Hidden government influence over privatized banks

Theoretical Inquiries in Law

Volumn 13, Issue 2, 2012, Pages 567-596

  Hamdan, Assaf ^a   Kamar, Ehud ^b  

^a HEBREW UNIVERSITY OF JERUSALEM   (Israel)

^b UNIVERSITY OF SOUTHERN CALIFORNIA   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 84870154204     PISSN: None     EISSN: 15653404     Source Type: Journal    
DOI: 10.1515/1565-3404.1305     Document Type: Article

References (97)

1. See, e.g., Marcel Kahan & Edward B. Rock, When the Government Is the Controlling Shareholder, 89 Tex. L. Rev. 1293 (2011);
2. Marcel Kahan & Edward B. Rock, When the Government Is the Controlling Shareholder: Implications for Delaware, 35 Del. J. Corp. L. 409 (2010).
3. We do not have in mind control in the sense of politicians wishing to influence bank lending decisions, as described, for example, in Serdar Dinc, Politicians and Banks: Political Influences on Government-Owned Banks in Emerging Markets, 77 J. Fin. Econ. 453 (2005). Rather, what we have in mind is regulators with a legitimate ground for close monitoring of certain industries wishing to exercise their supervisory power in an informal manner.
4. In many cases, the government retains veto power, see Bernardo Bortolotti & Mara Faccio, Government Control of Privatized Firms, 22 Rev. Fin. Stud. 2907 (2009);
5. Steven Jones et al., Share Issue Privatizations as Financial Means to Political and Economic Ends, 53 J. Fin. Econ. 217, 219, 221 (1999); Nemat Shafik, Selling Privatization Politically, 31 Colum. J. World Bus. 20, 27-28 (1996).
6. See, e.g., William L. Megginson, The Economics of Bank Privatization, 29 J. Banking & Fin. 1931 (2005).
7. See William L. Megginson et al., The Choice of Private Versus Public Capital Markets: Evidence from Privatizations, 59 J. Fin. 2835 (2004).
8. See Rafael La Porta et al., Corporate Ownership Around the World, 54 J. Fin. 471 (1999).
9. See, e.g., A History of Corporate Governance Around the World (Randall K. Morck ed., 2005);
10. John C. Coffee, Jr., The Rise of Dispersed Ownership: The Role of Law and the State in the Separation of Ownership and Control, 111 Yale L.J. 1 (2001).
11. See Gerard Caprio et al., Governance and Bank Valuation, 16 J. Fin. Intermediation 584 (2007).
12. But see Mara Faccio & Harry H.P. Lang The Ultimate Ownership of Western European Corporations, 65 J. Fin. Econ 365 (2002) (finding that financial firms in Western Europe are more likely to be widely held). Canada, a country with many controlling shareholders, is a notable exception in that its largest banks are widely held. The explanation for this anomaly lies in a 1967 statutory ban on holding more than ten percent of the stock of a large bank, designed to prevent Canadian bank acquisitions by foreign banks, which was only recently relaxed somewhat at the behest of the local banking industry
13. see Eric J. Gouvin, The Political Economy of Canada's "Widely Held" Rule for Large Banks, 32 Law & Pol'y Int'l Bus 391 399-400 (2001) (describing the history of the rule)
14. Blair W. Keefe & Stéphane J. Fournier, Canada Adopts Major Revisions to Its Financial Institution Regulation, 8 Law & Bus. Rev. Am. 237, 245 (2003) (describing the recent modification of the rule).
15. See generally Ekkehart Boehmer et al., Bank Privatization in Developing and Developed Countries, Cross-Sectional Evidence on the Impact of Economic and Political Factors, 29 J. Banking & Fin. 1981 (2005);
16. William L. Megginson & Jeffry M. Netter, From State to Market: A Survey of Empirical Studies on Privatization, 39 J. Econ. Literature 321 (2001).
