The Israeli Corruption Story Hollywood Wouldn't Touch

Perfectly legal institutional corruption: Today’s goodfellas don’t need to break the laws. They wrote them

Death by committee

Last week the Knesset held a conference on the illicit ties between Big Business and government (and, some murmur, the media), sponsored by the anti-corruption lobby led by Knesset members Miki Rosenthal and Moshe Mizrahi. The speakers, from the state comptroller to the justice minister, breathed fire and brimstone. But for all the rhetoric, don’t count your chickens.

Like elsewhere in the West, most of the corruption in Israel isn’t the criminal kind that was discussed at the conference. It’s not about kickbacks on sweetheart deals. The corruption − and it’s the worst kind − is institutional. It’s the perfectly legal way that the big interest groups set the public’s agenda; how they pull politicians’ strings; how they create a system in which the strong and well-connected manage to preserve the status quo.

Justice Minister Tzipi Livni hails from Kadima, a party established (and buried) by politicians who are serial offenders against the public’s trust. She hasn’t seemed to care about that. As justice minister, she never showed any interest in how millions of dollars went into the bank accounts of Foreign Minister Avigdor Lieberman’s daughter and driver. It was done legally, approved by the attorney general, and thus a case is closed in Israel.

Before the last general election, corruption warriors promised that soon, all Israel’s politicians and senior regulators and officials would have to publish periodic statements of wealth. That never happened. The public never did learn just how the Sharon family, or Ehud Barak or Ehud Olmert made their fortunes. Nor does the public know about local authority leaders dividing the spoils of selling state land for construction by crony contractors, for instance.

The only ray of light so far in the war on institutional corruption is the recently enacted law that dismantles Israel’s business pyramids. About 10 people had controlled a third of the companies listed for trade on the Tel Aviv Stock Exchange, half the financial assets in Israel and most of the really cushy jobs, the ones that pay millions and millions a year. That situation begged institutional corruption among the decision makers and watchdogs.

How is it that two banks lent billions to the business barons, yet did nothing during the economic troubles in recent years to get their money back? Can democracy even exist when two big banks control half a trillion shekels worth of credit, hire former regulators as consultants or managers, and finance the big political parties and media as well? That’s the sort of fundamental ill that no Knesset member wants to touch with a barge-pole.

Institutional corruption, structural − not criminal − is the root cause of many of Israel’s economic ills: the cost of living, the poor effectiveness of the public sector, and regulation dictated by the interest groups. The incumbent Knesset may have been elected on promises of reform, but it’s turning out like its predecessors − death by committee.

Israelis pay more for food

When exactly did economic concentration start spiraling, lifting the cost of living? Opinions differ, but most feel it began in 2005-2007. Last week the Knesset research center published a paper showing something our readers all know, but that the regulators were insistently denying three years ago − food costs 20% to 25% more in Israel compared with the developed world. (The biggest gaps are in dairy produce and beverages.) The paper also marks the turning point for economic concentration as 2005 − the year Super-Sol, Israel’s biggest retail chain, bought the (bankrupt) No. 3 chain at the time, Clubmarket. That was when prices started to spiral skyward, the paper postulates.

Why did other potential buyers for Clubmarket suddenly vanish at the last second, leaving the Antitrust Authority and court with little choice but to agree to let Super-Sol buy it? Was it that nobody wanted to frustrate Super-Sol’s parent, the great and mighty IDB group, which the court ordered to be sold last week? One of the contenders for Clubmarket that suddenly disappeared received a big investment from Clal Insurance a few months later − Clal Insurance is Super-Sol’s sister company in the IDB pyramid.

The Knesset report studies the claim by the marketing chains and food manufacturers that tax is responsible for the high cost of food in Israel. They concluded that tax explains less than half the high cost; the rest is growing concentration, especially among food manufacturers. In the last seven years, food prices increased by 16% in real terms, compared with less than 2% in the developed world.

Apropos tax, that shouldn’t be an excuse in any case. If the public felt it gets back the heavy tax it pays through good services, it would live with the high food prices, as is the case in some European countries. But the Israeli public isn’t stupid and realizes that much of its tax bill goes to independent tax militias − inefficient interest groups that divvy up the spoils.

A lot of Israel’s parliamentarians have embraced the cost of living as a cause célèbre, but few actually delve into the issues and come prepared for debates with Israel’s Big 5 food companies and their lobbyists. Nor do they realize that in contrast to, say, security issues, here the public expects results of the type that Moshe Kahlon brought to Israel’s cellular industry, reducing prices by 90%.

New owners for IDB, old order

After weeks of posturing as a new type of company owner, Moti Ben-Moshe, buyer of the IDB group, hired Aharon Fogel as chairman. If there’s a man who represents the old order, the war against reform, it’s Fogel.

As if we didn’t need Fogel’s appointment to know that the IDB pyramid needs dismantling. In an economy like Israel’s, pyramids destroy value for investors. They reward robbery of minority shareholders, build up political power and block regulators from regulating markets that lack competition. Helped by the leverage and financial clout of subsidiary Clal Insurance, IDB became a machine that vacuumed up the public’s money and corrupted the watchdogs.

Aharon Fogel, Nir Gilad and their ilk, who held high office at the Finance Ministry and moved to business, have not only tarnished the image of the business sector, which consists mainly of businessmen fiercely competing in the markets, they delegitimize the Finance Ministry itself, thanks to identification of the ministry with a handful of people who moved onto pyramids and businesses that siphon off value.

It’s serious for the ministry, mainly its budgets department, to lose legitimacy, since as things are, most ministries are preoccupied with protecting their subjects of supervision, not the greater good. When the only player motivated to see the big picture is suspected of turning into a machine that makes Fogels, a vacuum is created that serves the interest groups.

Banksters don’t break the law

Twenty-three years after producing “Goodfellas” (1990), featuring gangsters and a dead body in the trunk of a car, Martin Scorsese is back, with gangsters on Wall Street or if you will, banksters.

“The Wolf Of Wall Street,” starring Leonardo DiCaprio, ostensibly teaches that the gangsters threatening our lives aren’t the type that hide corpses in trunks; they’re the ones that will steal our money through dubious securities. But the truth is that if Scorsese et al wanted to teach us a lesson about contemporary America and capitalism, they failed.

The story is about a man who sets up a brokerage that aggressively pushes penny stocks to wealthy patsies. That’s the setup for easy filming − endless hookers, cocaine, dwarf-tossing contests, more cocaine and more hookers. But thieves like trading tycoon Jordan Belfort, on whose real story the movie is based, are marginal. They don’t matter. The ones who robbed the pension savings of hundreds of millions of Americans, legally, are bankers, financiers and other robbers who buy politicians and set the rules of the market game. Institutional corruption in America − buying the government, the law and regulation − is carried out in broad daylight, and in keeping with the law.

From that perspective, the Nexflix series “House of Cards” starring Kevin Spacey is much more relevant than the Wolf. House of Cards explains how American politics works and for whom. As Warren Buffett once told TheMarker: America is headed for plutocracy, if it isn’t there yet.

Dwarf-tossing and parties film well and emblemize the decadence typical of much of the financial world, but the goodfellas of today don’t need to break the law. They don’t need pretty young mules to smuggle envelopes of cash to a silent Swiss banker. They’re on Wall Street, they’re at the pharma companies, at every giant company that is supposed to be regulated, and they’re too big to fall and go to jail. At worst they plead out and write a check, but the billions are being paid by investors anyway, not them. Today’s goodfellas write the laws and pay a pretty penny for the pleasure. That’s a story that neither Scorsese nor Hollywood has told yet.

AP