Analysis

How Much Teva's Collapse Has Cost Israelis - and Why It Endangers the Economy

The drug maker's profit warning wiped out $14 billion in value, but the overall confidence in the system is priceless

Ten years of Teva

Many people have asked me this month how much money they’ve lost on the stock market dive by Teva Pharmaceutical Industries. The answer isn’t that much, at least for anyone whose money is with Israeli institutional investors like pension funds and insurance companies and who didn’t make a specific bet on Teva.

The stock is down around 45% since the company released the bad news on August 3 in its quarterly report: massive losses and a bleak forecast, wiping out 50 billion shekels ($14 billion) from its market value.

This number looks downright monstrous, and rightfully so. Teva’s loss in value is 10 times as much as tycoon Eliezer Fishman’s debts, and 100 times as much as Nochi Dankner’s personal debt. It’s roughly equal to all the troubled Israeli tycoons’ haircuts over the past three years combined.

But this mind-boggling figure is no reason to cancel your vacation plans. It doesn’t even have to concern people saving for retirement.

How is this possible? Public assets are valued at about 3.5 trillion shekels, so even if Israelis were fully exposed to Teva’s collapse in market value, the loss would be on the order of 1.5% of their portfolio. Unpleasant, but not so terrible.

But even that figure is an overstatement because Teva ceased being an Israeli-owned company long ago. Foreign institutional investors hold most of its shares. Israeli investors are estimated to hold no more than 5% of Teva, thus the damage to local portfolios is probably no more than 0.1%.

So yes, Teva is heavily weighted in the stock indexes, and stock portfolios and mutual funds have been hit, but the total impact is marginal. You can breathe again.

The experience with Teva also shows that the tycoons' deals that made headlines have had a minimal impact on our savings. A minor shake-up of the markets amid news from abroad, like threats between U.S. President Donald Trump and North Korean leader Kim Jong-un, influences our pensions and savings more. The markets, whether stocks and bonds or anything else, move up or down daily, and the differences that fill the newspaper columns get muffled by the noise.

Dubious tycoons

Even if a financial calculation shows that the cases of Teva and the tycoons barely shake the value of public savings, that doesn’t mean they’re not important to Israel’s economy. On the contrary, Teva’s fall is critical to the economy and standard of living. The damage is enormous, but it’s in the realm of public faith in the stock market, financial reports and the overall economy.

When Teva’s shares suddenly dive double-digits because of a financial report, when the company’s managers disclose bad news they long knew about, public faith in the stock market and company reports is eroded.

Many people have little faith in the financial markets anyway. The series of crashes, starting with technology stocks in 2000 and culminating in the world financial crisis of 2008, greatly curtailed many people’s appetite for stocks. The tycoons’ haircuts and debt arrangements, and the preferential treatment some of them received from banks reduced many people’s appetite for bonds.

No one is surprised that many investors decided that the markets are a game of well-connected crooks, and that it’s better to invest in real estate, even if the return is low. It’s a rational consumer decision, which the Teva affair reinforces.

The logic is sane and simple. If you can’t even believe in Teva’s management, and if Israel’s largest company and symbol of business success can crash because of management conflicts, maybe it’s better to buy an apartment and to hell with Finance Minister Moshe Kahlon’s threats to get tough with investors in apartments.

Den of thieves, Israel style

The same logic applies to the tycoons, from Dankner and Fishman to Bezeq controlling shareholder Shaul Elovitch. If Dankner gambles his investors’ money on Credit Suisse and manipulates IDB’s share price, why believe in the stock market? If Fishman gambles public money on fluctuations in the Turkish lira, why should a reasonable person get near the markets? If Elovitch conspires with his managers on a deal involving Bezeq, the monopoly that’s part of just about every institutional portfolio, why not stay away from this den of thieves?

The entire financial system is based on one thing, faith. People have colorful pieces of paper in their wallets and treat it as currency only because they have faith in state institutions like the Bank of Israel and Finance Ministry. They put their money in banks and think the numbers on their statements and computer screens reflect the value of their assets because they believe in the banks. They let their employer park 20% of their monthly salary with institutional investors to buy securities for them only because they still believe in the markets and the basic honesty of the institutions.

The moment this faith crashes, the whole system might collapse, or at least suffer severely. People put faith in the stock market because they assume that the absolute majority of company reports reflect financial truth and that most managers are honest. But when they see that companies like Teva, Bezeq, IDB, Discount Investment Corporation, Jerusalem Economy, Bank Hapoalim and Bank Leumi have all been involved in scandals that involved money going from the public to the top 1%, faith in the market gradually vanishes.

Shmuel Hauser, the chairman of the Israel Securities Authority, often talks about the market’s health, and he seeks to reduce regulation, but regulation isn’t the problem, even if some of the rules undoubtedly are excessive or unnecessary.

Again, the real danger to the market is the public’s loss of faith. Thus, no doubt Hauser’s decision to investigate Dankner’s stock manipulation and Elovitch’s deals are two of his career’s major accomplishments, much more than regulation. It’s easy to prove that Hauser’s predecessors noticed similar deals, but when the people involved were high-profile businessmen with ties to power, they kept their mouths shut.