All That Glitters / See the Gun. See It Smoke

'Economic concentration' is a vague and boring term until it translates into less money in your pocket at the end of the day. That day is here.

Eytan Avriel
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Eytan Avriel

"Our problem," groused a member of the economic concentration committee a couple of years ago, "is that we have no empiric proof that economic concentration is damaging the economy. There's plenty of anecdotal evidence but no studies have been done. We have no smoking gun."

Economic concentration is a situation in which economic power is concentrated in the hands of a small clique of people, with sweetheart ties in government and the press.

Time passed. Research papers were prepared by the Finance Ministry, the Bank of Israel, the Israel Securities Authority and others, showing exactly how much damage economic concentration causes. Take the companies listed on the Tel Aviv Stock Exchange and add up their value: Half that value is controlled by 20 families. Half of the public's savings is also controlled by some 20 families.

Those 20 families do business with one another and own chunks in each other's companies.

Toward the end of the committee's deliberations, with the empiric facts before their eyes, some of the committee members still entertained doubts. But today, a year after the committee filed its final report, looking at the big businessmen lining up to rearrange their debt and stiff their bondholders – "Now we see economic concentration in action," another committee member said. "Now we have the smoking gun."

The biggest gun is the debt rescheduling by IDB Holding Corp, says that same guy. IDB is controlled by Nochi Dankner. The smoke is the way Dankner is handling his negotiations with bondholders: He intends to retain control even though the company is factually bankrupt and he isn't putting in a penny of his own money to cover its debts, explains the ex-committee member.

One of the worst things about economic concentration in Israel is cross-ownerships. Instead of competing tooth and nail with each other, Israel's big businessmen cozily cooperate, and rescue each other from this or that morass – but not with their own money. With yours.

Now, when Dankner began his negotiations over rescheduling IDB's debt, the bondholders needed a representation to handle the talks on their behalf. Four finance institutions were appointed to that representation: Psagot, Harel, Gilad and Excellence.

At first Psagot took a militant line against Dankner. But it withdrew from the representative team after losing faith in the entire process – after the team decided Psagot couldn't vote anyway because of conflicted interests. To wit, Psagot had holdings in a second-tier Dankner company, IDB Development Corp, a direct subsidiary of IDB Holding Corp.

For whom the bell doesn't toll

That was convenient for Dankner. Psagot, which has no particular relations with IDB and could therefore form an independent position, was gone.

More recently, Harel was disqualified too. This time the Israel Securities Authority was behind the decision. It found a conflict of interest because of the close relations between Dankner and Harel's leader Yair Hamburger. Harel recently bought several businesses from an IDB group company, Clal Finance and Hamburger personally put money into a recent IDB group offering.

The ouster of Harel is slightly less convenient for Dankner, as Harel has been quite considerate of him. But it reflects the strength of the cross-relationships within that tight clique at the top.

Dankner himself isn't suffering too much harm. Harel the institution may be out of the process, but its representative Yoni Sher remains in the bondholders' representation, now wearing the hat of an external expert who's getting paid by IDB group. Sher has already shown a conciliatory attitude toward Dankner.

Let's move on. Dankner also has to negotiate with Excellence, which is owned by businessman Yitzhak Tshuva. Dankner and Tshuva have business together, for instance their massively failed venture in Las Vegas, which caused IDB and its shareholders painful losses.

Now it turns out that Dankner has been holding private meetings with Excellence CEO Uzi Danino, who is Tshuva's personal appointment. Danino hadn't been personally involved in the debt talks: Excellence had been represented, as is the norm, by professionals. But two weeks ago Danino upped and said he wanted to get into the thick of it, it being the IDB debt arrangement, and began to personally meet with Dankner.

Why his personal involvement in the IDB debt arrangement? Excellence didn't invest that much of its clients' money in IDB bonds, and in any case the value of these bonds has long since badly shrunken. The haircut has been delivered and savers won't get much, however the negotiations go.

So why Danino's involvement? It's anybody's guess and he isn't saying. What is known is that like Harel, Excellence is being conciliatory toward Dankner.

One man standing alone

The only body involved in these talks without any ties to Dankner, and the only one left taking a militant position, is Gilad, a pension funds management company. Most of its clients are from the religious community. But can one single person in the representation team, Yoav Armoni, stand strong before the majority and the pressures wielded by Dankner and his battery of experts?

But there's a deeper question. Is it proper for the CEO of an institutional investor representing the public's money to meet with the defaulting borrower?

It isn't illegal, says an expert on corporate law. Also, sources near Excellence say the meetings are known to the other committee members.

That said, the meetings could stink, adds our expert, at least at the level of appearance. Especially if the two people meeting have joint businesses in other spheres. This, dear reader, is in and of itself a smoking gun of the economic concentration weighing on the Israeli economy.

Meetings of this sort should take place with all the members of the bondholders' representation, with bondholders' trustees and a court-appointed expert whose job is to make sure the public gets the best deal it can.

That is the essence of the so-called "Haircuts Law" the Knesset passed of late. The legislators suspected that the public would be the loser in any negotiations between tycoons and institutional investors, and so legislated the involvement of the court and an expert on its behalf.

So, says our expert on corporate law, private meetings – even if held with the knowledge of the other representatives – beg suspicion that the outcome is not, how shall we put it, in the public's best interest.

When Dankner is meeting privately with a man appointed by his fellow tycoon Tshuva, who is Dankner's partner in Vegas and who just delivered the public a drastic haircut himself (at Delek Real Estate) – the concern grows all the keener.

Let us spell it out: The debt arrangement at IDB isn't a deal between two private businessmen. On the contrary, the whole thing is totally public.

The money Excellence put into IDB is the money it manages for savers, you and widows and orphans and so on. IDB is a pyramidal conglomerate in which the public owns about 20% of the parent company at the top, IDB Holding Corp, a majority of the stock in IDB group subsidiaries and all the bond debt that the group issued.

IDB Holding Corp alone owes bondholders NIS 1.8 billion, and NIS 250 million to banks, in which the public also owns shares. Therefore, simple logic and justice would dictate that meetings take place in public, in the presence of all the representatives and trustees, with the public knowing each syllable that was said.

This is the Internet age. If Dankner and Danino want to meet privately, free of trustees and other reps, then they should tape their conversations. Then they should have it transcribed, syllable and grunt, and published on Internet so that everybody can know what was said. Since what they're discussing is the public's money, if they don't they beg suspicion that the public's good isn't at the top of their agenda.

The great American justice Louis D. Brandeis famously said that sunlight is the best disinfectant. In other words, deeds done in the dark are dubious.

If Israel's past sins – economic concentration and cross-ownership – are to be cleaned up, at least let's use the best disinfectant.

There it is. A smoking gun. Now we can see it.Credit: Adi Emanuel

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