Einat Wilf: Economic concentration is out of control
Dismantle the giant conglomerates, she tells interministerial committee on business competition.
She said it loud and clear. "Economic concentration is out of control," stated MK Einat Wilf (Atzmaut ). "A small number of groups and families control an entire economy without proper supervision or balance of their actions."
Wilf, who left Labor to join the party's former chairman, Defense Minister Ehud Barak, in his new party, made the claim in a position paper she submitted to the interministerial panel appointed to examine economic concentration and competition in Israel. "Most of these groups use the nation's wealth to serve their private interests, while the private capital of the group members is protected," Wilf wrote.
Economic concentration, Wilf claimed, has ramifications for a great many areas: It accelerates inflation, reduces private retirement savings and heightens systemic risk - the likelihood that the entire economy will collapse. The high prices charged by monopolies aggravates poverty, as does the artificial suppression of the minimum wage, she continued. Overall, competition is depressed.
The issue also spills into politics and the public debate, Wilf argued: Media outlets are owned by powerful people who do not hesitate to wield that power as they see fit.
On May 12 members of the committee met with Wilf and with representatives from Shari Arison's business group, the Movement for Quality Government in Israel and the Israel Consumer Council.
Nili Even-Hen, an attorney from the Movement for Quality Government, said that the big business pyramids - chains of companies with a holding company at the top that owns controlling interests in other companies that own controlling interests in yet other companies - work against the greater public good. According to her, the individuals and organizations who are charged with protecting the public, from the regulators to elected officials to the credit rating agencies, have fallen down on the job.
As majority shareholders the tycoons control more than a trillion shekels of public money, Even-Hen said, noting that Israeli law has no remedy for the problems resulting from the structural flaws in the economy.
There is no choice but to dismantle the pyramids, to prohibit an individual or a group from owning both industrial concerns and financial institutions, Even-Hen concluded. It's one or the other.
Ambitious goal: Make Israel better
The economic concentration committee was created in October by Prime Minister Benjamin Netanyahu and Finance Minister Yuval Steinitz. It is headed by the Director General of the Prime Minister's Office, Eyal Gabbai, and the Director General of the Finance Ministry, Haim Shani. Among its members are the head of the National Economic Council, Eugene Kandel, and the supervisor of banks, David Zaken.
The panel's goals are ambitious. The main ones are to better protect the public's financial assets and the money placed by investors in publicly traded companies as well as insuring the stability of the banking and financial systems, while increasing competition and efficiency in the economy.
Among the many issues on the committee's agenda is cross-holdings, that is, companies that own shares in other companies. Of particular concern is the implication of cross-holdings by companies in different areas, such as when a large manufacturing conglomerate and a big financial institution own stakes in each other.
Last year Wilf submitted to the Knesset a private member's bill aimed at curbing economic concentration. Among the reforms she recommended in her position paper were severing ties between finance companies and other types of companies, devolving control over banks and insurance companies to the public, instituting effective supervisory guidelines for financial institutions, abolishing tax breaks for pyramid companies and gradually dismantling them.
Wilf, who has a doctorate in political science from Cambridge University, as well as an M.B.A., believes that sector-based regulators (such as the supervisor of banks ) should not have veto powers, that controlling shareholders should not hold such large chunks of publicly traded companies (in other words, that the public float should increase ) and that the interdependence between media groups and big business should be reduced, as should ties between big business and regulators.
She used the IDB group as a model to demonstrate her arguments.
IDB in the crosshairs
IDB is one of the groups that accrued power by unkosher means, Wilf claimed. As the English-language website of group member Elron states, "IDB group's business interests encompass a broad cross-section of Israel's economy, including insurance and the capital markets, communications, technology, industry, real estate development, retail, trade and tourism." In short, a pyramid business.
Wilf's position paper describes how the group's main controlling shareholder, Nochi Dankner, controls dozens of publicly traded companies worth NIS 140 billion. The group has high leverage levels, which means it borrows heavily. It has numerous cross-holdings between its financial institutions and its other companies, and has a host of former regulators and government officials on its payroll.
Most of the companies making up the tangle of interlocking firms of IDB borrow heavily from the public (through bonds ) and from the banks.
In fact, it's the public's money that finances IDB's operations. When a bank extends a loan, it's lending out money deposited in the bank by the public. When provident funds or pension funds or insurance companies lend money to the groups, they too are tapping into money that the public deposited with them.
The great business pyramids soak up an enormous proportion of the credit available in Israel. The Bank of Israel found that in 2009, just six business groups were using 40% of total nonbank credit (bonds ) and 25% of all bank credit.
IDB's leverage ratios (debt-to-equity ratio ) are 60% to 70%, says credit rating agency S&P Maalot. The Israel Corporation, another business pyramid, featured a much lower leverage ratio of 35% at the end of the third quarter of 2010.
According to IDB's own financial statements, it owes NIS 17 billion to banks and an addition NIS 31.5 billion to other financial institutions another.
The Bank of Israel gives the total amount of credit at the end of 2010 at NIS 765 billion. IDB, therefore, has soaked up 6.2% of all credit extended in Israel.
Empire worth NIS 140 billion
Dankner has been buying control over companies using borrowed money from day one, said Wilf: That's his modus operandi. In 1999 he sold his holding in Dankner Investments and created Ganden Holdings, a private company. Ganden borrowed heavily to buy into real estate companies, bloating its balance sheet to $300 million.
Despite Ganden's already high leverage, in 2003 Dankner decided to buy the controlling interest in IDB Holding Corporation - the company at the top of the pyramid. To do so, he took out three more loans through Ganden: from the Mivtachim pension fund, Azorim Properties and businessman Ilan Ben-Dov, today the controlling shareholder of Partner Communications.
Dankner has partners in IDB: the Livnat and Manor families, who jointly own 27% of the group; and his sister Shelly Dankner, who owns 4%. But Dankner is the key figure and the man who manages the assets.
Dankner is believed to have invested from NIS 75 million to NIS 150 million of his own money, Wilf noted, pointing out that Mivtachim lent him money through Ganden when no other financial institution was willing to do so. The Mivtachim board of directors was expanded in preparation for the loan's approval, Wilf explained: MK Amir Peretz, who at the time was chairman of the Histadrut labor federation, appointed additional board members.
Mivtachim's then-chairman, Shmuel Avital, was later named chairman of the Maxima Fund, an IDB subsidiary.
The group's pyramidal structure gives Dankner control of more than 40 big companies with a relatively small investment of capital, Wilf wrote.
As of year-end 2010, the consolidated balance sheet of the IDB group exceeded NIS 140 billion. In addition, Clal Finance manages NIS 27 billion in assets. Neither figure includes the assets managed abroad by the Titanium investment firm.
What all this means is that Dankner achieved control over a vast swath of the economy while risking the equivalent of about 1% of that consolidated balance sheet (NIS 75 million to NIS 150 million ) of his own money.
Wilf backed up her claim about IDB's propensity for hiring former regulators and other government officials with examples: Arie Mientkavich, former Israel Securities Authority chairman (IDB Holding vice-chairman ); Eyal Solganik, former ISA chief auditor (IDB chief financial officer ) ; Shy Talmon, former Finance Ministry accountant general (CEO of Clal Insurance ); Yoni Kaplan, former tax commissioner (Clal Biotechnology board member ); Yitzhak Klein, former manager of national insurance company Inbal (high position at Clal Insurance ); and Gabi Picker, director and a personal friend of Netanyahu.
Former cabinet ministers Danny Naveh and Roni Milo, and former chief of staff Dan Halutz, are also on Dankner's payroll.