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Not a few capital market animals in Tel Aviv raised eyebrows this week when the learned that in March 2008, when Bank Hapoalim was forced to sell its portfolio of mortgage-based derivatives at a huge loss, it chose to do the multi-billion dollar deal not through a major investment firm but through a bitty brokerage called ISP Financial Services.

ISP, located in Zurich, is owned by two Israelis, Itay Strum and Roy Tal.

Hapoalim was the only Israeli bank to leap into the market of high-risk mortgage-based derivatives.

To recap, in 2007 and 2008 Bank Hapoalim bought a large amount of American bonds backed by mortgages taken out by American citizens. It was investing its own money, not that of clients. However, the volume of transactions was enormous, even in the terms of a big Israeli bank: Hapoalim invested $3.7 billion in these instruments.

Other Israeli banks also dabbled in mortgage-based securities, but none of the others leaped into the pool with anything like that magnitude.

Toward the end of 2007 and during the first quarter of 2008, the skies above the American real estate market began to blacken. The value of these securities began to fall hard. At the time, Hapoalim issued statements admitting to ever-growing losses on its portfolio of mortgage-based instruments.

When its loss exceeded $1 billion, the Bank of Israel became involved. As regulator of Israel's banks and the watchdog responsible for ensuring their stability, the Bank of Israel demanded explanations, and ordered Hapoalim to lock in more capital to cover its risks.

Come March 2008, the central bank began to lean on Hapoalim, which decided to sell the rest of its portfolio - more than $3 billion worth of the securities.

After several in-house discussions, Bank Hapoalim indeed sold the portfolio in the international market. It received about 75 cents per dollar on its initial investment.

In retrospect, Hapoalim did well to flee the portfolio, even though it had to lock in a heavy loss. If it had waited, it could have lost another billion dollars.

Selling piece by piece

The portfolio sale process was unusual. After it was decided to sell the whole portfolio, Bank Hapoalim contacted several bodies, mainly investment banks, and asked them to name a price for the deal. Some of the major global players responded, as did a small unknown company called ISP Financial, which had never worked with Hapoalim before.

Itay Strum, ISP's manager and one of its controlling shareholders, asked for and received a meeting with Hapoalim's officer in charge of selling the portfolio, Uri Levine. Hapoalim agreed to let ISP try to sell the $3.5 billion in mortgage-backed securities.

TheMarker has leaned that ISP's brokers began contacting various bodies, offering bits of it to different investors. In parallel, other bodies were trying to sell the portfolio as a whole.

The ISP brokers' method helped obtain a relatively attractive price for the portfolio at the time. ISP contacted a small European bank, which contacted Deutsche Bank to submit a bid for the portfolio. No less importantly, Deutsche Bank was to serve as the clearer of the deal - the body that would handle the money transfer.

A brokerage isn't a bank, and therefore, it can't clear a bond deal worth billions of dollars. Deutsche Bank ultimately brought in the final buyer: Pimco, the biggest management company in the world for mutual funds and bond portfolios. Pimco is managed by "bonds guru" Bill Gross.

Pimco, it turns out, had previously offered a preliminary bid for the Hapoalim portfolio. But it improved its offer after Deutsche Bank became involved, and after learning that other potential buyers were sniffing at the portfolio.

Capital market players who learned of these events were surprised by Hapoalim's decision to involve a small, anonymous brokerage in a deal of this magnitude. Market sources estimate that ISP's two Israeli brokers received fees between $2 million and $3 million from the various bodies involved.

"There's no reason to suspect alien interests, but at the end of the day the one that pushed through the deal and brought the buyer was Deutsche Bank, a large, known body," observed a local investment banker. "Couldn't Bank Hapoalim have contacted Deutsche Bank directly? Did Hapoalim really have to involve a small European bank and this unknown brokerage? In my opinion, at the least, the decision-making process was wrong."

The cheaper alternative

Hapoalim confirmed the main details, but refused to comment on the players' claims.

"The bank made a hard decision, at its own initiative, to sell the entire portfolio of U.S. mortgage-backed securities in May 2008," Hapoalim stated.

There had been a narrow window of opportunity: for a short time liquidity was created in the global market for mortgage-backed securities, which enabled it to sell at a proper price, the bank said.

"The bank's decision prevented far greater losses, since from that point, the value of the portfolio has fallen sharply." It's now worth $1 billion less than the price the bank got, Hapoalim said.

"The sale was carried out in the optimal way, and the price the bank received was considered excellent at the time. Before selling the portfolio, the bank contacted, among others, leading investment banks in the world (including Goldman Sachs and JPMorgan), and directly contacted big investment bodies. It ultimately did the deal with Pimco through Deutsche Bank, with the help of ISP Financial," the bank went on.

"Closing the deal the way it was done was significantly cheaper than any other alternative. This deal was preferable in terms of price and other transaction terms, compared with any other offer the bank received from other bodies."

ISP Financial manages investment portfolios for wealthy families and brokers deals in bonds and credit derivatives, including mortgage-backed securities. The company also advises several leading institutional investors in Israel.

ISP and its managers declined to comment for this report.