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Do not banks’ shareholders have any fault in this?
Federal Reserve (FED) brings together twelve regional central banks. Among these, Kansas City Central Bank has been organizing a professional conference in Jackson Hole for thirty one years and convenes economists and central bank officials. Last week, various people from FED Chairman Bernanke to European Central Bank Chairman Trichet started to convene in this holiday resort in the Wyoming province. Kansas City Central Bank Chairman Hoenig, inaugurating the meeting, mainly put the question at the title on the agenda: Are not banks' shareholders among the convicts of the economic crisis that led to extensive use of the financial resources of taxpayers? And did not they have to pay a price for this? This is the topic we will deal with this weekend. If you are interested; please proceed.
The first point related to this topic is: Why does this question come to the agenda today? Until today, we have identified a number of convicts for the global financial crisis. To begin with; we did not like economists at all. Second, we did not like company managers and in particular bank managers. Distribution of bonuses to their employees by companies and banks sponsored by the public sector was discussed even at the Congress. Ultimately, we decided that company-firm executives and employees should not be granted bonuses. Yet, last week, Finance Minister of France Christian Lagarde said that it is now time to let go the race to prevent executive bonuses. However, the following discussion burst in the USA: So, would the shareholders of the banks that became needy switch to the post-crisis period as if nothing has happened? To be truthful, this is a legitimate question. If there is a badly managed enterprise, anyone that did not make any effort to prevent the slip though she could in a way participates in the bad management. This is the first point.
The second point that should grab attention is related with the timing of the discussion. That this discussion started recently implies that at least some believe that the free fall has ended. It is apparent that the time of such a discussion is not during but after the crisis; just as the discussion we initiated with the "concepts are not the same anymore" title. As the tumult of the financial crisis ends; now it is time to take a look around and pick ourselves up; get used to the already started economic recession and wonder "So, who has pushed me down?" Who made money in the expense of taxpayers? Who socialized individual risks via the crisis and saved his skin? Who are those that did not suffer a change in level of living while that of millions were affected negatively by the crisis? Therefore, this discussion showing a tendency to start certifies that we have switched to a new phase in the crisis. At least, this is so in the eyes of Kansas City Central Bank Chairman Hoenig. A supplementary point to be added can be: If a belief that the crisis has ended gains ground, the "so, who pushed me down?" discussion will and has to become widespread and intense in normal countries.
But, are bank shareholders the right target? Theoretically; yes they are. What is the difference between a person that holds equity shares of a company in his portfolio and a person that holds the borrowing instrument of the same company? Former has become a partner of the relevant company while the latter has lent to the company. Responsibilities and obligations about the management of the company the shareholder and the lender have undertaken are quite different. Former combines her destiny with the destiny of the company. It is the shareholder that supervises and controls how risky the management of the company is and whether or not the course of events bodes any good. Therefore, shareholder is granted the right to vote. Purpose of the right to vote is compiling information on how the company is managed; and supervising and controlling the management directly. Control mechanism of the capital is translated into the right to vote. On the other hand, a person that lends to the company has nothing to do with the management of the company. She waits for the date of maturity to receive the predetermined return; and uses her legal rights if she cannot receive it. However, the return shareholders will receive depends directly on company's performance. If the company is managed "well", she earns more, and vice versa. If she is not satisfied with the course of events; she can intervene in the company management. Or, she sells the shares in secondary market and gives up the close monitoring on the company. With this lens, shareholders that continued holding shares of the company but did not control the risky activities of the company should definitely pay a price. This is the theoretical case. Nonetheless, were not the complicated financial techniques even internal control mechanisms of banks failed to understand, the most important reason of this financial crisis? Is not it too much to ask this from shareholders given that it is not possible to monitor clearly the operations carried out? What is it expected from a shareholder in this era? Is he supposed to be superman? This is the third point.
The fourth point is: Shareholders have already paid a price along with the crisis, did not they? Yes, they paid a price with the fall in share prices in the face of the crisis. However, after the support provided to banks and companies with public funds, share prices started to rise. Therefore, shareholders, who did not object to the bad management in the company, broke loose owing to the finances of the taxpayers utilized so that the public in general does not get affected more deeply by the crisis. There is no doubt that, here there exists a problem considering taxpayers. This is not fair at all. In Turkey, which is used to unplanned and uncontrolled investment project designs for instance as the meaningless "u-turn bridge" in Sihhiye by Ankara Municipality or the unnecessary congress center at Eskisehir road; it might seem that "taxpayer rights" do not make much of a sense. However, in normal countries, it is not the same. In a country where the rights of taxpayers are not granted, there is no tax justice and no one thinks of entering the formal economy. So, with this lens, reason for the informal economy in Turkey is also the presence of mayors like Ankara mayor Melih Gokcek, is not it? Yes, it is. Taxpayer rights are important.
I guess the fifth point to be addressed here is this: Is this discussion coming on the agenda optional? Is there a step to take or a thing to be done? The solution is not that simple. Fund transfers carried out in the past without directly making state appropriation makes the problem too hard to solve. Here, public conscious can be relieved in two ways: Either equity shares of the shareholders will be appropriated or a certain charge of cost for the funds transferred will be asked. Here, the second option has been selected. From this point on, the discussion will be a theoretical one. We can only call to account politicians that transferred public funds to private sector at law prices.
These are what the discussion opened by Hoenig makes us think. It seems that we are at the beginning of a period where the world will discuss more extensively the issue of corporate governance.
This commentary was published in Referans daily on 22.08.2009