All That Glitters / Cognitive Capture, Israel Style

Our bankers really believed they were sacrosanct. But suddenly the people realized that was balderdash. Is that a whiff of revolution?

It turns out the frustration had been bubbling very close to the surface. Just one little push was all it took, one more story about big boys getting away with financial murder, to ignite the blast.

TheMarker broke the story a week ago, about Bank Leumi agreeing to restructure debt for Ganden Holdings. That is the company through which Nochi Dankner controls IDB, the biggest business group in Israel.

Leumi intended to write off about NIS 150 million. The affair made starkly clear how in finance, some people get sweetheart terms from banks, that other people can't get.

In other words, it became clear how the system works. And the message sank home. People howled. Things had to change.

There was no need for demonstrations and burning tires. After the social-justice protests in 2011, people had realized they could influence how the country was run from their homes – as long as they had an Internet connection.

And they had enough of a tiny club of powerful people controlling the economy. They learned not to believe officials who denied that such a club existed. The people learned that protest could make the difference even on hideously complex subjects like the financial markets.

Outbreak on Facebook

Within 48 hours, the intensity of the protest on the Internet shook things up. Within a week, the Bank of Israel had decided to look into the Leumi-Dankner agreement, Leumi's board had scrapped the deal and changed its approach, and the Bank of Israel and Finance Ministry had decided to set up a panel to examine debt rescheduling in general. The inquiry will also be scrutinizing deals that have already been cut.

The new panel has lots of things to look into.

There is the relationship between Bank Leumi, its CEO Rakefet Russak-Aminoach and Nochi Dankner. Then there's the relationship between Dankner and Bank Hapoalim and its CEO, Zion Kenan.

Now let's look at Dankner's corporate pyramid. He owns the sprawling IDB group through Ganden Holdings. But there's another privately-held company on top of Ganden, Tomahawk Investments, that received a loan from Bank Hapoalim - even though IDB's problems were already known.

There we may see an example of that small corporate clique. Kenan got his job due to pressure from Danny Dankner, Nochi's cousin. Never mind that Danny Dankner was ousted from Hapoalim at the urging of the Bank of Israel: The point is, the panel should study whether this influenced Hapoalim's decisions on IDB.

The panel should look into whether Hapoalim's oversight and credit committees and board treated dealings with IDB the way they treated the bank's other customers.

That's what riled the public, the idea that the banks don't treat their customers equally. Particularly galling is that the difference stems from close ties between the big-money managers and tycoons who can give these managers and their kids cushy jobs.

A lot of precedent

The banks also forgave debt for other business barons, including Yitzhak Tshuva of the Delek group and Ilan Ben-Dov, who had bought (and later sold) Partner Communications.

If a committee is being set up to look into such things, let it look into the people who were supposed to provide oversight in the first place.

Was the Finance Ministry's capital markets commissioner right when he said market forces should be allowed to play out and we should rely on the independence of financial firms?

Did the Bank of Israel's supervisor of banks know about the relationships between bank CEOs and the controlling shareholders of major companies? And if he did know, what did he do about it?

Even more questions

That's just the first and less important phase of the committee's work, since the milk has already been spilled. We can't rewrite the past, and most of the money that the tycoons burned up can't be recovered.

More important are the standards that should guide financial firms in the future.

Will the regulators hand down directives on dealing with businesspeople who didn't repay the banks, and then seek new loans?

Will the panel investigate cases in which bankers become interested parties in companies belonging to borrowers?

Most importantly, will the panel narrow its focus to nuts and bolts, or will it delve into how the system really works – how plutocrats beat the system?

Will the panel ask what a more egalitarian market would look like?

Don't forget that the members of the new committee hail from the Finance Ministry, the Bank of Israel and the Israel Securities Authority. In other words, they're part of the system.

Jus look at where top officials work after they leave government. Now you understand that the committee may be reluctant to examine these issues.

Leumi CEO Rakefet Russak-Aminoach, Leumi chairman David Brodet and other top officials at the bank swore last week they were doing their work in good faith. Despite the cynicism in comments on the Internet, we agree with the bank's executives on one thing. They're not lying. They really think they're right.

Bankers' beliefs

It is not unknown for people earning pots of to convince themselves that what they're doing is in the public interest. It's called cognitive capture, a term coined by Citigroup chief economist Willem Buiter.

U.S. researchers say folks on Wall Street were convinced before the crash of 2008 that what was good for them and their banks was good for the public. Even regulators, who in the United States too jump from the public sector to private-sector jobs, were convinced until everything blew up in their faces.

Cognitive capture is explained by Duke University's Dan Ariely, in Chrystia Freeland's book "Plutocrats: The Rise of the New Global Super Rich and the Fall of Everyone Else."

"When you have a financial incentive to see reality in a certain way, you will see it that way, not because you're bad but because you're human," he says.

People really do change their deep beliefs in the process, Ariely adds. They adapt beliefs to conform to the interest of their social circle: "We see things from the perspective of our friends, not of strangers," Ariely told Freeland.

If we apply that to Israel, we can probably conclude that the wealthiest among us really do think they're being fair, and that what they do is right for their companies and their country.

Of course, the problem is that they're wrong, as was proved by the Wall Street crash, debt rescheduling in Israel.

You can find similar stories in other sectors. Defense officials really believe that the benefits they receive are necessary to defend the country. People at the Israel Electric Corporation are convinced that only the current setup can ensure that electricity flows. And all of them shriek to the heavens if someone calls for a debate.

According to sources at Leumi, following Friday's board meeting, Russak-Aminoach not only decided to scrap the write-off and rescheduling agreement with Dankner, she opted for a paradigm shift on everything linked to the bank's relationship with the tycoons.

Leumi is one of the country's two largest banks; it can lead such a process, but it needs a lot more than words.

After years of ties between the banks' big-money managers and the controlling shareholders of major corporations, this system has become embedded in Israel's financial culture. If you're a member of the club, we'll help you out. If not, we'll operate strictly by the rules. And if you challenge or threaten the club, we'll really have it in for you.

In any case, Leumi did its turnabout, the government is setting up its panel, and the people found they could influence the system. So the ball is in the court of the CEOs of the banks and other financial firms. If they don't get with it, the public won't forgive them.

Moti Kimche