Taking Stock / Somebody has to be right
An interesting little spat broke out in the op-ed section of TheMarker this week, between bankers and Amos Sapir, the chairman of Maalot, the Israel Securities Rating Company.
Credit officers at the banks told Haaretz's op-eds editor, Meirav Arlosoroff, that a dangerous bubble is developing in the bonds market. Institutional investors - provident funds, insurance companies and pension funds - that manage billions of the public's money are lending tens of billions of shekels to corporation and entrepreneurs at inflated prices, assisted by the approval stamps of the rating companies Maalot and Midroog.
Sapir, chairman of Maalot, which belongs (among others) to the banks, shot back. The banks are sweating blood, he said; the capital markets are opening up, their monopolies on extending credit are being shattered and remember, he added, their embarrassing credit records from the bubble days.
Bemused readers, businessmen and savers alike, are wondering: Who's right? The bankers' warnings or Sapir? Both were given a lot of space.
Once upon a time there was an unhappy couple. The husband went to the rabbi and poured forth his woes. "You're right," the rabbi said. The next day the irked wife showed up and delivered her version of events. "You're right," the rabbi said.
The next day, sorely puzzled, they sent their oldest son to the rabbi. "On Monday you said Dad was right and on Tuesday you said Mama was right," the son complained. "You're right, too," the rabbi said.
The bankers are right
The bankers are right that institutional investors managing our money are not properly pricing the risks of the companies and entrepreneurs issuing bonds, billions worth of bonds.
The institutionals generally think in the short-term. They care what an investment will do to their returns in the near-term quarters, how the securities they buy will behave in the short-term (in the case of a registered bond) or how they'll record the bond in their portfolios (in the case of bonds not registered for trade).
The bankers are right that many of the institutionals sport dreadfully young investment managers with little experience in credit, who have never personally experienced crashes and bankruptcies.
But Sapir is right that the bankers are simply under pressure. They had become accustomed to a convenient world in which they controlled all credit, keeping the business sector crushed under their boot. They hate to see power moving to new players.
He is also right when he mentions their dreadful mistakes of yore, when they got carried away in the bubble days and lavished credit on every Tom, dreck and Yossi.
But the issue is not the banks' past sins, or the present mistakes of the institutional investors. The question is the long-term trend in the capital market and there is no mistake: The direction is the right one.
Way to go
Diversified, efficient and competitive capital markets are better at resource allocation than banks are. Almost all the major financial meltdowns involved the banking systems, not institutionals. The best example is the latest crash on Wall Street. The U.S. economy, corporate America and most savers in these markets have recovered impressively. Why? Because the retail banks did not get bogged down in financing the business sector and the tech bubble. The American capital market acknowledged the new reality immediately, wrote off what it had to write off - mark to market, as they say, cleaned the stable and moved on.
Three years ago, Israel was in the throes of economic trouble that threatened to turn into full-blown financial meltdown, because the banks were the only source of credit, and the longer the trouble in the business sector persisted, the more imperiled the banks became. When a company collapses, its workers and suppliers suffer, but that's all. When a bank implodes, it can send ripples throughout the economy.
The bankers should learn the lessons of America and Israel. They should stop moaning about the growing competition over credit and focus on their own, on granting short-term financing, and in distributing financial instruments. Institutional investors for their part should hone their investment and analysis departments, and think beyond their returns one quarter down the line.
But the most important thing of all is what the regulator will do. What the regulator should do is more reforms, making the capital market completely flexible, and allowing savers to freely move money from one investment sector to another. At the end of the day, experienced bankers or daring institutionals won't help us. What we need is a market with proper disclosure, a market with flexibility in money movements and enforcement agencies that give savers and investors the tools to punish and reward the people who manage other people's money.