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Dov Gilboa broke the bankers' silence.

For a month, Tel Aviv's financial circles have been wondering how the bankers could remain so resolutely mum even though the Yossi Bachar team is about to deliver its recommendations regarding the separation of the banks from their provident and mutual funds.

Where were their lobbyists? Where were the fulminating interviews with the press? Where were the threats, the campaigns?

Apparently the bankers borrowed a practice from law and decided to see the evidence against them, as it were, or the charges, as they were, before revealing their defense.

They wanted to see what the Bachar team would recommend before resisting. And believe you me, when the recommendations are delivered, they will come out firing all their guns.

Yet something cracked, and the banks exposed a sliver of their line of defense in an article that Dov Gilboa, a top VP at Bank Leumi who is responsible for its investments division, wrote for Haaretz, which ran on June 7. The thrust of his claim against divorcing the banks from the funds was that it would hurt the customers.

We believe his article deserves further attention.

Comparing corruption

Gilboa begins by saying that for all the arguing, the view of the funds' investors had not been sought.

That is not accurate. During the last year, bank clerks heard quite a lot from their clients, who were appalled by the low returns of the banks' provident and training funds, and tried to withdraw their money, after garnering the courage to confront their banker - often a difficult thing to do.

And they found it wasn't a simple matter at all. Often enough, the bank employed substantial pressure, and threats, including hinting that transfering their money to private brokerages could be dangerous.

Gilboa warns that foreign investment banks are inappropriate new owners for Israeli provident funds and mutuals because of their conflicts of interest, a point he proves by noting the financial scandals hat have rocked Wall St. over the last two years.

He is right: the American capital market is no less corrupt than the Israeli one. But he misleads.

Most of the great financial scandals on Wall St. were related to the sell-side investment banks and analysts - institutions and people whose job was to market securities.

On the other hand, buy-side companies, which manage other people's money, the ones that are supposed to maximize gains for investors, were far less involved in the scandals. Leaving aside the affair of trade in mutuals after closing, which was trivial, most of the major U.S. asset management companies were not spattered by the muck.

The duty to invest sensibly

Gilboa warns that foreign management bodies could export billions from Israel, hurting the economy. "By nature, they would operate mainly overseas, and would export tremendous sums of money that Israel needs for its development," he writes.

First of all, the Bank of Israel spent the last decade liberalizing the capital market not in order to hamper economic development but on the contrary. Experience worldwide shows that opening the markets leads to more efficient resource allocation, while also encouraging foreign investment.

Second, the sheer peculiarity of Gilboa's position may well attest to the banks' patronizing attitude. He must know that the manager of a provident fund or mutual fund owes loyalty solely to his depositors. If the right thing is to invest in foreign markets, then that is what the manager should do.

Is Gilboa hinting that the banks' provident and mutual funds invest most of their money in Israel for nationalistic reasons? Not only would that be devoid of economic sense, but it would also violate their basic duty to customers.

What's good for the gander

Gilboa warns that the foreign bodies would not be regulated by Israel. Should we understand that Bank Leumi trusts the Bank of Israel's Supervisor of Banks and the treasury's capital market commissioner more than the regulatory bodies of the U.S., England or Switzerland?

If so, why does Leumi itself deposit billions of dollars in foreign banks? Is what's good for Leumi not good for its customers? Why do all of Israel's fattest cats, including some of Bank Leumi's wiliest customers, hold billions in Switzerland, New York and London? Apparently because they feel supervision there is just as good as here, to put it mildly.

Gilboa warns against handing the money to private brokers, and mentions how stable the banks are compared with the potential rickets of smaller companies. Not accurate: one could assure that the money stays at the banks while the management stays with the brokers. That's how most of Israel's portfolio management industry is conducted.

Gilboa praises the Chinese walls separating the banks from their provident and mutual funds and mentions the outsider directors. He can't be serious!

These directors would never stand in opposition to the banks. That can be proved: no director at any bank's provident or mutual fund has ever asked why the surplus money of the funds gets deposited solely at the parent bank. The funds should hold daily tenders instead and deposit the money at the winner.

He warns that the provident and mutual funds should not be given to the tender care of the insurance companies, which are rife with conflicts of interests and are relatively non-transparent. He is right that the insurance companies is a bad solution; that of the foreign bodies is a far better one. He also forgot to mention that the insurance companies, or their controling shareholders, are associated with, or dependent on, the banks.

But even if the insurance companies is a bad solution, they're certainly a better one than perpetuating the current situation, in which two banks (Hapoalim and Leumi) control two-thirds of Israel's financial resources.

But the real problem with Gilboa's article is that it doesn't discuss Israel's real economic problem - the banks' total domination of the financial system and the absence of a financial system outside of them, two facts that combine to strangle the marketplace.