Taking Stock / A clever plan to save the economy
Trading turnovers in Tel Aviv have been shrinking like snowballs in hell. We have some ideas how to solve this terrible problem. First: Clearly the economy isn't concentrated enough.
Head for the hills!
No, it isn't that we have new information on the tensions with Iran or the true battlefield, the defense budget. No, there's another reason to take shelter and start worrying. According to the business press, trading turnovers on the Tel Aviv Stock Exchange have been vanishing.
The TASE is lagging behind other stock exchanges around the world. "Experts" frown that the sagging volumes attest to dismay among foreign investors over the economic reforms the government is planning.
We checked the figures.
It turns out that during the past year, stock prices of certain pyramidal business groups have tanked and trading volumes in shares of the big banks, insurance companies, investment firms, fertilizer producers, food manufacturers and telecom companies have significantly diminished. If until two or three years ago these stocks achieved beautiful returns for investors and pushed up the entire TASE, now they're a yoke around the market's neck, and on low trading volumes to boot.
We actually think these are encouraging developments, and we have a plan to help heal the Israeli capital market, restore some color to the pallid cheeks of traders, brokers, CEOs of the great monopolies and their lawyers.
First, we can ask the antitrust commissioner to jack up all fees in the market and at the banks, by say 50%, in doses of 10% per quarter. That will sharply boost income at the financial companies, which are responsible for much of the action in the capital market. It will also make market players feel a lot better. The higher income will be shared by the company owners and their executives, and if anything's left, some of the workers and shareholders might get some crumbs.
Since there is little competition in the financial sector, we could call this order a "finance tax" and quiet any rumblings among the public by pointing out that paying a little more in fees is a small price for restoring the joie de vivre to the financial sector, which as we all know, enormously affects the rest of the economy.
Second, we can ask the antitrust commissioner and the Finance Ministry's budgets director to stop trying to introduce competition to the monopolistic food and retail industries. No! Let them smile upon a merger between Strauss and Osem; let them allow Super-Sol to marry Blue Square and Rami Levi too; may they bless the union of Super-Pharm with Neopharm, Jaf-Ora with Coca-Cola Israel and so on.
The resultant companies will have even more clout in the market than they do now; they'll be able to raise prices as they please, pound the consumer into the ground and squash their suppliers like bugs. Their share prices will gallop ahead, and again, the color can return to the trading community's ashen faces.
In parallel with steps one and two, the chairman of the Israel Securities Authority could declare a month's hiatus for corporate governance. A month, or better yet a whole quarter, in which they can push insider transactions through without needing the approval of their boards, shareholders or anybody else. Freed from the shackles of having to justify the deals, the company owners can dump lousy privately-held assets into the companies, relieving their own financial stresses and bringing fresh blood into the system.
These are all small beer compared with the master plan: to increase economic concentration. The Bank of Israel and the Finance Ministry will allow insurance companies to merge with banks and private monopolies. The TA-100 index, most of whose companies belong to one of the big business groups, will be reorganized into five business groups, each having a bank, an insurance company, a brokerage, a retail chain, a telecommunications provider, an industrial monopoly and a high-tech company that's in a state of near-collapse.
To deal with the new organizational complexity, dozens of executive hubs will be formed. Each will have 30 senior vice-presidents earning $2 million to $3 million a year, before stock options, which will be priced by backdating (as is the norm ). Naturally the reform will be coordinated with the Audi importer because people of this caliber won't drive anything less than an Audi Q7. At a conservative estimate, the importer will have to double his imports.
To assure that the share prices of the pyramids and monopolies flourish, all the government's plans to stimulate high-tech, industry and education should be abandoned immediately. The billions saved should be given as grants to companies that prove they 1 ) operate only in Israel, 2 ) enjoy a monopoly, or nearly so, and 3 ) have more than three executive hubs.
According to our econometric model, doing all these things at once will boost these companies' share prices by at least 50% in the first 12 months, while executive bonuses will increase by 200%. The cost of living might rise a little, but that's a tolerable price to pay for the capital market's health.
In the second year of the plan, an acute counterreaction to the huge increase in leverage is likely, and production is likely to implode. But that's the stage when the government announces Haircut Month.
During Haircut Month, every concern owing more than NIS 10 billion will be allowed to write off half its debt to pension funds that bought its bonds. (They'll still have to pay private debt to rich investors in full. )
But will it fly?
But given that the public's attitude on economic reforms has been changing, it's possible that Israel's leaders will reject our clever plan. So there's no escaping the need for a deeper debate on the economy's weaknesses and how to cure them.
• Like most economies around the world, Israel should welcome foreign investors with open arms. Not because we lack foreign currency - on the contrary, we're glutted with it. No, we need foreign investors who provide expertise and marketing channels. Foreign investors who buy and sell shares of Israeli monopolies increase trading volumes on the TASE, which is a good thing, but their contribution to economic growth over the long run is negligible. Anybody measuring the capital market's health by trading turnovers in monopolies' shares is making a mistake.
• Trading turnovers in shares of monopolies and the profitability of financial institutions are very weak indicators of economic health. In fact, the correlation between financial institutions' profitability and economic health can be reverse. The bloating of the American financial system is considered one of the worst things to have happened to the American economy; it warped the allocation of resources, disrupted the labor market, widened inequality and impoverished households throughout the land.
• The wails of woe about Israel's feeble capital market aren't emanating from industry, high-tech or any of the businesses operating in competitive markets. Surprise! They're coming from bankers, monopolists and the heads of the business pyramids. The moaning is designed to distract us from true issues such as the Israeli capital market's contribution to smaller companies, high-tech and industry, or the fact that most of the money raised in the last decade went to about 10 great business groups.
• Why haven't we heard Gil Shwed from Check Point Software Technologies, Yossi Ackerman from Elbit Systems, Sami Segol from Keter, Zeevi Bregman from Nice Systems, Dita Bronicki from Ormat or Shlomo Yanai from Teva Pharmaceutical Industries griping about the TASE's low trading turnovers, or about efforts to dilute economic concentration? Maybe it's because they're preoccupied with building multinational companies with tens of thousands of employees that operate in competitive markets. Maybe they're just too busy to whimper.
• During the 1990s, the Israeli government spearheaded a number of reforms designed to dissolve economic concentration, introduce competition and encourage business activity. The business sector welcomed these reforms, and rightly so. But during the last 10 years, the economy has backslid toward concentration. It has developed an ugly Middle Eastern version of crony capitalism, and the government noticed this regression rather late. Now it's trying to halt the slide.
But the people who gained control of the pork barrels also control Israel's public discourse, and some have become sworn, if not stated, enemies of competition, reforms and growth. The only thing the public can do is be aware and study the issues. If that isn't done, some people might think the satirical essay at the start of this column is gospel truth.
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