'Israeli conservatism could save us'

The events unfolding on Wall Street are dramatic by any criteria. The collapse of Lehman Bros, one of the most venerable institutions on Wall Street, and the Bank of America's decision not to save it - and to buy Merrill Lynch instead, can't be taken likely here across the world, say analysts.

But the Israeli institutional penchant for conservatism may spare the locals much pain.

"What is happening is very dramatic and shouldn't be taken lightly," says Eyal Klein, International Markets Head Strategist at Tel Aviv's I.B.I. Investment House. "Lehman Brothers officially went belly-up after the Bank of America decided to [eschew buying it and to] buy Merrill Lynch instead."

The Bank of America had at first agreed with Lehman's marriage proposal but ultimately went with the prettier bride, he quips. But note that Merrill Lynch is in trouble, too, says Klein. At least its situation is apparently much better than Lehman's, thanks to the composition of its assets.

"It is hard to think of anything more dramatic than what is happening with Lehman," Klein puts things into proportion. On Sunday night the U.S. Federal Reserve said it would be using the tools at its disposal aggressively, to inject liquidity into the financial system.

"The Fed will be funneling more than $350 billion into the system. The move is likely to accelerate inflation in America, but most probably, a significant economic slowdown will counter much of the price increases," Klein says, and injects yet more proportion: "The American central bank does not have many choices, and these consist of bad and worse."

And over here? By nature Israeli banking is conservative, Klein says.

"Its exposure to the current financial crisis, although estimated in the hundreds of millions [of dollars], is ultimately relatively low compared to assets. They aren't heavily exposed to the subprime assets that triggered the current crisis," says Klein.

Klein isn't worried about Israel's financial strength. He's worried about the indirect impact of a possible global slowdown in the wake of the crisis. Foreign investment in Israel will in all probability slow down. Exports will drop.

"As a small, open economy we cannot be unaffected by what is happening around the world. 2009 will be a very dangerous year. The macro environment in Israel will probably be very different that what we have been used to in recent years," he says.

"Anyone who can be patient for years will find plenty in the stock market," concludes Klein.

"The financial companies may continue to suffer poor results, but in the end those that survive the crisis can be expected to bounce back strongly, which will pay off for patient investors."

Meanwhile, the financial crisis isn't over. Roy Laufer, head dealer at Excellence Nessuah, predicts that the snowball won't stop with Lehman's collapse of Bank of America's sudden purchase of Merrill Lynch.

When a bank like Lehman Bros goes bankrupt, it sets off a shockwave among the financial institutions that invested in its bonds, Laufer says.

Lehman's implosion is bad news but the acquisition of Merrill Lynch is good news, from the market's perspective, says Laufer.

Both were a shock to the marketplace but it shows that players are distinguishing between good assets and bad ones, he says.

Meanwhile, the liquidity crunch continues to hover - but the Bank of America's move is a heartening one. Now the markets have to digest the news, he says.