This cross-ownership dilemma is a simple case to demonstrate how a small group can take over large sectors of economy without having any own capital.
Consider two companies with shares. Both companies are owned by small shareholders and both have a board. The chairman of the board of company A suggests buying 51% of the shares of company B and paying them with shares of company A. As a result, A owns 51% of B, and B owns 51% of A. Who controls these companies? Naturally, it is the two chairmen of the board. The shareholders have in each company only 49%. They cannot even change the chairman of either company. The chairmen do not need any capital for total control of these companies.
How can this situation appear? It can appear by just one crooked person being elected as the chairman of the board. He needs to succeed only once: in convincing the board to buy 51% of a company and to pay it with its own shares. But of course it can be so that the purchase is paid with a loan from a bank headed by a friend of this crooked person. The following steps are easy. After gaining 51% of the company, the crooked person replaces the chairman of the board in the purchased company. Together these companies buy 51% of a third company. Now they need to cross-own each other only by 25.5%. By gaining control over more companies, cross-owner shares in each company do not look alarming at all, yet everything is in control of a small group of friends. Shareholders have no power.
How can this be avoided? In the old times it might have been possible for the state to forbid cross-ownerships of this type, but today states have privatized their activities to companies with shares. The state is a major shareholder in these companies, thus the state hardly can forbid an organization from owning a share in another organization and using the power of the owner.
Indeed, the state, with its deep pockets of taxpayers’ money, can be used to gain control over the economy. It is only needed that the state is in control of the group. This can be accomplished easily in a democracy, where elections cannot be won by a candidate, who does not have the support of campaign financiers and media. Assuming that the state is in the hands of the group, they can gain control over a private bank rather easily. First they have to get the CEO of the bank to make bid losses. That is usually easy. Then the state has to cover the losses, which makes the state a major shareholder of the bank. Who loses the control are the actual shareholders of the bank.
If is very good to take over banks, because with bank money and loans from the bank it is easy to take over the rest of the economy.
That was a simple take-over trick. It does not need super brains to invent it. How to solve this dilemma? There always is a solution to these take-over tricks. In this case it is quite simple.
If a group B of organizations hold shares of organization A and the organization A holds shares of the group B, then the amount of these shares that have equal value must first be subtracted before counting the values of shares in the board meeting of A. Thus, in the first example, though the representative of company B (the chairman of the board of B) has 51% of shares of A, these shares will not have any vote in the board meeting of A because A holds 51% of shares of B and these cancel the voting power of the shares of the representative of B. However, if the state has bailed off a bank from its loans and obtained 51% of the bank shares, these do have the decisive vote in the board meeting of the bank as the bank does not hold shares in the state.
This solution leaves out other ways of power than shares. It is indeed quite possible that the bank has much control over the state. For instance, in the USA the central bank is owned by private banks and it has much power over the state. This problem deserves a separate treatment, which will not be done in this post.