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Bank Hapoalim's exposure to the floundering investment bank Lehman Brothers totals about $109 million, the bank announced yesterday. Bank Leumi chose not to disclose its own risk, but it is estimated at $90-$95 million. Israel's central bank has a relatively small exposure of about $4 million to Lehman Brothers' woes, hedging the bank's foreign currency reserves.

Leumi's and Hapoalim's exposure is apparently the largest in the Israeli banking system.

Bank Hapoalim reported it is directly exposed through a $44 million direct in Lehman Brothers corporate bonds with a maturity date of between 2009 and 2010, around $50 million in credit derivatives hedged against the debt of a group of banks, including Lehman, which are due to expire in 2009 and 2011, and another $40 million from the issue of Credit Default Swaps, a type of derivative.

Credit Default Swaps (CDSs) are used to manage credit risk. A CDS buyer in effect buys insurance from the seller - usually a financial company - against the event of credit default, in exchange for premiums paid to the seller.

It is not very different from car insurance, for instance, where the insurance seller undertakes to indemnify the buyer in the event of an accident or damage to the vehicle, in exchange for premiums. But unlike car insurance, CDSs have no underlying real asset, but an assurance by the issuer who undertakes the debt.

Bank Hapoalim, the issuer, sold insurance based on Lehman Brother bonds. The insurance buyer, whose identity is unknown, paid the bank premiums for this insurance - and with Lehman's collapse, Bank Hapoalim will accept Lehman's debt to the buyer. Bank Hapoalim's report reveals that the derivatives were due to expire in just five days - and had the default occurred five days later, Hapoalim would not have faced with indemnifying the buyer to the tune of $40 million.

On the other hand, Bank Hapoalim has also bought $25 million in CDSs against Lehman Brothers debt, so that it racked up an exposure of only about $15 million when it sold CDSs. Add to this its direct exposure through corporate bond and through credit derivatives hedging the debts of the group of banks, and Hapoalim's total exposure totals $109 million.

Leumi's and Hapoalim's exposure to the fate of Lehman Brothers, to the tune of $95 million and $109 million accordingly, doesn't necessarily mean that the banks will have to write off these amounts. The figures represent the banks' maximum losses, since at this stage it remains unclear how much bond holders will be able to recover after Lehman's collapse.

Other than the local banking sector, with a total exposure estimated at about $300 million, there are Israeli brokerages, which have yet to reveal the depths of their risk since they have not been required to do so by the supervisor of capital markets, Yadin Antebi.

The number of public financial instruments exposed to Lehman Brothers' woes is very limited, and appears to be limited to a range of bonds and foreign currency products issued by Excellence, and Meitav's Fix Dollar and Fix Euro products.

Nevertheless, some of the products sold by Lehman Brothers in Israel were marketed to investors privately. According to estimates, hundreds of such products were tailored to meet the various needs of customers - institutional investors, so that the hidden risk could be great.

The Bank of Israel announced that it does not have direct holdings in Lehman Brothers securities. The central bank is legally allowed to maintain only government securities and commercial deposits. But unfinished transactions brokered by Lehman Brothers could cost the central bank some $4 million if U.S. government bond deals are not completed.

Late last week, insurance companies and investment houses were busy assessing the risk posed by Lehman's collapse. To date, institutional investor risk has been found to be relatively low, totaling several million dollars at Harel, Menorah, Mivtachim and Clal, and about $10 million in the large provident funds Gadish and Psagot.

Some institutional investors are also exposed to Lehman Brothers through their investments in mutual funds.

Also at risk are some $60 million invested by Mivtachim, the veteran pension fund operating under a fund member's management arrangement, an unusual high exposure in comparison to other institutional investors, and the Israel Electric Corporation workers' NIS 15 billion pension fund managed by Clal Insurance, with an exposure of NIS 200 million, TheMarker has learned. Clal says its other long-term savings products are managed separately from the IEC workers' pension fund, and are not substantially at risk.

Employees at Lehman Brothers Israel, a subsidiary of the collapsed international investment bank, convened yesterday in the company's office on Ha'arba'a Street in Tel Aviv, expecting to learn something of their own fate after the collapse of their parent company.

But Leonard Rozen, the CEO of Lehman Brothers Israel, told workers that he was still waiting for news from abroad.

Workers are experiencing a great deal of uncertainty at the moment. Lehman Israel hopes that in spite of the bank's collapse, Lehman Brothers Investment, which operates the subsidiaries involved in international investments, will be sold. If this happens, workers may just be able to keep their jobs.