Three months ago, a spokesman for the Bank of Israel deviated from the beaten path. A few days after Haaretz wrote once again that the central bank was captive to the banks that it’s supposed to supervise, it issued an irked response titled “The regulator is captive to the general’s public good.”
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It was a good sign; the irritation may show that the central bankers have noticed the change in public sentiment. Their usual method of ignoring criticism might not work.
The uproar in the last two weeks over the debt arrangement for the failed tycoon Eliezer Fishman showed that the central bank’s PR machine had competition in the form of the institution’s banks supervisor, Hedva Ber. In a series of interviews and public appearances following the banks’ disgraceful arrangement with Fishman, she confirmed what we feared: Bank supervision is in thrall to the big bankers and borrowers.
To recap, for over a decade Fishman was depicted as a luminary of business. Once a year the newspaper he owned would hold a business conference. Israel’s leaders, from prime ministers to central bankers to finance ministers to regulators and Knesset members would make a pilgrimage to these events, passing by Fishman in the front row.
This week he was declared bankrupt, as he has been for a decade, maybe more. In other words, more than the prime ministers, regulators and Bank of Israel officials who attended Fishman’s conferences needed the tycoon and the newspapers he controlled, Fishman needed them. This way he could avoid bankruptcy and everything this entails including the loss of great prestige.
But the corporate and banking elites who enjoyed a decade of Fishmanism and Danknerism (named for another failed business baron) are still with us. We saw the result two weeks ago when the special administrator appointed by a court to handle Fishman’s crash was about to submit an arrangement. Fishman would pay a fraction of the debt and be spared bankruptcy; meanwhile, he, his wife and children would retain assets worth hundreds of millions of shekels at the expense of billions taken from public pensions.
But a media campaign that began in this newspaper was taken up by other media outlets, politicians and social movements. It made something happen. Ber told the banks that the arrangement was unacceptable. The banks had to sharply reverse course.
Interesting as the U-turn by the Bank of Israel is, the reasons cited by Ber are even more so. She announced that she had “changed her mind,” so she ordered the banks to oppose the arrangement that would have let Israel’s largest private borrower evade bankruptcy and continue to live like a king. He would do this after losing billions in people’s savings – allegedly demanding guarantees protecting him along the way.
Two types of borrowers
So if Ber changed her mind, what had she been thinking before? It’s not hard to work out from the Bank of Israel’s reactions, or lack thereof, to the affairs in recent years involving billions in loans to tycoons wit political clout.
To this day the Bank of Israel has been unwilling or unable to grasp that its claims that Israel’s banks are stable are irrelevant when scandal is swirling. The very stability the central bank boasts about doesn’t stem from integrity and efficient, fair and professional management. It’s because two banks call the shots and shape the laws. It’s because of the lack of competition and the tremendous market power the banks have at the expense of most customers.
Now Ber has a new opinion, which is surprisingly similar to an opinion that appeared here and elsewhere over the past decade – an opinion that had been deflected by the central bank. That is, oligarchs who take giant loans from the public may not be exempted from bankruptcy and investigation. The system’s stability doesn’t depend solely on the provisioning for doubtful debts. And democracy doesn’t exist when there are two types of borrowers.
A few days later, speaking with business daily Globes, which for the first time in 20 years isn’t owned by a business baron, Ber exposed how in 2006 Israel’s savers actually lost about 2 billion shekels ($565 million) when Fishman gambled on the Turkish lira with their money.
She suddenly decided to reveal that Israel’s banks let Fishman gamble on the lira using public money, without providing liquid collateral that could be seized to recoup the losses. He didn’t even employ a stop-loss mechanism that would halt the gamble if a loss passed a certain threshold.
People might be surprised that anybody could gamble billions on the Turkish lira or anything else using public money. But currency dealers get it. What Ber tells us, 11 years after the event, is that Fishman gambled billions of our money without having the wherewithal to make good on his losses. If the lira had gained, all the profits would have been his (minus bank fees). His newspapers would have continued to hail his genius. Business and political leaders would continue to file by his chair at the conferences and receive more advice on how to run the country – eradicate regulation, assure stability, block competition.
And if Fishman lost, no problem, the banks would continue to roll over his credit, maybe even offer him new loans so he, his children, cronies and friends could keep living like kings.
He’s an extreme case, but not the only one. Inquiries published on these pages and recently aired on public television revealed that the biggest borrower, Nochi Dankner who controlled the IDB Group, made secret loans to his cousin, Bank Hapoalim Chairman Danny Dankner. The Bank of Israel learned this eight years ago but didn’t tell the public.
With both Dankner and Fishman the Bank of Israel concealed such information for years and basically still does so. From time to time, when some social protest arises and the media does its work for once, the public gets thrown a bone. It’s told that the top bankers have been corrupt but that was then – now new procedures are in place.
Eternal crony banking
To this day, the Bank of Israel cites banking confidentiality. This is a ludicrous excuse given that these are bankers who play only with public money.
Now it turns out that the Bank of Israel doesn’t buy its own excuse either. When Ber saw the fierce tidal wave approaching, she didn’t scream confidentiality, she elaborated exactly how the banks conducted themselves in the Fishman lira affair.
The dynamic where the Bank of Israel “changes its mind,” disclosing critical information or making a move only when under the spotlight, is a case study for how captive regulators operate. Most people tend not to care and aren’t informed. Regulators know this and can serve the people they supervise. When the public stirs, the politicians do too. Then the regulators suddenly “change their minds” and become heroes for doing what they should have done in the first place.
Ber says crony banking is history. We know this isn’t true based on her own reasoning. She points at the percentage of bank loans to tycoons as proof that all is well now. But she’s looking at the symptom and ignoring the disease: the banks’ quality of corporate governance, their political power and the regulators’ fear to confront them, partly because their own careers follow the revolving door between the banks and the Bank of Israel.
Interest and power groups, chiefly in the business sector, are violent viruses. And they’re flexible ones. Yesterday they exploited their power and regulatory weakness to launch giant leveraged deals without adequate collateral. Tomorrow they’ll find some other method. A decade ago it was business pyramids. Today it’s monopolies in natural gas or infrastructure. Public money will be used to engineer around regulation and the rules in some new way.
When the Bank of Israel forced out Danny Dankner as chairman of Bank Hapoalim, it said he was a bad apple, but it quickly approved the appointment of Zion Kenan, who years later turned out to be the one who let Dankner borrow millions based on a false valuation. The Bank of Israel knew this before Kenan was appointed chief executive.
If the Bank of Israel wanted to show that it hadn’t “changed its mind” but would change balance of power between the weak public and the banks’ power centers, it wouldn’t keep prattling about new procedures sent to the banks. It would force the banks to disclose all their documents in the Fishman and Dankner cases, and call for the establishment of a commission of inquiry to weed out all the bankers, directors and bank supervisors who took part in the events of the last decade. It would demand that all the directors and bankers still in the system be discharged. It would publish a report on the roots of the problem, not the symptoms.
Ber doesn’t seem to be gunning for a job at banks Hapoalim or Leumi, but our experience with the Bank of Israel has been disappointing. She has an opportunity in the weeks ahead to show what she really intends to accomplish.
Will she be dragged into a parliamentary inquiry? Will an inquiry really want to tackle the legal and criminal corruption in the banking system, or are the Knesset members just looking for publicity? Has the media really shaken off the tycoons’ bear hug or is it just giving itself an alibi after decades of failing? Stay tuned.