17. Isaac Otchere, Competitive and Value Effects of Bank Privatization in Developed Countries, 33 J. Banking & Fin. 2373, 2380 (2009).
18. Maria K. Boutchkova & William L. Megginson, Privatization and the Rise of Global Capital Markets, 29 Fin. Mgmt. 31 (2000) ("[G]overnments usually adopt privatization programs primarily to raise revenue, and in order to improve the economic efficiency of former stateowned enterprises");
19. See, e.g., Mark A. Edwards, Nationalization, De-Nationalization, Re- Nationalization: Some Historical and Comparative Perspective, 30 Pace L. Rev. 124 (2009).
20. See George Clarke et al., Bank Privatization in Developing Countries: A Summary of Lessons and Findings, 29 J. Banking & Fin. 1905, 1916-17 (2005)
21. See James A. Verbrugge et al., State Ownership and the Financial Performance of Privatized Banks: An Empirical Analysis, Paper Presented at the World Bank/ Federal Reserve Bank of Dallas Conference on Bank Privatization 1 (June, 1999), available at http://faculty-staff.ou.edu/M/William.L.Megginson-1/ prvbkpap.pdf.
22. William Megginson & Jeffry Netter, History and Methods of Privatization, in International Handb ook on Privatization 25, 36 (David Parker & David S. Saale eds., 2003).
23. See Bernardo Bortolottia et al., Privatization: Politics, Institutions and Financial Markets, 2 Emerging Markets Rev. 109, 134 (2001);
24. See Carliss Baldwin & Sugato Bhattacharya, Choosing the Method of Sale: A Clinical Study of Conrail, 30 J. Fin. Econ. 69, 86-87, 90-91 (1991);
25. Francesca Cornelli & David Li, Large Shareholders, Private Benefits of Control and Optimal Schemes of Privatization, 28 RAND J. Econ. 585 (1997);
26. Rafael La Porta et al., Government Ownership of Banks, 57 J. Fin. 265 (2002);
27. See Privatization of Eilat Port Company Ltd., Government Companies Auth ority, http://www.gca.gov.il/gcaeng/privatizations/namaleilat (Isr.) (last visited Apr. 17, 2012).
28. Government Companies Auth ority, http://www.gca.gov.il/GCA/HomePage (Isr.) (last visited Apr. 17, 2012).
29. See Yaron Zelekha & Ayelet Zur-Nayberg, Mashber Menayot Habankim - Mehal'ama Ve'ad Lehashlamat Hafrata [The Banks' Share Crisis: From Nationalization to Completion of the Privatization], 40(160)
30. Rivon Lebankaut [Q. Banking Rev.] 61 (2007) (Isr.). Some of these banks remained publicly traded even under the government's control.
31. See The Bank Shares in Arrangement Law (Temporary Order), 5754-1993, SH No. 1438 p. 10 (Isr.).
32. See Ohad Marani et al., Doh Hava'ada Lebh inat Hebetim Haksh urim Bemihirat Bank Leumi Be'emtza'ut Shuk Hahon [Report of th e Committ ee for Examination of Aspects Related to a Sale of Bank Leumi Thr ough th e Capital Market] 5 (2002) (Isr.) (noting that Merrill Lynch was hired in 2001, but failed in its effort to find a strategic buyer).
33. In 2004, the Israeli Parliament adopted the Banking (Licensing) Law (Amendment No. 13), 5764-2004, SH No. 1956 p. 508 (Isr.), which imposed several restrictions on the rights of shareholders of widely held banks to nominate directors.
34. These included not only a control permit from the Bank of Israel, but also similar approvals by banking supervisors in countries where Bank Leumi has banking operations, most notably the Federal Reserve Board, see Tal Levy, Bank Leumi Sells U.S. Bank So Cerberus Can Buy Controlling Stake, Haaretz, Mar. 29, 2007, http://www.haaretz.com/news/bank-leumi-sells-u-s-bank-so-cerberuscan- buy-controlling-stake-1.216960 (Isr.).
