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Five days before the privatization of Israel Discount Bank, the deal may have run aground. Daniel Strauss's group, one of the two bidders, announced yesterday that it is withdrawing from the tender due to what it calls "violation of understandings with the supervisor of banks".

The group is comprised of Daniel Strauss and two large financial institutionals - investment funds Silver Point and Angelo, Gordon.

According to sources in the Strauss group, the agreements would have allowed the foreign funds to hold 49.9 percent of the controlling stake in the bank. However, deputy supervisor of banks Avi Eckstein told them yesterday that the percentage cannot be higher than 25 percent. The restructuring this would require in the group's bid would require Strauss to invest hundreds of millions of shekels more in the bank.

The group's withdrawal could mean the cancellation of the tender, since having just one bidder - Matthew Bronfman and his partner Robin Shruhan - might make it impossible for the state to get a decent price. This would be the second failure for the Discount tender, which was also canceled in 2000.

A Strauss representative confirmed yesterday that "in light of the zigzagging and changes in the rules of the game, we have informed the supervisor of banks and MI Holdings of our withdrawal. We had already invested millions of dollars based on understandings that the funds could acquire 49.9 percent of the controlling stake."

Sources said yesterday that the group is considering its legal options, as it believes decisions were taken in bad faith. Sources in the banking sector said yesterday that institutional investors were clearly never going to be allowed larger than 25 percent holdings, as the state has an interest in tycoons putting new equity into the bank rather than institutionals investing assets under management. The state believes that those investing their own funds would be more motivated to succeed than entities that invest other people's savings.

The Bank of Israel and MI Holdings are slated to hold an urgent meeting today to decide if the tender can continue. Bank of Israel Governor David Klein is expected to take a personal role in the issue.