The price of financial leveraging
It is unacceptable for the wealthy not to pay back their debts while continuing to live at the same exorbitant standard with the same huge salaries.
Last week was a tough one for Israel's wealthiest people. Their stocks plunged by dozens of percentage points, wiping out billions of shekels in value. Bonds also dropped sharply, their yields reaching 10 percent - junk status.
This means that the public expects that some of these owners of big companies will not be able to pay back their debts; bondholders will have to "take a haircut." That is, the owners will pay back only part of the debt. As a result, the banking system is very concerned about loans given by banks to big business.
The fall of the stock market has also meant losses to the public, indirectly in stocks and bonds that big business has sold to pension funds, provident funds and executive insurance funds. That is, no one has come out of this unscathed.
This comes on top of the global crisis that began in the United States when its credit rating was reduced a week ago, and Europe's debt crisis that began in Greece and has spread to Italy and even France. It's a crazy roller coaster characterized by fear and uncertainty about where the world is headed.
But the crisis that Israel's wealthiest business people are experiencing doesn't stem from the crisis elsewhere in the world. It derives mainly from the huge debts these people have taken on to finance their purchase of giant companies. This system is called financial leveraging, and it's very risky because when profits go down or turn into losses, concerns increase that these wealthy corporate leaders will not be able to pay back their loans.
It is unacceptable for the wealthy not to pay back their debts while continuing to live at the same exorbitant standard with the same huge salaries. Wiping out some of their debts must be conditioned on their reducing their personal assets, salaries and standard of living. The salaries of the people who granted them these loans - the heads of banks and investment houses - must also go down if bondholders "take a haircut," because proper norms of reward and punishment must not be wiped out.