Poet and communist Jeremy Cronin suggested recently that the subprime crisis at the heart of the global financial crisis was similar to BEE deals.
The deputy minister of transport and deputy general secretary of the South African Communist Party was speaking at a teach-in at Rhodes University, arranged by the politics department and my centre for economics journalism in Africa.
Just as subprime loans were meant to allow people without capital to buy houses, BEE deals were designed to allow “capitalists without capital” to become capitalists.
All was fine, he said, as long as markets were rising but, as soon as they collapsed, the BEE deals went sour in the same way as the subprime housing drive collapsed.
There’s some truth in what our leading critic of capitalism had to say. Both BEE deals and surges in subprime lending are based on rising share and housing markets respectively.
There are lots of differences too. One is that the global crisis came about not just because of sub-prime loans, but because of a general housing bubble in the United States colliding with a form of financial engineering called “credit derivatives”.
BEE deals often — but not invariably — involve financial engineering. The innovative structuring of finance to create BEE deals sometimes resembles the complex derivatives that were part of the crisis.
For instance, both sometimes use special-purpose vehicles (SPVs). These are not to be confused with the sports utility vehicles beloved of some Cabinet ministers. SPVs are special shell companies created to house shares in deals.
The big difference is that companies do BEE deals because the law, soft law though it may be, requires them to. Credit derivatives are mechanisms designed to decrease risk and increase profit. That they increased risk instead is one of the ironies of the financial crisis.
Have BEE deals done what they were originally supposed to do — to create black capitalists?
It seems at least partly so from figures released by First National Bank to the media. FNB says that individuals own 1% of the total value of the Johannesburg Stock Exchange (JSE). Corporates and institutions own the rest.
Of that 1%, about half is BEE-share ownership, so potentially there is some gain of black individual wealth since 1994 when the percentage was probably close to zero. Yet BEE shares sometimes have a way of vanishing out of black hands entirely, so it may be premature to count those.
That means only half a percent of the JSE’s wealth is actually owned by individuals, I guess mostly by white people, though that half a percent represents about R25-billion, which is not small beer.
Hang on, you might say, if individuals own only 1% or less of the entire wealth of companies listed on our stock exchange, representing most of the really big companies, how can the 25% target of the BEE codes ever be attained?
The answer is that it is unlikely the modest ownership target of the codes will be met if the 25% is measured by direct ownership.
Hence other better measures of BEE ownership transfer are needed.
Black people may own a lot more than 1%, but through institutions such as pension funds and BEE companies. White people clearly also own shares not individually so much as through institutions.
BusinessMap is also used to measure the percentage of the JSE controlled by black people, but this is a different issue.
What all this means is that new research is now needed on who actually owns what, by racial group, directly and indirectly, so that the progress of black people in share ownership can be accurately measured.
Perhaps, too, the focus of ownership research should switch to other assets, such as housing or land, or we should move back to measuring black control of companies rather than ownership.
Market crises always underline the reality that share ownership itself is not always such a wonderful thing. For instance, if you retire when markets are in the doldrums and your retirement savings are in the stock market, you could be in deep trouble.
An assessment by Who Owns Whom is that black control of the JSE is about 7%, which is as high as it ever climbed in BusinessMap’s reckoning in the mid-1990s.
In 2006 Empowerdex, defining control very narrowly as 50% plus, found that less than half a percent was controlled by black companies.
So perhaps the cynicism of our leading communist poet is justified, though I don’t know how he would suggest racial ownership of companies be changed.
Nationalisation of the biggest companies, followed by privatisation on racial lines, is one answer. Privatisation would have to follow nationalisation, because state ownership is not black ownership.
That would be a swift solution and far more orderly than the forced sale to black people of majority shares, as has been proposed in Zimbabwe, but it would have devastating short-term consequences.
Just as BEE shareholding can prove worthless sometimes, so too can wealth evaporate when trust is damaged. Trillions of rand of market capitalisation would vanish overnight.
Neither would it solve inequality because experience of mass privatisations in other countries — Russia is a prime example — is that it has simply created oligarchs.
Some new and creative thinking is necessary to bring about change of ownership without fatally damaging the entire system. The only alternative is scrapping the entire system, which is more Cronin’s territory than mine.