Beyond the slogans, we have to start talking about practical solutions and actions.
It’s pretty clear by now that the financial engineering transactions allowed banks to have excessive profits through usury interest rates paid to them by the central bank, and, they, in turn, paid usury rates to ultra-rich clients (in the top 3 per 1000). These rates were as high as 40% to the banks and as high as 30% to these ultra-high net worth clients. There is no justification to pay that kind of rate by the Lebanese taxpayer. I’m not here to assign blame, but as part of any government budget, these excessive profits over the last 3 years need to be reversed, no questions asked.
The excess financial engineering profits have to be clawed back by the Lebanese taxpayer. This could be done over 5-7 years, so as not to threaten the existence of these banks. Furthermore, the bonuses of all senior managers of the banks who benefited from these transactions need to be clawed back by the shareholders (to partially cover the revenue clawbacks). If these banks had independent boards, instead of the same guy running the bank and his own board, which is supposed to supervise him, that’s precisely what would have happened. In fact, he would have been paid in stock vesting over 3-5 years, making it much easier to claw back his compensation if the board finds out that he’d subjected his bank to excessive risk.
When the dust settles, there has to be a proper overhaul of governance in the country, including setting up truly independent boards, with an independent chairman, so that they can properly supervise the CEO and ensure that Madoffian bulls#### like this never happens again.
What about the depositors who earned all this phantom interest? You can call it a haircut, or an exit tax, or a deferred tax, or whatever you want, but that has to be part of the process of cleansing this Ponzi Scheme they’ve been running.
A guy with $10 million 10 years ago, at 12% interest, has $31 million today. A haircut of 50% puts him at $16 million. It wouldn’t be an enjoyable experience, but not the end of the world either, to help save his country. It would be equivalent to earning 5% annually (which is the market rate in the real world) instead of 12%, and with no loss of any of his initial investment. For those of you who might have a problem with this plan, wake the f### up. The haircut is happening anyway because a chunk of your money’s already gone. The only thing we’re doing is recognizing the loss and determining how far down to go, meaning at what level of account balance to stop the hit? $1 million? $500,000? $100,000? $10,000? Do you really want the little guy with $10,000 who earned 4% to subsidize the guy with $20 million who earned 25%? When banks open eventually, probably around November 4, they’ll have a very bad day, as crowds scramble to pull their money. Is it viable to prevent the little guy from withdrawing his measly savings, while the big guy calls the branch manager or regional manager and applies a wasta to give him an exemption to transfer his money to Luxembourg? With 2 million people in the streets ready to eat you alive, do you really want to go there?
The longer we stay in denial, instead of hermetically sealing all the exits, the wider the haircut has to go. If we close it up immediately, we could probably stop at $1 million, and not affect the small depositors who were earning reasonable, market-driven rates, instead of the Disneyland returns. Accounts above $1 million hold an aggregate $90 billion, so a haircut would affect only 6,000 multi-millionaires (worth over $12 million each), which plugs 70% of the dollar hole in the central bank. This is what’s owed to the banks and which can never be returned, unless you want to privatize MEA and the Casino to make these multi-millionaires whole — good luck if the demonstrators find out — I wonder if the Hizbullah crowd would come to your defense then.
For those depositors who are upset about this, your time is better spent demanding to know what the senior managers that talked you into this deposit were doing with their money. Is it still in Lebanon alongside yours or did they hightail it out of Dodge?
First agenda item for the government is to implement capital controls immediately, because if you allow the big guys to escape, and have the little guy bear the brunt of it, you will be held accountable by the people.
I wouldn’t want to be you, in that case.
Dan Azzi is a regular contributor to Annahar. He has recently been invited to be an Advanced Leadership Initiative Fellow at Harvard University, a program for senior executives to leverage their experience and apply it to a problem with social impact. Azzi’s research focus at Harvard will be economic and political reform in a hypothetical small country riddled with corruption and negligence. Previously, he was the Chairman and CEO of Standard Chartered Bank Lebanon.