The Tycoons Are Fading Away but Our Problems Aren't

Nochi Dankner, standing alone in court without his IDB group, symbolizes a new era for the economy, but not necessarily a much better one.

Ofer Vaknin

The scene of Nochi Dankner in a Tel Aviv courtroom last week is the stuff of a Greek tragedy or a prime time soap opera. Here was the man who once stood at the helm of Israel's formerly most powerful conglomerate, the IDB group, giving him control of many of Israel's biggest and best known companies.

He talked about grand plans for expanding abroad because Israel was too small for him. He lived high and borrowed heavily, but was brought down by the same hubris that had served him so well on the way up. He failed to predict the depth of the financial crisis and spent much of his borrowed money on dubious ventures, such as buying the debt-ridden Maariv daily, only to find that the debts he had run up were beyond IDB's ability to repay. He fought bitterly to keep the conglomerate but lost it to creditors and a pair of investors – Eduardo Elsztain and Moti Ben-Moshe—who had the financial resources to keep the group afloat.

Now, everything lost , he is defending himself against charges that he manipulated the share price of IDB Holding Corporation ahead of a share offering in the hopes of raising badly needed cash.

End of an era

The fall of Nochi Dankner is more dramatic than any of Israel's other tycoons, but it is not atypical. The era of tycoons is coming to a rapid close.

Motti Zisser has seen his real estate empire seized by creditors and his home being auctioned off by Bank Leumi to repay debts. Yossi Maiman'senergy empire was sunk by the Egyptian revolution and the end of gas exports to Israel, with Ampal-Merhav taken over by bondholders. Ilan Ben-Dov's emergent telecoms combine is in tatters: he has been cut down to minority shareholder status at Partner Communications and he has lost control of Suny and Scailex.

Even many of the tycoons who steered their way through the last few difficult years without losing their realms are struggling or shrinking. Africa Israel Investments' Lev Leviev is no longer in an expansion mode but is toiling to keep creditors one step away. He has to get his bondholders' permission to issue more debt. Yitzhak Tshuva's Delek Group was rescued by his stakes in the Tamar and Leviathan gas fields, but the fact he is offloading much of his real estate and financial services empire in order to put his eggs into the energy basket. He will be richer than ever, as more and gas comes belching out of the two fields, but he will not be an early 2000s tycoon lording over vast swathes of the economy.

The great tycoons asset sale

On the Tel Aviv Stock Exchange, insider shareholders – many of whom are tycoons – have sold some 9 billion shekels ($2.6 billion) of shares since the start of 2013. The 3 billion shekels they alone sold in the first five months of this year increased the public's holding in all TASE companies by two percentage point to 60% at the end of May, according to a TASE study.

People who assert that nothing has changed in Israel since the 2011 social justice protests are wrong. Not that the protests themselves changed very much, because the movement was inchoate, its leaders more radical than its followers and the whole thing fizzled out after a few weeks. But economic policy has changed – driven from the top down, as is usually the case, because policy makers have a better of an understanding of the issues involved, an ability to design a coherent policy and the insider political skills to put them into effect.

Thus, while the tycoon's debt woes felled many of the tycoons, the government's Business Concentration Law will ensure they never rise again by limiting the multi-tiered holding companies so beloved of the tycoon set and blocking them from holding financial and non-financial companies. A great asset sale of tycoon holdings is already under way.

The tycoons and their holding groups have been justly accused of distorting Israel's economy. Their business acumen is more often founded on political influence and monopoly markets than entrepreneurial skills. Their business groups act more to enrich themselves than to serve shareholders. The concentration of so much Israeli business inside large holding groups risks a domino effect if things go sour in one group company (although in fact nothing of that sort happened during the 2008-09 financial crisis).

But the ill effects of tycoon-dom can be easily exaggerated. They make an easy target for public anger because they provide a face and a personality. The structural problems that continue to bedevil the economy don't have homes you can demonstrate in front of. Structural problems are hard to pack into a slogan, hard to define and complex to solve.

The real problems

We don't have a lot of monopolies, but the ones we do have are big enough and critical enough to act as choke points for much of the economy – electric power, land and the ports. But we also have a lot of industries where competition is very limited, such as banking and financial services.

The solution to this problem is more complex than it is usually presented: We are a small, isolated, economy and to expect than more and more players in any industry will simply increase competition, lower prices and improve products and services is naïve. Economies of scale will shrink and, as we have seen in the cellphone sector, it's hard to be profitable when you’re, say, the No. 5 contestant in a small country.

The second problem is the exuberant borrowing that brought down so many tycoons is back again. The Bank of Israel warned as much in its first Financial Stability Report last week. Record low interest rates – a phenomenon imported from the West, where central banks are trying to breathe life into slow-growth economies – have encouraged companies to borrow. Institutional investors, desperate in this low-interest rate environment to find something with a reasonably high yield, are putting money into increasingly risky companies, a lot of them in the real estate sector, which was interestingly the sector in which many of the tycoons took on debt in their heyday.

The central bank is right to worry that this is going to lead to trouble. A rapid turn higher in interest rates would leave investors with big losses and make it very difficult for lower-grade borrowers to recycle the debt they have taken on. In other words, we have the ingredients of a financial crisis in front of us.

Neither problem was caused by tycoons, even though they were features of the tycoon era. The tycoon made a good whipping boy when he was strutting on top of the economy; but now that he has been laid low, it doesn't mean our real problems are over.

Moti Kimche