Bubble Business and Galia's Shoes

"That's it. The bubble is starting." A worried market veteran called yesterday, to talk with us. Not just any market veteran: this is one who specializes in the hottest activity in the financial markets - underwriting. Meaning, taking companies public, helping them sell shares and bonds to the public.

Underwriters are busy bees these days. The other day, for example, three of them were pondering how exactly to begin counting the NIS 65 billion orders that were spurred by the Paz energy company's offering of shares and bonds. Paz was selling just NIS 1.7 billion worth of securities, but NIS 65 billion were fighting over the right to buy that NIS 1.7 billion. Each participant will get just 2% of the order placed.

Paz, owned by Zadik Bino, is certainly an impressive company. It is a well-known supplier of gasoline in Israel that in the last year bought the Ashdod oil refinery from the state for NIS 3.5 billion. That further established Paz's status as the leading energy company in Israel. But it also meant the company had to find NIS 3.5 billion.

If anybody thought Paz might have difficulty raising an amount that unthinkable, then he hasn't visited the Tel Aviv capital markets lately. Inside a month, in two offering that were snapped up at warp speed, Paz raised NIS 4 billion from investors. Mainly, from the big institutional investors - the provident funds, the insurance companies and the pension funds, which represent investment  by the public in the financial markets.

Two conclusions arise from this tale. One At least in the context of creating a source of credit outside the banks, the capital market reform was a stunning success, three and four years ago it was unthinkable for Israeli companies to finance a giant acquisition without the banks. To buy the Ashdod oil refinery, Bino would have had to kowtow before Galia Maor, Zvi Ziv or Giora Offer. Today Bino can instead invite Mrs Cohen from Hadera to a cup of tea, she representing the everyman and everywoman who lent him the money he needed to buy his refinery, from their pension funds.

Aside from a cup of tea and the chance to see Bino in person, Mrs Cohen can boast having revolutionized business in Israel. Today she is as important as Galia Maor, the CEO of Bank Leumi, and that means the Israeli marketplace is a more open one, a more competitive one, and a fairer one, too.

The second conclusion is that it may be very nice to have a cup of tea with Zadik Bino, but one shouldn't lose one's head. Which means, don't overlook the risks. Big business has a way of looking after its own interests before Mrs Cohen's.

That is the bubble effect that aroused such concern yesterday. The effect of too much money running around the financial markets, the money of Mrs Cohen and her friends, which is streaming to the capital market instead of streaming into government pockets. It means that Mrs Cohen may yet discover the hard side of the business that Galia Maor runs. If the credit is too cheap, it may wind up leading to losses.

"Bino paid a billion shekels too much for the Ashdod oil refinery," commented his arch-rival Yitzhak Tshuva just a few days before the Paz initial public offering. Comparisons with peer companies abroad weren't complimentary to Paz's IPO figures either: note that foreign investors hardly participated at all. Yet Israeli investors stampeded for the right to buy a piece of Paz, and indulged in shenanigans not seen for years and years - "People opened 20 bank accounts to simultaneously place orders from different accounts."

Paz was hot property yesterday, but the truth is that almost every offering takes off these days, which is a glaring sign of surplus liquidity. Too much of Mrs Cohen's money. She can be proud of having walked in Maor's shoes. But she should worry that the shoes will prove to be too expensive.