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Finally they can smile again at Bank Hapoalim. The uncertainty is over. The pain is bad but yesterday the bank sold its portfolio of mortgage-based securities, which had caused such onerous losses, to Pacific Investment Management Co. (Pimco) - manager of the world's largest bond fund - for $2.55 billion.

Hapoalim's loss on the securities is $870 million in pretax terms, a figure that drops to $550 million after tax. Altogether Bank Hapoalim has lost about $1.3 billion on its adventures in the U.S. market for loans to homebuyers of dubious creditworthiness, reducing the value of the portfolio sold yesterday to a mere $3.42 billion. The deal was brokered by Deutsche Bank.

Bank Hapoalim originally estimated that it would lose about $160 million on the sale.

Bank Hapoalim is also expanding its voluntary retirement program by 300 more workers, beyond the 300 who already have signed up, which will increase the program's costs by about NIS 300 million. Following the sale of the portfolio and the cost on retirement provisioning, the bank is looking at a sea of red ink in the first quarter of 2008.

How deep? Analysts think as much as NIS 1.3 billion. But Bank Hapoalim itself thinks it can achieve more than a billion shekels in profit for the year. Even so, the first-quarter loss will depress its capital adequacy ratio to about 10.1%, and Hapoalim's return on equity will sink to the range of 7% to 10%, well below its level last year.

Investors applauded as the uncertainty was dispelled. Hapoalim stock shot up by 5.4% on the Tel Aviv Stock Exchange, on huge turnover of NIS 450 million. On the eve of the subprime meltdown, Hapoalim's share price was NIS 22, representing a market capitalization of NIS 28.4 billion. In March 2008 the stock sank to a three-year low of NIS 12.40, reflecting a market value of NIS 15.6 billion. Hapoalim's share price rallied 30% since then, on anticipation that it would dump its pesky portfolio.

Chairman Danny Dankner and CEO Zvi Ziv had taken the brunt of criticism over Hapoalim's subprime adventures, which far surpassed the exposure of any other Israeli bank. Yesterday the twain issued a letter to the bank's staff, explaining the sale and the bank's ensuing losses. They claim that the bank's approach had been "conservative" but that the crisis in the U.S. property market had spiraled to unforeseen lows. Thus it, like many banks around the world, found itself buffeted in the eye of a storm.

With the portfolio gone, Hapoalim can move on, investing in new profitable avenues, they explained. "In 2002 the bank wrote off more than NIS 3 billion in a single quarter after credit losses in the local market," they wrote. "But we moved on, developed, expanded and improved, and shortly restored high profitability. We know this will happen again."

The beauties and the beasts

The portfolio Pimco is buying had 220 types of securities. Bank Hapoalim received an average of 74 cents for each dollar it had invested, but there were vast differences between the types of securities. On some the bank got only 40 cents per dollar, and on some it got as much as $1.04. The deal was done in cash.

Who hasn't paid a price? When publishing its 2007 financial statement, Bank Hapoalim said it was extending CEO Ziv's contract. In fact, no senior manager lost his job over the fiasco.

"The market wants a head," said a leader in the financial scene yesterday.

"But if you look around the world, you see there weren't a lot of personnel changes. The big banks fired maybe four or five CEOs, but those were at banks that wrote off 70% to 80% of their equity."

It is true, also, that the chairman and CEO didn't leave, but Jacob Rozen, Shy Talmon, Zvi Furman and the legendary Shlomo Nehama did. And a lesson has been learned: The bank can't afford great uncertainty.

It can't hold a major portfolio of uncertain future. The bank also realized that the market wouldn't tolerate more writeoffs, and understood that it could have hung on to the portfolio and perhaps cut its losses. But it couldn't afford that luxury.