Dankner’s Fall

An Earthquake in Israel’s Old-boys'-club Economy

Crony capitalism was the big loser in the court’s decision on IDB Holding Corp.

“For several weeks I tried to interest Israeli and foreign investors in competing for IDB Holding Corporation. They all said they were very interested in the assets but didn’t want to take on Nochi Dankner and all his friends,” an experienced business broker told us some months ago, when the court solicited additional debt settlement offers for IDB Holding. “They feared the public fallout, getting lynched by the media,” he said.

In retrospect they were right. That’s probably the main reason why bigger and better known organizations did not participate in the tender for the company’s acquisition. Although Dankner did lose control – pending due diligence by the authorities of Moti Ben-Moshe over the next week – of the concern he bought 10 and a half years ago, to the very last moment he collected and disgorged every bit of dirt he could find on his rival.

Dankner would have done the same to anyone else who dared to enter a bid. Certain newspapers would have called these businessmen tax evaders, carpetbaggers who would hurt IDB employees and sell damaged goods. What businessman wants to endure such treatment just to gain the right to buy a holding company that needs hundreds of millions of dollars just to stay afloat?

But beyond the treatment meted out to opponents and rivals by Dankner and the many spheres he controlled up to now, Judge Eitan Orenstein’s ruling was nothing less than earth-shattering for the Israeli economy; at the very least, it created a rare opportunity for a revolution.

Until Tuesday Israel was an economy controlled by “the club,” a group of several hundred people through whose hands everything passed, and if you weren’t part of it then huge sections of the economy were off-limits to you. The people who controlled most of the public’s financial assets, running the banks, the insurance companies and other financial institutions, the people who controlled and managed Israel’s biggest companies. The people behind and in front of the scenes who made it all this possible: accountants, appraisers, lawyers, media and public relations consultants – and of course the newspaper and electronic media publishers and editors who cooperated with Dankner and other members of the club.

Until Tuesday the Israeli economy was an old boy’s club, fueled by mutual back-scratching and quid pro quo: Give me loans, take jobs for yourself or your family. Give me a favorable valuation, for which you’ll be paid in full, and I’ll send you clients. Consider my needs now, maybe you’ll end up with a dream job with a salary to match.

The club worked together, enjoying each other’s company while grabbing each other by the throat. There were always carrots, but there were also sticks: If you don’t buy the securities I’m issuing you might not get hired, get promoted, get work from companies and institutions close to me. Group members socialized together at home and vacationed together abroad. They thought nothing could challenge their stranglehold over the economy, which underneath it all was based on their access to the public’s savings and pensions.

Until Tuesday we had an economy of relationships. If you were situated deep enough within the club you could gain control of more and more businesses using very little of their own equity and very big loans from the public purse. If you knew bankers, underwriters, pension fund managers, regulators, politicians and the big publishers, you could raise capital and expand your reach.

The best dancer

Dankner was better at this dance than anyone else. Thanks to a combination of charisma and lust for power, as well as a dogged, unlimited determination, Dankner became king of the clubhouse. In the communications sector, for instance, for years there was a sense that he was its patron.

That sense was amplified considerably when MK Ariel Atias was communications minister, especially after two meetings they had and the photos suggesting a remarkable level of intimacy between regulator and the regulated. Once Dankner had met with Atias several times at the beginning of his term in the ministry – together with their wives at a kosher fish restaurant and in private – Atias failed to take firm action to increase competition in the wireless sector. The men’s social bond protected the entire sector from the scourge of competition while exposing consumers to the scourge of its absence.

Atias’ replacement as communications minister by the reformer Moshe Kahlon was a key factor in IDB’s downfall. On several occasions, Dankner admitted that the government’s reform of the cellphone sector was the main cause. When he had a friend in the Communications Ministry his empire flourished, even during the 2008 global financial crisis. When the friend left, replaced by someone who didn’t play by the rules, Dankner fell.

That’s how things also went in the area of media and public influence. Wielding control in the media was a key element of Dankner’s strategy and for the club as a whole. This was accomplished through relationships with publishers, editors and senior reporters.

Using carrots and sticks, the distribution of advertising budgets, a legion of publicists and an army of lawyers, the club usually enjoyed the support of the country’s largest media outlets.

Dankner bought Ma’ariv specifically to shore up his control of the media, and only sold it when the Hebrew daily’s finances flat-lined. Even now, when his downfall seems more imminent than ever, Dankner’s views and the messages he seeks to deliver still have support in many media outlets.

Assuming that Eduardo Elsztain and Moti Ben-Moshe’s victory becomes final, after all the checks and appeals, the king of the clubhouse is on his way down and his fall will rock the entire club. From now on the fear of the long arm of Dankner and his cronies will fade, together with his ability to dispense favors, contracts, jobs, work and spending on advertising.

Human nature will not change, but the moment the club loses the ability to activate the levers of power – the carrots and sticks – the entire economy will automatically become more professional and businesslike.

Here’s an example. Today it’s clear that the financial institutions that bought bonds issued in the IDB group’s numerous offerings hadn’t assessed their risk correctly. The fact is that these securities collapsed due to management failure and not some unusual external event.

Why? Because Dankner was at the height of his power and it was hard for an institution to refuse taking part in the offering or to demand higher interest. Today the situation is different. After Dankner’s fall the banks and institutions no longer need to fear the tycoons and their pressure, and therefore the pricing of credit and securities in the capital market will become more professional. It’s amazing: One decision by a court can immediately make the pricing of securities in Israel’s capital market more accurate.

Following Tuesday’s events in court, the main message to the economy and capital market is that anyone basing his business model on nothing but connections won’t go very far. The banks and institutions won’t continue rolling over debt forever and it won’t be possible to feed fictitious success stories to a supportive media for long.

In the end each manager and each principal owner will need to display genuine business performance based on competitive capabilities and professional management – and it isn’t possible to specialize in both this and in forging connections. Anyone busy mainly with connections simply can’t manage a company focused on efficiency, productivity, and competitiveness. It’s a simple matter of specialization, focus, and business culture.

A new club? 
Not necessarily

But wouldn’t the club be replaced by a new club, perhaps Ben-Moshe’s? When Stanley Fischer, then-governor of the Bank of Israel, was asked two years ago about the fate of tycoons, he surmised that in the future we’d discover they’ve been replaced by others.

This scenario doesn’t need to play out. It take years, sometimes more than a decade, to build such a club. It’s like building a crime family. A network of dependence and mutual secrets needs to be created, along with family and work ties, and absolute loyalty and trust need to be achieved, and all these things take time.

The hope for Israel’s economy is that the club that controlled it for the past 20 years will be severely weakened, and not replaced by another club, and that the managerial decisions and allocation of capital will finally be done based on considerations of capabilities, professionalism, and loyalty to the real stakeholders: the shareholders, bondholders, employees, and customers – and the general public.

Tomer Appelbaum