"Economic leaders," "tycoons," "fat cats" or even the technical appellation "institutional investors": Call them what you will, the name conceals their most critical role in the Israeli economy – managing your pension savings and allocating capital.
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Twenty people manage most of the Israeli public's money, and they've had it for more than long enough to evaluate how they've handled it.
In contrast to what the tycoons' pet newspapers have been saying, the process of transferring the people's short and long-term savings to these people didn't start with the Bachar Reform of the capital market seven years ago. It began 25 years ago, when the government withdrew from the capital market in the course of its Great Stabilization plan. The latest spasm of reform was in 2003.
The Bachar Reform, spearheaded by the then treasury director-general Joseph Bachar, wasn't responsible for the government withdrawing from the markets, or for the movement of money from secure, government-controlled pension schemes to the roiling waters of the open market. What Bachar did was eradicate egregious conflicts of interest by forcing the banks to sell their holdings in prudential and mutual funds. With that, it diluted concentration in the Israeli economy, resolved certain conflicts of interest and significantly reduced the probability of Israel sliding into massive financial crisis.
But the Bachar Reform merely prodded the problems riddling the Israeli capital market and banks, the worst of which are feeble regulation and structural conflicts of interest. The massive influx of pension savings from sheltered government-controlled vehicles into the messy marketplace during the last decade greatly enhanced the influence of the markets over business activity and the allocation of resources.
Well before the great global crisis erupted in the last few years, the risks built into the Israeli capital market were becoming screamingly clear. But the public didn't take notice and the regulators were in thrall, whether to their own mindsets (at best) or to the very business elements they were supervising (at worst).
In the last year too, though the public became achingly aware of the failures in the markets, the regulators blithely sailed on, not only continuing to ignore the flaws in the structure of the markets but also the souring public sentiment. These regulators are spending rather too much of their time deflecting criticism and explaining why the structure of the market is just fine the way it is.
The truth is it isn't fine. The best illustration of what's wrong with the structure of the Israeli market is the way pension fund managers are handling the latest fashion of haircuts. A haircut is market argot for partial default. A company simply doesn't repay its debt to bondholders in full. It may offer some of their money back, a piece of equity instead of some debt, sweeter interest rates or other incentives to induce bondholders to forgive some of the debt.
Four annoying things come to mind regarding the way managers respond when companies start waving the scissors.
Let me count the ways
One is the extravagant pay, or management fees, the managers have been taking, while providing mediocre investment management in return.
Two is that the people managing our pension monies have been sitting around doing nothing while the bond prices of company after company collapses. Until a company actually states that it's in trouble and that it can't meet principal or interest payments, the institutional investors keep their blinkers on and ignore the signals of distress. They take too long to ask hard questions, often waiting until the horse has bolted.
Three is that having noticed a company is in distress and realizing it can't or won't honor its debts in full, they still hem and haw. They don't leap up immediately and demand a working plan to fix the situation.
Four is that the people managing our pensions tend to let the people who ran a company into the ground stay on and keep managing it.
Not one of the roughly ten big institutional investors managing Israel's pensions has gotten to its feet and fought to protect savers as the haircuts march on. The people managing these vast sums of money, who employ armies of analysts, lawyers and accountants and who have grown filthy rich in the last decade, have evinced very little interest in the fortunes of their savers.
Where's Batman when you need him
Yair Hamburger, who controls the insurance group Harel, doesn't talk with the press. Nor has he told his managers what to do about the plague of haircuts.
Hamburger is the biggest "responsible adult" in Israeli capital market circles. That's because he owns and manages a major finance group and knows the scene inside and out.
In light of his avoidance of heavy leveraging, this column has praised Hamburger for the conservatism with which he has managed his business. But now he is not showing any leadership. He isn't showing the market that he's given his managers total freedom to act firmly with companies preparing to default. Instead of leading, he seems to be walking on eggshells.
Banker Shlomo Eliahu who's in the process of buying the insurance company Migdal, could also be a responsible adult. He's preoccupied with closing the Migdal deal. He will be leading a huge insider transaction, in which Migdal will take over some of his private businesses. In the years to come his priority will be to service the huge debt he took to buy Migdal.
Eliahu talks a lot about buying Migdal because of its prestige, the good name and the heritage it comes with; but he still doesn't see the link between these good things and fighting on behalf of Migdal's customers.
The investment management company Psagot, which is controlled by the international investment fund Apax Partners, has a name for fighting for investors – from the time it was managed by Roy Vermos. Now it has a new manager, Hagai Badash, who's been making baby steps in that direction. But he seems hesitant and it’s far from clear that he has the backing of Apex Israel CEO Zehavit Cohen.
Shy Talmon, former government official and banker and today the CEO of Clal Insurance (which belongs to Nochi Dankner's imploding IDB group) probably won't be baring his fangs to the big borrowers. The dissonance he's been demonstrating may explain whispers in the gossip columns that he wants to leave. The chance of Clal Insurance spearheading the battle against defaulters, on behalf of the little man, seems remote.
The Stepak family that owns the Meitav brokerage (soon to merge with DS Apex) sees itself not only as a leader in the Israeli capital market, but also as bearing social responsibility. But the family hasn't evinced any actual leadership that could change norms in the capital market.
Especially disappointing perhaps is the quasi-government company Amitim, which manages veteran pension funds. It isn't owned by some heavily leveraged tycoon. It could easily have led the battle to defend the little investor; it could have filed class-actions; it could have changed the rules in the marketplace. It didn't.
Unless one or more of the above gets to their feet and shows leadership, which they should, given the vast amounts of the public's money they control – the government and public will have to conclude that the Israeli capital market is a dud and needs profound reform. This would call for the extracting the people's money from the hands now controlling it. The silence, the indifference, the opacity and the hesitation with which billions upon billions of the public's money is managed cannot continue. Unless they change their ways, these people cannot be considered worthy of managing the people's money any more.