-- 
including for political and even religious reasons-- and to 
warn that Turkish government actions to seize their assets 
are both "unlawful" and "unconstitutional."  Representatives 
of these groups have bombarded diplomatic missions with 
mailings, placed advertisements in newspapers such as the 
Wall Street Journal, and lobbied agressively overseas in the 
United States and Europe, leading to a number of articles in 
the Western press that have supported their arguments.  Given 
the questions that this campaign has raised, we thought it 
useful to provide some background and perspective on their 
allegations.  Though in some cases the crackdown on Turkey's 
failed bank owners may have political side benefits for the 
GOT, broadly speaking we find their complaints unconvincing, 
and the bank regulators' tough approach justifiable.  End 
Summary. 
 
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Background 
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2. (SBU) The bulk of Turkey's bank failures occurred in the 
crisis years of 2000 and 2001.  When the government was 
forced to abandon its exchange rate-based stabilization 
program and devalue the lira in 2001, many banks were driven 
into insolvency as a result of the large open positions they 
had taken to finance their holdings of lira-denominated 
government securities.  It also emerged that many had been 
misused by their owners to support the operations of their 
other businesses.  The cost to the Turkish government was 
high.  All told, 20 banks were transferred to the Savings 
Deposit Insurance Fund (SDIF), at a cost of 17.3 billion USD. 
 An additional 21.9 billion USD was spent restructuring 
Turkey's state banks.  With strong support from the IMF, 
which shared its concern that delay would weaken the banking 
sector as a whole, the Banking Regulatory and Supervisory 
Agency (BRSA) and the Savings Deposit Insurance Fund (SDIF) 
moved expeditiously to resolve individual bank situations 
through merger, sale, or direct liquidation. 
 
3. (SBU) Turkey's banking travails were capped in 2003 by 
discovery that Imar Bank, owned by the infamous Uzan clan but 
previously regarded as a minor player in the banking sector, 
had been operating fraudulently for years.  In place of its 
audited total of 500 million USD in deposits, investigators 
discovered that the bank had actually accumulated more than 
10 times that total.  The Imar Bank scandal-- which required 
a state injection of USD 6 billion to honor the deposit 
guarantee-- led directly to adoption at the end of 2003 of 
Turkey's draconian banking laws, number 4969 and 5020, which 
permit the Turkish government to recoup its costs by seizing 
the assets not just of owners and officers of failed banks, 
but also the assets of their relatives and in-laws. 
 
4.  (SBU) Since that time, the Turkish government has 
vigorously pursued the effort to make good its losses by 
applying the full letter of the law.  As the elusive Kemal 
Uzan, now in hiding in an unspecified foreign location wrote 
in a letter to the Consul General in September 2005, "without 
any court order or judgement, solely based on TMSF 
administrators' decisions, fungible assets, equipments and 
buildings of companies not indebted to the TMSF, to any bank 
under its supervision, or to any agency of the Turkish 
government, are being offered for sale."  (Note: The Uzans 
are no friends of the U.S. and their complaints about the 
law's impact on Turkey's investment climate ring hollow, 
given a separate USD 2 billion fraud they perpetrated against 
Motorola.  End Note.)  Up to August 2003, the SDIF collected 
nearly 1.8 billion USD; under current Chairman Ahmet Erturk 
it has doubled that total, and hopes to earn back most of the 
Imarbank costs through its sale of Uzan assets. 
 
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Legal Challenges 
---------------- 
 
5. (C) The Uzans are not the only group speaking out against 
the Turkey's new banking regime and alleging a government 
"vendetta."  Also making the argument is Mustafa Suzer, whose 
group's Kentbank was taken over in 2001.  Suzer's son Serhan, 
the only member of the family not subject to a travel ban 
(another weapon in the SDIF's arsenal), has lobbied 
extensively in Washington and elsewhere, arguing that the 
Suzers have been targeted because of their secular and Alevi 
background.  They have buttressed their case by pointing to 
the fact that they won a decision in 2004 in Turkey's High 
Administrative Court (or Danistay) overturning the seizure of 
Kentbank.  The government's failure to honor that decision, 
they argue, proves its bias.  These charges have resonated in 
the Western press, appearing in the Washington Times, 
National Review, and other outlets. (Note: As have charges 
related to the separate controversy over the Suzer Plaza 
building, covered in Ref. B.  End Note.) Similarly, the 
owners of Demir Bank and Pamukbank won cases against Turkish 
regulatory authorities (though Pamukbank owner Mehmet 
Karamehmet reached a settlement with regulators giving up his 
right to the bank), and the family of Dinc Bilgin, which 
owned the failed Etibank, indicates that he soon plans to go 
to court to prove that the bank was in unsound condition when 
it was privatized in 1997. 
 