35. See Sarit Menahem, Deutsche Bank Buys Gabriel, Cerberus Shares in Bank Leumi, Haaretz, June 24, 2009, http://www.haaretz.com/print-edition/business/ deutsche-bank-buys-gabriel-cerberus-shares-in-bank-leumi-1.278690 (Isr.).
36. See Ronald J. Gilson, Controlling Shareholders and Corporate Governance: Complicating the Comparative Taxonomy, 119 Harv. L. Rev. 1641, 1651 (2006) ("[A] controlling shareholder may police the management of public corporations better than the standard panoply of market-oriented techniques employed when shareholdings are widely held").
37. For example, on January 17, 1996, Sumner Redstone, the controlling shareholder and chairman of media giant Viacom Inc., walked into the office of the company's CEO, Frank Biondi, to tell him that his services were no longer needed, see Ehud Kamar, The Story of Paramount Communications v. QVC Network: Everything Is Personal, in Corporate Law Stories 293, 321 (J. Mark Ramseyer ed., 2009);
38. see also Leo Strine The Inescapably Empirical Foundation of the Common Law of Corporations, 27 Del. J. Corp L 499 512 2001) ("When an 800-pound gorilla wants the rest of the bananas, little chimpanzees, like independent directors and minority stockholders, cannot be expected to stand in the way, even if the gorilla putatively gives them veto power").
39. See The Banking Ordinance, 1941, IR No. 1134 p. 69, § 11A (Isr.).
40. The government can also retain golden shares with decisive voting power in privatized firms with dispersed ownership. Golden shares' likely cost is lower privatization revenue due to retention of government control. Moreover, in some jurisdictions they are illegal, see, e.g., Case C-543/08, Comm'n v. Portuguese Republic, O.J. C 13/3 (Jan. 15, 2011) (holding that Portugal's holding of a golden share in Energies de Portugal is contrary to European Union law); Case C-112/05
41. Comm'n v. Federal Republic of Germany, 2007 E.C.R I-8995 (holding that a golden share in Volkswagen is contrary to European Union law). In Israel, the government holds golden shares in at least two privatized firms: El Al Israel Airlines and Israel Chemicals.
42. Recently, for example, the Governor of the Bank of Israel met with the managers of all Israeli banks and urged them to be conservative when extending home loans, see Eran Peer, Fischer Reprimands Bank CEOs on Mortgages, Globes, May 1, 2011, http://www.globes.co.il/serveen/globes/docview.asp?did= 1000641754&fid=1124 (Isr.). The Governor supplemented his admonition with a binding instruction to banks to increase reserves for mortgage default risk
43. see Eran Peer BoI Orders Banks to Raise Mortgage Provisions, Globes May 11 2011 http://www.globes.co.il/serveen/globes/docview.asp?did= 1000644408&fid=1725 (Isr.). The banks' controlling shareholders were left out of this affair. Involving them would have been pointless as most of them are not professional bankers and would not have grasped all of the technical aspects of the matter. They would, however, likely be asked to intervene if management was unresponsive.
44. See Stephen Prowse, Corporate Control in Commercial Banks, 20 J. Fin. Res. 509 (1997) (finding that hostile takeovers of commercial banks rarely occur).
45. See Eran Peer, Zvi Ziv Resigns As Bank Hapoalim CEO, Globes, Mar. 25, 2009, http://www.globes.co.il/serveen/globes/docview.asp?did=1000437607 (Isr.).
46. In March 2007, the bank's former chairman, Shlomo Nechama, was pressured to resign, and Dan Dankner was appointed as the new chairman. A month later, outside director Amir Barnea also resigned, triggering a heated dispute over the reasons for his resignation, see Eran Peer & Hadas Magen, Hapoalim Admits Barnea Was Pressed to Resign, Globes, Sept. 3, 2007, http://www.globes.co.il/ serveen/globes/docview.asp?did=1000250442 (Isr.).
