Make no mistake. Debt arrangements are the stuff of life in the financial system. And there's no question that the global financial meltdown and associated credit crunch are a good reason for companies to reach new arrangements regarding their debt, whether through the banks or the capital market.
Debt arrangements are inevitable as long as business continues to rely on borrowing, and as long as economies behave cyclically, riding high, falling low and round and around again. That is the entire meaning of "risk management."
But when a new arrangement is reached regarding debt, it matters not only what is done, but how.
There have been any number of suggestions for how to "rescue" or "bail out" the tycoons in recent months. But a flaw lurks in the very definition of the problem.
The mission of the new government, announced this week, isn't to "rescue" or "bail out" the tycoons. It's to help the Israeli economy develop and advance, to protect savers, to encourage competition and to buttress the stability of the financial institutions.
What happened in recent months? As the crisis spread from the world of finance to that of manufacturing and consumption, companies, whether owned by "the tycoons" or ordinary businessmen, are struggling. They need to repay debts incurred by issuing bonds to the public.
A bond is a loan agreement, if you will. You agree to lend a certain sum for a preset period of time to a certain borrower in exchange for a certain interest rate. And if the borrower can't repay in time, what then? That is what's happening now: these companies are admitting that they can't repay in full, on time.
Moreover, because credit is so tight these days, they can't take out fresh loans to repay the old ones. (That is how these companies did business in the normal course of things - they regularly recycled debt.)
Hence the initiatives to "rescue the tycoons," some of which were marketed as "dealing with unemployment."
Who are we to teach the tycoons and their envoys how to negotiate. They've already forgotten more about handling negotiations than we'll ever learn. But we do know one thing. If one side feels he won and the other feels he lost, it's not a good deal.
The deal that Israel Securities Authority chief Zohar Goshen proposes, and the tycoons' ideas, are bad deals for savers and taxpayers. They don't compensate us adequately for agreeing to wait to get our money back, thereby saving their companies. They don't want us as partners in the companies, even though we hold the key to rescuing them. We're just a pocket to pick, for money to rescue businessmen who hared after madcap schemes, and failed.
But we must be practical. Sure, we'll help. These are the terms that the institutionals managing our money must insist upon.
Before any debt arrangement, the borrower must use all his assets to repay debt. All his businesses and assets, including private ones, must be open to scrutiny. If he still can't repay all his debt, a mechanism will be instituted to give lenders a stake in the company (and its survival). The company must slash executive pay to acceptable levels, and can't pay dividends until all debt is repaid.
And that is the plan that will make the man in the street financing the arrangement feel that he made a good deal.
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