Fifteen years ago, there was no question about it. The greatest hub of economic power in Israel was Bank Hapoalim. It had holdings in 770 companies, accounting for 8.2% of the country's gross domestic product.
The Brodet Commission, appointed back then to examine the concentration of economic holdings, focused on the problems stemming from the banks' both financing and investing in their pet companies. In particular, the commission scrutinized Hapoalim, which controlled the biggest companies, including Koor Industries, Clal Industries and Investments, Delek Group, Poalim Investments and Ampal-American Israel Corp.
One fear was that banks in that kind of position were not basing decisions on whether or not to lend to portfolio companies on pure business considerations.
Another concern was that major complications at any of these pet companies controlled by the bank would entangle the bank.
Then the Brodet Commission, headed by David Brodet, shocked the business community. It urged the regulator to ban the banks from controlling companies outside the financial services industry.
Hapoalim and Bank Leumi were forced to sell their controlling stakes in dozens of companies. Hapoalim significantly reduced its non-financial services holdings, and even though the bank was allowed to own up to 20% in such companies, it did not fully exercise this option. One reason was that it had new owners with better things to do. Hapoalim had been acquired by Ted Arison and the Dankner family, joined by four big American investors. Each had their own private businesses.
Despite the selloff, Hapoalim still has great, albeit diminished economic clout. Its controls a third of Israel's banking market. But during the boom years on the market, when corporate Israel could tap investors for loans (through bond sales ), it found itself providing about 51% of total bank loans to businesses, instead of 75%.
Shari Arison's bank
In the years since then, things happened that offer insight into the problem of overly concentrated economic power in Israel.
One such affair concerned the Dankner family, which had been a partner in Hapoalim through its holdings in Israel Salt Industries.
The Dankners borrowed NIS 4.1 billion from Leumi, to buy 11.6% of Hapoalim.
The shares in Hapoalim served as collateral backing the loan. After the economic crisis caused by the second intifada and the bursting of the high-tech bubble, Hapoalim's value nosedived. The Bank of Israel forbade Hapoalim to pay dividends until it was clear that paying them wouldn't hurt the bank.
As Hapoalim's share price tanked, Salt Industries' stake in the bank fell in value, to a billion shekels less than the loan the company took to buy the shares.
This showcases one of the dangers inherent in concentration: The central bank was terrified of a domino effect, in which one bank in trouble would drag others down with it. It issued a directive restricting the purchase of one bank's shares with money borrowed from another bank.
Later, the Dankners sold their Hapoalim holding to Shari Arison, Ted Arison's daughter. When she bought the Dankners' Hapoalim shares, she also acquired those of the other partners in the bank's controlling stake, upsetting the system of checks and balances on the bank's board of directors.
This imbalance was evident in Arison's kerfuffle against Bank of Israel Governor Stanley Fischer and Supervisor of Banks Rony Hizkiyahu, over their demand that she fire the bank's chairman, Danny Dankner.
Arison's takeover of Hapoalim increased concentration from two perspectives. First, she became the bank's sole controlling shareholder. Second, the Arison Group's leverage ballooned in the wake of Arison's Hapoalim stock-buying campaign. Arison, who went on to buy Salt Industries and former Hapoalim chairman Shlomo Nehama's share of the bank, needed cash and borrowed NIS 1.4 billion from a consortium of institutional investors and banks - Mizrahi Tefahot Bank and the Harel, Mivtachim and Menora insurance groups.
Today Hapoalim has a single controlling shareholder, who is leveraged more than ever before, with no certainty that the huge capital reserves that she inherited from the family businesses bequeathed to her by her father in the United States will be sufficient to back that leverage. Who even knows if she'd be willing to dig into her own pocket, should Hapoalim hit troubled waters.
Such extensive leverage has important ramifications, one of which is the distortion in resource allocation in the market.
When economic problems spiral and a credit crunch develops, the insurance companies and banks may lend to each other, and to their owners, but not to to the general public (Hapoalim owns 9.9% of Clal Insurance ).
This can create conflicts of interest between the interests of the owner, who is usually a big borrower, and the interests of the institutional investor's depositors, whose money the group manages.
Systemic risk also increases: Come trouble, the regulators tend to crack down on insurers and banks.
Business and philanthropy
The Arison Group operates in two main avenues: philanthropy, through foundations, and business, through Arison Investments, headed by former Hapoalim chairman Danny Dankner.
Arison Investments is the outright owner of Salt Industries, which owns real estate and mines salt. Salt Industries also owns 26% of Hapoalim, Israel's second largest bank, Miya, a water infrastructure company (100% ) and Housing and Construction, a real estate developer (47.5% ). Housing and Construction is a stakeholder in Derech Eretz, which built and operates the Trans-Israel Highway.
The business relationship between Housing and Construction and Hapoalim go back to the days when the two companies were peers with the Histadrut labor federation's workers' company. The information stored at Hapoalim on the real estate market and Housing and Construction's competitors is valuable, even if there are "Chinese wall" rules to avoid conflicts of interest.
Housing and Construction is the Arison Group's biggest cash guzzler. It borrows heavily from Hapoalim. The bank's 2009 statement shows that Hapoalim lent it NIS 928 million and provided the company with commitments and guarantees for an additional NIS 984 million. The firm had been borrowing from Hapoalim since before they became related, though, and its lending complies with central bank regulations.
Derech Eretz owes Hapoalim NIS 708 million, and that company has commitments and guarantees from the bank for an additional NIS 160 million. In addition, the bank loaned Miya NIS 58 million.
In 2009, Hapoalim lent more to Arison group companies than other Israeli banks lent to their affiliated companies. Discount lent all of NIS 152 million to companies belonging to the Schron-Bronfman group that owns it in 2009. Beinleumi lent companies owned by its owner a total of NIS 439 million.
Housing and Construction owes a total of NIS 3 billion to bondholders and to banks. There has to be concern that in the event of difficulty, it will grant preferential treatment to Hapoalim, prioritizing it above other creditors. The same goes for Derech Eretz.
Another major shareholder in Housing and Construction is Clal Insurance, of the IDB group. By investing money of its depositors, the insurer owns 10% of Housing & Construction, and in turn - Bank Hapoalim owns 9.9% of Clal Insurance.
Hapoalim has been known to lend to IDB group companies, and Clal Insurance has been known to lend money to Arison group companies.
In its financial statements, Clal Insurance details its exposure to Hapoalim, under insider transactions. It hasn't said what guarantees it's given to Housing and Construction, if any.
Recently IDB placed Clal Insurance on the block, and Hapoalim also reclassified its shares in the insurer as "available for sale". However, sources at Hapoalim say it doesn't plan to sell its Clal Insurance shares.
Shy Talmon, chief executive of Clal Insurance, used to be deputy CEO of Bank Hapoalim.