47. See Eran Peer & Stella Korin-Lieber, Shari Arison in Stormy Meeting with Fischer, Hizkiyahu, Globes, Apr. 21, 2009, http://www.globes.co.il/serveen/ globes/docview.asp?did=1000443759 (Isr.);
48. Sharon Shpurer & Ram Dagan, Fischer Tells Arison: Dankner Is Responsible for Hapoalim Problems, Haaretz, Apr. 22, 2009, http://www.haaretz. com/print-edition/business/fischer-tellsarison- dankner-is-responsible-for- hapoalim-problems-1.274581 (Isr.).
49. See Sharon Shpurer, Fischer to Depose Bank Hapoalim Chairman if Shari Arison Refuses, Haaretz, Apr. 28, 2009, http://www.haaretz.com/print-edition/ business/ fischer-to-depose-bank-hapoalim-chairman-if-shari-arison-refuses-1. 274990 (Isr.).
50. See Stella Korin-Lieber & Eran Peer, Bank Hapoalim Chairman Dankner Resigns, Globes, June 1, 2009, http://www.globes.co.il/serveen/globes/docview. asp?did=1000454578 (Isr.).
51. See Eran Peer et al., Shari Arison Set to Make Rare Appearance at Board Meeting, Globes, May 3, 2009, http://www.globes.co.il/serveen/globes/docview. asp?did=1000446333 (Isr.).
52. See Ofer Wolfson, Hizkiyahu Nifgash im Havrey Direktorion Hapoalim [Hizkiyahu Meets with Members of Hapoalim Board], News1 (May 19, 2009), http://www.news1.co.il/Archive/001-D-200924-00.html (Isr.).
53. See Companies Law, § 92.
54. See Eran Peer, Hamephakeah al Habankim Hizkiyahu:"Habankim Hirvicho Beyosher et Hatadmit Halo Tova Shelahem" [The Supervisor of Banks: "The Banks Have Justly Earned Their Bad Image"], Globes, Sept. 5, 2007, http:// www.globes.co.il/news/article.aspx?did=1000251397 (Isr.).
55. Zvi Zrahiya, Fischer: We Meant to Handle Dan Dankner Problem Quietly, Haaretz, May 7, 2009, http://www.haaretz.com/print-edition/business/fischerwe- meant-to-handle-dan-dankner-problem-quietly-1.275555 (Isr.).
56. On the futility of fighting board leaks, see, for example, Tracking the H-P Controversy, Wall St. J. Online, http://online.wsj.com/public/resources/ documents/info-hptime0609.html (last visited Oct. 22, 2011) (describing the whirlwind events that followed when Hewlett Packard's chair hired private investigators to track the source of repeated leaks from the company's board meetings).
57. See Hadas Magen, State Comptroller Closes Arison - Bank of Israel Case, Globes, Nov. 1, 2009, http://www.globes.co.il/serveen/globes/docview.asp?did= 1000509769 (Isr.).
58. See Hadas Magen, Arison Brings Press Clippings in Complaint Against Fischer, Globes, June 17, 2009, http://www.globes.co.il/serveen/globes/docview. asp?did=1000459363 (Isr.).
59. See Chen Ma'anit, Police Call to Indict Bank Hapoalim CEO, Globes, Feb. 17, 2011, http://www.globes.co.il/serveen/globes/docview.asp?did=1000624397 &fid=1725 (Isr.).
60. See Yuval Yoaz, Former Hapoalim Chairman Dan Dankner to Be Indicted, Globes, Sept. 5, 2011, http://www.globes.co.il/serveen/globes/docview.asp? did=1000679571&fid=1725 (Isr.).
61. See Bezeq - The Isr ael Telecommunication Corp. Ltd ., Doh Bodek Hizoni [Report of Outs ide Examiner] (2007), available at http://maya.tase.co.il/bursa/ report.asp?report-cd=259402&CompCd=230 (Isr.).
