In last week’s Dankner family drama, which captured the national agenda, it was easy to sort out the white hats from the black hats.
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The bad guys were cousins Nochi and Danny Dankner. As controlling shareholder of the IDB group, Nochi looted our pensions, while during his stint as chairman of Bank Hapoalim Danny robbed it blind. The good guys, according to this analysis, were the members of the public whose funds were stolen, and perhaps also the judges who finally meted out a little justice.
In the last act, Danny Dankner will go to jail. Nochi, who presumably has been thrown out of IDB, must now attend to his own enormous debts. But neither Nochi nor Danny are the main story when it comes to the revelations of the past year. In a free, capitalist economy, people in business play to win — that is, to amass as much money as possible. If someone gives you cheap, easy money, you take it.
The real problem is not with those who took the money. Rather, it’s with everyone who gave it to the Dankners, and with everyone who was supposed to be protecting the interests of the public.And that’s the main problem. When we focus our attention on those who gave the money, we discover a complete, colossal system failure that raises doubts about such a system’s ability to change.
To comprehend the magnitude of the failure, one must consider the other players and determine their role. Otherwise, the fact that IDB has been transferred from one tycoon to another won’t change a thing. Here are some of these players.
The capital markets commissioner
The treasury unit that oversees savings, pensions and capital markets, which until recently was headed by Oded Sarig, did nothing to investigate or stop the looting of the public’s funds.
For years, Nochi Dankner used money from account holders at Clal Finance for his corporate pyramid’s needs, investing them, for example, with the Swiss bank Credit Suisse. The department never raised a red flag and never questioned the conduct at any of the IDB group’s companies. From its perspective, the impact of IDB on the capital markets and pension funds was “business as usual,” a situation in which companies sometimes fail and investors’ funds evaporate.
Thorough reform is needed here. It is not for nothing that a recent report from the Organization for Economic Cooperation and Development recommended transferring this division to the Bank of Israel.
The banks supervisor
Rony Hizkiyahu, the banks supervisor in the Bank of Israel until 2010, recommended to then-Governor Stanley Fischer that Danny Dankner be removed as chairman of Bank Hapoalim because his conduct in the post resembled that of a drunk bull in a china shop. With the exception of that extreme comment, however, the banks supervisor remained silent.W
And unlike the treasury’s capital markets supervisor, the banks supervisor has a team of investigators and access to every scrap of information in the banks. But we never heard a word about loans the banks gave to associates, sometimes without proper collateral, or any criticism of the failure to collect these debts. We also have not heard criticism from Hizkiyahu’s successor, David Zaken, on the performance of other bodies under his supervision, such as the banks’ boards of directors, credit committees and accountants. Tel Aviv District Court Judge Eitan Orenstein asked in amazement in the course of court proceedings on the IDB case how loans were provided without collateral. He didn’t get an answer from the banks supervisor.
The Securities Authority
Since Shmuel Hauser assumed the helm at the Israel Securities Authority, there has been a change in approach regarding IDB. Hauser prevented IDB from hiding losses and presenting a misleadingly rosy picture of its state of affairs. He also opened an investigation against Nochi Dankner over what appeared to be an attempt to manipulate share prices.
Prior to that, however, IDB did whatever it felt like in the capital markets, while senior officials at the securities authority viewed IDB as a cushy source of future employment. Eyal Solganik and Samson “Shoni” Albeck, both of whom had high-level jobs at the ISA, joined IDB, as did former ISA chairman Aryeh Mintkevitz. And former ISA chairman Zohar Goshen briefly brokered deals involving IDB after leaving the agency.
The bank executives
At least publicly, the banks are saying now they’ll do whatever is necessary to collect on Nochi Dankner’s debts. “We’ll treat Nochi Dankner as we would any borrower,” Bank Leumi chairman David Brodet said, “as we would relate to a mortgage borrower from [the Tel Aviv suburb of] Rishon Letzion.” But that’s a new tune of sorts. Just half a year ago, Leumi sought to write off loans to Dankner, stopping only due to public pressure. Bank Hapoalim has declined to comment on uncollected loans to Dankner’s closely held Tomahawk Investments. In practice, the banks gave Danny and Nochi Dankner money on terms others can’t hope to get.
What do members of a bank’s boards of directors do? Not much, in fact. They appoint the bank’s CEO and accountant, and mainly they have monitor management. But the cases of Danny and Nochi Dankner proved they did none of this. The CEOs were selected under pressure from controlling shareholders and others with influence. The same accounting firm was on the job for decades and there was no oversight of management.
Not a single Hapoalim director resigned over Danny Dankner’s conduct or the failure to collect debts owed by Nochi Dankner, and not a single Bank Leumi director objected to a proposal that would have written off debt owed by Nochi Dankner’s Ganden Group.
Even though the banks’ accounting firms are paid by the banks, they have a fiduciary duty to the members of the public who read their financial statements. After all, these are documents that must reflect the banks’ true condition and without which the capital markets couldn’t function.
Even “value assessors” are obligated to provide the truth, without which their own work is devoid of value. But they too fell down on the job. One accounting firm, KPMG Somekh Chaikin, audits four of Israel’s five major banks, including Leumi and Hapoalim. And it also audits IDB and most of its subsidiaries. And it was KPMG Somekh Chaikin that fought with the Israel Securities Authority to hide IDB losses. On the other hand, we haven’t seen it pressuring the banks to disclose Nochi Dankner’s personal debt and the steps that they have taken, or not taken, to collect it.
Insurance companies, investment banks and pension funds extended most of the credit that IDB got, by buying its bonds. They are also the ones who rushed to sell those bonds at rock-bottom prices, as long as they didn’t have to face debt rescheduling negotiations with Dankner and his associates. But in the process, members of the public suffered losses. On the plus side, before the law was changed, the handover of IDB to its new bosses, Moti Ben-Moshe and Eduardo Elsztain, would have taken place in secret at the banks, without transparency and without the public’s knowledge or input. But this also shows that in the past, institutional investors were doing the tycoon’s bidding, succumbing to pressure by the tycoons without a fight.