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