62. See Eran Gabay, Moshe Terry Nifgash im Adam Chesnoff Mekvutzat Saban ve Stephen Grabiner me Apax ve Hivhir Lahem ki "Kol Haoptziot Ptuhot" [Moshe Terry Met with Adam Chesnoff of Saban Group and Stephen Grabiner of Apax and Informed Them That "All Options Are Open"], The Marker, Apr. 11, 2007, http://www.themarker.com/hitech/1.409664 (Isr.);
63. Hadas Magen, Mekoravim Labdika be Bezeq:"Lo Nashlim im Matzav Shebo Weissglass ve Shloosh Yishaaru Betafkidam be Bezeq" [Persons Related to the Bezeq Examination: "We Will Not Accept a Situation in Which Weissglass and Shloosh Remain in Office"], Globes, Apr. 29, 2007, http://www.globes.co. il/news/article.aspx?did=1000206233 (Isr.).
64. See Companies Law (Amendment No. 16), 5771-2011, SH No. 2281 p. 390, § 10 (Isr.).
65. See Stella Korin-Lieber, Everything Is Fine at Psagot but Not OK, Globes, Oct. 31, 2010, http://www.globes.co.il/serveen/globes/docview.asp?did= 1000597902&fid=4163 (Isr.).
66. The Supreme Court dismissed a claim by the terminated CEO that the agreement was invalid, see HCJ 8137/10 Roy Vermus v. State Prosecutor [2010] (Isr.), available at http://elyon1.court.gov.il/files/10/370/081/s06/10081370. s06.htm.
67. See Banking Law (Licensing) (Amendment No. 13), 5764-2004, SH No. 1956 p. 508 (Isr.).
68. Draft Bill Amending the Banking Law (Legislative Amendments), 5771-2011, HH 360 (Isr.).
69. Banking Law (Legislative Amendments), 5772-2012, SH No. 2345 p. 206 (Isr.).
70. Banking Law (Licensing) (Amendment No. 13), 5764-2004, SH No. 1956 p. 508, § 13 (Isr.) 67
71. The Banking Law (Legislative Amendments), 5772-2012, SH No. 2345 p. 206 (Isr.).
72. See Stephen Haber, Mexico's Experiments with Bank Privatization and Liberalization, 1991-2003, 29. J. Banking & Fin. 2325 (2005) (arguing that the Mexico's bank privatization failed because the new owners had been reluctant to extend credit).
73. See, e.g., David Brodet, Bdikat Keda'iut ve'hitahnut Lehaf'alat Tohnit Ha'optziot Lemehirat Menayot Bank Leumi [Viability and Feasibility Examination of an Option Plan for the Privatization of Bank Leumi] (2004) (Isr.).
74. See Stella Korin-Lieber & Eran Peer, Bronfman v. Bronfman (and Schron) at Discount, Globes, Nov. 1, 2009, http://www.globes.co.il/serveen/ globes/ docview.asp?did=1000510067 (Isr.).
75. See, e.g., Michael C. Keeley, Deposit Insurance, Risk and Market Power in Banking, 80 Am. Econ. Rev. 1183 (1990). There is no formal system of deposit insurance in Israel. Nevertheless, in the 1983 crisis, the government showed it would not allow a bank to collapse.
76. See, e.g., Harold Demsetz & Kenneth Lehn, The Structure of Corporate Ownership: Causes and Consequences, 93 J. Pol. Econ. 1155 (1985).
77. See Mara Faccio et al., Large Shareholder Diversification and Corporate Risk- Taking, 24 Rev. Fin. Stud. 3601 (2011); Teodora Paligorova, Corporate Risk Taking and Ownership Structure (Bank of Canada, Working Paper No. 2010-3, 2010).
