Are Israel's Banks Using the People's Money to Control the People?

The average Israeli's anger toward the country's banks is reasonable, but the issue is much more complex than haircuts and debt arrangements for tycoons.

Haircuts. Defaults. Debt arrangements. Write-offs.

The average Israeli now knows these terms as well as any banker. On radio and television, in Knesset speeches and on the beach – finance experts have been popping up and spouting argot overnight. Defaulting tycoons seem to be replacing the ultra-Orthodox as scapegoats for Israel's social evils.

The good news is that we are seeing a breakthrough in awareness: The public is starting to take an interest in economic structures and democracy, rather than confining its attention to marginal issues.

The bad news is that most of these speakers frothing at the mouth don't really understand the issue.

It's time to get into more detail.

Bankruptcies, business failures, haircuts and so on are an integral part of the world of finance. Only in backward economies do companies not fail and do haircuts never happen.

The process of competition and innovation involves risk. Progress cannot only involve success: Failures are inevitable. Failure is integral to success and risk is integral to economic progress.

Likewise, debt is an integral part of finance. When a company stumbles and debt weighs too heavily on its balance sheet, it has to reschedule or refinance that debt (that is the fabled "haircut").

An investor seeking better returns than what government bonds or bank deposits can provide has to take risks, and some of the risks will cost him money. That's how the capital market works.

Some of the howlers against haircuts seem to think that failure should be outlawed. But that isn't how it works. Without failures and haircuts, there is no market, no competition, nowhere to invest.

The anger against banks Leumi and Hapoalim over their lending habits has good reason; but the issues are more complex than people seem to realize, and aren't just about a specific business failure or haircut.

Decisions made by the banks' leaders about loans to Nochi Dankner and his companies weren't made last week or the week before that. They're just part of a long list of decisions about lending and collateral and covenants and enforcement, and actions taken or not taken to collect debt.

The questions being asked now – whether Leumi and Hapoalim were reasonable in lending to Dankner and whether they did everything they should to obtain collateral, and whether they did everything reasonable to collect the debts – don't go far enough. Bigger questions should be asked about the relationship between Dankner (and other business barons) and Israel's banking chiefs.

In other words, are open or hidden relationships between bankers and business barons the main reason for economic concentration in Israel? Are they using the people's money to control the people, to paraphrase Louis Brandeis?

Directors in the dark

Some regulators, politicians and pundits also dismiss the whole issue – "It's the board's decision." But that phrase is misleading. All too many are marionettes, as noted by Avishay Braverman, formerly a director on the boards of several big companies and future chairman of the Knesset Economic Affairs Committee. They are appointed by the company owner and do his will; mainly they don't want to get fired and tossed from the club. Aharon Dovrat, who dominated the business scene 25 years ago as Dankner does now, used to dismiss directors as fungi who are kept in the dark and get fed manure.

The board at Leumi is about as eager to delve into the entire Dankner group's debt as the hap board was to investigate its own conduct five years ago, back when Danny Dankner (Nochi's cousin) ruled the bank roost, treating it like private property, helping himself to loans and meddling in deals in which he had interests.

Five or 10 years late, Zvi Ziv, the former CEO of Hapoalim, testified that governance at the bank had been deteriorating for a decade. What did he do as CEO to stop that decline to which he attested? About what the board did – nothing much. They were engaged mainly in personal survival.

The directors and regulators who are supposed to safeguard corporate governance are afraid to tackle the clique of powerful people who mete out cushy jobs and social status.

I hope I'm wrong but I'm not holding my breath for Bank Leumi to investigate the loans to Dankner's company Ganden, or Hapoalim's conclusions about its loans to Dankner's company Tomahawk. These loans are the most bizarre of all, as there is no obvious reason why (or when) they were granted in the first place. Nobody wants to rock the boat – perhaps not even the enforcers. They'd rather keep the peace and say everything was kosher.

Sometimes we only learn the truth in court – that the banks are run in schlemiel fashion at best, or corruptly at worst.

Economic concentration is causing far greater damage than some billions of shekels lent to tycoons who can't repay. If you want to know why the banks charge such insanely high commissions, ask no more – it's to cover their inefficiency, which inflates their costs by as much as NIS 10 billion a year.

If there is value in the events of the last couple of weeks, it's in the banks starting to grasp that the party is over; lending the lion's share of their capital to a handful of close friends has to stop; and the public is moving its attention from costly cottage cheese, drafting the Haredim, and other distractions, to the banking and financial systems that underlie so many of Israel's ills.

The fact that a handful of people control a trillion shekels belonging to the public requires profound reform of ownership of financial institutions.

It remains to be seen if the triumvirate of Benjamin Netanyahu, Yair Lapid and Naftali Bennett, each of whom aspires to be society's white knight, will grasp that their blather about the middle class and "sharing the burden" is all well and good – but unless they make new rules for the finance set that controls the country with the tycoons, their talk will be for naught.
 

Bloomberg