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Judiciary's Weakness Compelled a Regulatory Response 
--------------------------------------------- ------- 
 
6. (C) Yes, but: Current and former banking regulators-- and 
IFI officials--  are unapologetic about the seizures, and 
argue that more than anything else the Danistay decisions in 
Suzer's favor point up lingering weaknesses in Turkey's legal 
system.  Most tellingly, SDIF Chairman Ahmet Erturk told Econ 
Counselor and P/E Chief earlier this year that the SDIF has 
taken a hard line with former bank owners precisely because 
the judicial system was unable to do so.  The corruption and 
abuses that were endemic in the banking system before the 
crisis, he argued, would be addressed by prosecutors and the 
courts in a "normal" country, however, Turkish courts were 
not up to the task.  Regarding the Suzers' specific 
complaint, Erturk said that the bank could not be returned to 
the Suzers as it no longer existed at the time of the 
Danistay decision.  Instead, the Suzers should sue the 
government for damages.  Both he and a number of banking 
experts whom we consulted, however, predicted that such a 
suit would fail, given that the bank had negative equity when 
it was taken over.  Some speculate that the Suzers have not 
filed such a case as they know that they would lose, and 
thereby would also be liable for court costs. 
 
7. (SBU) Easy Money: Banking experts remind us that the 
genesis of the crisis lay in Turkey's weak regulatory 
supervision of banks in the 1990s, coupled with the 
government of the day's decision to introduce a full deposit 
guarantee following an earlier banking crisis.  At a time 
when Treasury guarantees for other projects were difficult to 
obtain, the politically well-connected quickly saw that this 
was a way to obtain a defacto government guarantees for their 
business operations.  Political insiders, the mafia, and 
others all thus moved into banking on a major scale, winning 
licenses to operate their own banks.  One senior banking 
consultant notes that the vast majority of these banks were 
not true banks in any real sense, but rather undercapitalized 
hedge funds that were used to speculate in government 
securities.  As long as the lira remained strong, they were 
extremely profitable.  When the crisis hit, however, they 
were overexposed, and their capital quickly evaporated.  In 
many cases too, it became apparent that banks had been 
misused by some group owners to fund the unprofitable 
operations of other group companies.  Tellingly, of the 
dozens of banks created in the period, none remain in 
existence today. 
 
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Questions of Degree 
------------------- 
 
8. (C) Our contacts among former regulators and within the 
banking sector note that it is important to differentiate 
among the varying degrees of criminality of former bank 
owners.  At the top of the scale, they suggest, are the 
Uzans, who "cooked the books" and were "crooks and 
criminals."  Lower down on the scale are bank owners like 
Erol Aksoy (Egebank) and Suzer (Kentbank) who used their 
banks to support other group operations and drove them to 
financial ruin.  One former regulator is dismissive of the 
Danistay decision on Kentbank, which he argues betrays a 
total lack of understanding of banking.  This contact, who 
has had his own difficulties with the AK government-- they 
forced him out-- nonetheless dismisses the suggestion that it 
is pursuing a vendetta against Suzer and others.   The 
Secular-Islamist issue has nothing to do with the case, he 
argues, adding that the BRSA and the Yargitay (High Criminal 
Court, which has reinstated criminal charges against Suzer 
Group officials) are pursuing the case correctly. 
 
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Changes to Come 
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9. (C) Both current and former regulators concede that 
Turkey's current banking legislation is too tough and perhaps 
even transgresses the constitution.  They add that its 
one-size-fits-all nature may not be appropriate for all the 
banks taken over in recent years.  (Demir Bank, for instance, 
was not taken over because it was misused, but because it 
encountered financial difficulties, and so may merit 
different treatment.)  Several predict, however, that such is 
the level of popular anger over the Uzans' abuses that no one 
will legally challenge the laws until Turkey's regulators 
have finished with the group and its assets.  At that point, 
one predicts, the law will be found unconstitutional, with 
the proviso that all actions taken earlier to implement it 
will remain valid. 
 
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Comment 
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10. (C) Turkey's banking crisis has left in its wake a 
tangled web of charges and countercharges, made opaque by the 
intricacy of the financial dealings in question, the broad 
scope of ensuing punitive legislation and its unfettered 
exection, and the simultaneous murkiness of judicial 
decisions on such 
ases as Demirbank, Pamukbank, ad 
Kentbank.  The charge that Turkish authoritiesare 
manipulating the situation for political advntage is one 
that apears untenable, however, givn tefact tat (exept 
for Imarbank, which reprsented crrupton n n 
unprecedented scale) thebank seizures in question predated 
the current gvernment's tenure, and were undertaken by 
indepedent regulators with the full support of internatioal 
organizations such as the IMF.  One senior fomer regulator 
can recall only one instance werehe was subject to 
politicalpresure but i that case it was to desist from 
excesivel prssring a failed bank owner in Bursa, whose 
companies were key employers in that politically important 
city.  As for the SDIF, its controversial chief Ahmet Erturk, 
though he clearly has strong ties to the AK Party, deserves 
credit for the success of his hard line approach in 
recovering assets from the bank owners' abuse of the deposit 
guarantee.  End Comment. 
JONES