78. See Ross Levine & Luc Laeven, Bank Governance, Regulations and Risk-Taking, 93 J. Fin. Econ. 259, 260 (2009).
79. See Anthony Saunders et al., Ownership Structure, Deregulation, and Bank Risk Taking, 45 J. Fin. 643 (1990).
80. See Andrea Beltratti & René M. Stulz, The Credit Crisis Around the Globe: Why Did Some Banks Perform Better? (Fisher College of Bus., Working Paper No. 2010-03-005, 2010) (finding that banks with more shareholder-friendly boards performed significantly worse during the 2008-2009 global crisis than other banks and were not less risky before the crisis).
81. See Reint Gropp & Matthias Köhler, Bank Owners or Bank Managers: Who Is Keen on Risk? Evidence from the Financial Crisis (Eur. Bus. School, Research Discussion Paper No. 10-02, 2010), available at http://papers.ssrn.com/ sol3/ papers.cfm?abstract-id=1555663.
82. See In-Mu Haw et al., Concentrated Control, Institutions, and the Banking Sector: An International Study, 34 J. Banking & Fin. 485 (2010).
83. But see Choudhry Tanveer Shehzad The Impact of Bank Ownership Concentration on Impaired Loans and Capital Adequacy, 34 J. Banking & Fin 399 (2010) (finding that ownership concentration reduces banks' non-performing loans ratio and increases their capital adequacy when the controlling shareholder owns a majority stake).
84. See Kostantin Kosenko, Evolution of Business Groups in Israel: Their Impact at the Level of the Firm and the Economy, 5 Isr. Econ. Rev. 55, 68 (2007).
85. See Lucian A. Bebchuk, Control of Financial Firms in the Israeli Economy: Probl ems and Policies 5 (2012) (a report prepared for the Committee on Increasing Competitiveness in the Economy);
86. Randall Morck et al., Banking System Control, Capital Allocation, and Economy Performance, 100 J. Fin. Econ. 264 (2011).
87. See Alexander Dyck, Privatization and Corporate Governance: Principles, Evidence, and Future Challenges, 1 World Bank Res. Obs erver 59 (2001);
88. See Alexander Dyck & Louigi Zingales, Private Benefits of Control: An International Comparison, 59 J. Fin. 537, 574-75 (2007).
89. See Ronen Barak & Beni Lauterbach, Estimating the Private Benefits of Control from Partial Control Transfers: Methodology and Evidence (Bar Ilan Working Paper, 2010) (Isr.), available at http://www.mba.biu.ac.il/center/data/ papers/6/ Block-Israel.pdf.
90. See Lucian A. Bebchuk & Luigi Zingales, Corporate Ownership Structures: Private Versus Social Optimality, in Concentr ated Corporate Ownersh ip 55 (Randall Morck ed., 2000);
91. Ehud Kamar, Beyond Competition for Incorporations, 94 Geo. L.J. 1725, 1733 n.22 (2006) and sources cited therein (showing that some member states in the European Union improved investor protection in conjunction with large privatizations to secure a good market for the shares of privatized firms);
92. Rafael La Porta et al., Corporate Ownership Around the World, 54 J. Fin. 471 (1999);
93. Rafael La Porta et al., Law and Finance, 106 J. Pol. Econ. 1113 (1998).
94. Consistently, control premiums tend to be lower in banks than in other companies, see Gianfranco Gianfrate & Laura Zanetti, The Voting Premium in the Banking Industry: A Cross-Country Analysis (CAREFIN, Working Paper No. 10/10, 2010) (studying 157 bank control transfers in forty countries and finding an average control premium of 3.3%).
95. Companies Law, 5759-1999, SH No. 1711 p. 189, § 328 (Isr.).
96. See Assaf Hamdani & Yishay Yafeh, Institutional Investors as Minority Shareholders (ECGI Law, Working Paper No. 172/2010), available at http:// ssrn.com/abstract=1641138.
97. On the importance of success of early privatizations, see Kathryn Dewenter & Paul H. Malatesta, Public Offerings of State-Owned and Privately-Owned Enterprises: An International Comparison, 52 J. Fin. 1659 (1997).