Bawag - problems of Private Equity or Hedge Fund Control

The diffuse ownership structure of the Austrian BAWAG Bank - where an alternative fund management firm has orchestrated a buy-out consortium a few years ago - is an apt illustration of the problems created by allowing alternative asset managers to control banking institutions. Apart from the fact that the financing often is debt-heavy there is the potential risk that conflicts of interest are not controlled properly. The age-old temptation of using a banking institution to supply credit on easy terms to controlling shareholders is one of the key areas that banking regulators have to focus on. There is also a potential conflict of interest when other banks (Goldman Sachs, Lehman Brothers in this case) are shareholders in competing institutions.