Comptroller Probing if Regulators Protected Savers From 'Haircuts'

Comptroller's financial division probe capital market division at the Finance Ministry, supervisor of banks at Bank of Israel and Israel Securities Authority.

As part of an investigation being conducted by State Comptroller Micha Lindenstrauss on the recent cases of companies that have sought to settle their obligations to bondholders for a fraction of the amount owed, staff from the comptroller's office collected documents over the weekend from three of the agencies that oversee the capital markets and the banking sector.

Employees of the financial division of the comptroller's office paid a visit to the capital market division at the Finance Ministry, the offices of the supervisor of banks at the Bank of Israel and the Israel Securities Authority. The agencies were told in advance that Lindenstrauss' staff members would be coming.

Micha Lindenstrauss
Michal Fattal

The so-called "haircuts" that bondholders had been faced with from a number of corporations, in which investors have gotten substantially less than the companies originally undertook to pay, prompted the opening of the investigation by Lindenstrauss' staff last month. In addition to individual investors, institutional bondholders that have invested the public's pension money have also taken a hit. Among the bond issuers that have sought such settlements with bondholders are companies associated with major business tycoons such as Yitzhak Tshuva, Yossi Maiman and Ilan Ben Dov.

Lindenstrauss is planning to issue a special report on the issue and it is expected to deal at least in part with the conduct of the three agencies whose offices were visited over the weekend. The comptroller is seeking to examine whether the agencies took decisions that would protect the pension accounts and provident funds of individual members of the public whose savings were invested in the bonds.

Lindenstrauss is also looking into whether the agencies demanded collateral of any kind from the corporate bond issuers in the event of their failure to repay their debt, similar to the security banks demand from borrowers. The issuers of corporate bonds are not subject to oversight by the comptroller's office, but Lindenstrauss is nonetheless thought to be considering summoning some of the corporate tycoons to a meeting to hear them out about the decisions taken by the regulatory agencies.

Lindenstrauss is thought to place high importance on the report he will be issuing, in light of the impact of the failure of bondholders to repay their obligations on the investment of the public's savings. Once his staff has gone through the records that were collected over the weekend from the three agencies, a draft report will be prepared containing Lindenstrauss' initial findings, but that is to be preceded by additional meetings with staff of the agencies under investigation.

The agencies will ultimately be given an opportunity to comment on Lindenstrauss' draft report, after which a final report will be prepared. It is expected to take at least six months before the final document is issued.

The three agencies have not responded for this article, but the State Comptroller Law bars agencies whose operations are under examination from being privy to the work of the Comptroller's Office.