Knesset Bill Would Prevent Firms From Defaulting on Debts to Investors

Knesset member Carmel Shama-Hacohen says "tycoons have lost all shame."

Carmel Shama-Hacohen, chairman of the Knesset Economics Committee, presented a legislative proposal on Tuesday designed to deter companies from defaulting on debt to investors - and he minced no words in the process.

"The capital market clique, headed by the tycoons, has lost all shame," the Knesset member said. "The Financial Turpitude proposal is fair, and from the moment it passes into law, free haircuts will go out of fashion."

"It's become very trendy to ask 'Where's the money?'" said Shama-Hacohen, in a reference to would-be politician Yair Lapid, who has adopted that phrase as his slogan. "We know where the money is, and our purpose is to protect it."

"Free haircuts" refers to companies admitting they can't pay their debt to bondholders, in whole or in part - and thereby suffering no real penalty as a result. In the middle of hashing out a debt arrangement with one company, a businessman can borrow money through another of his companies, for instance. There is no legal impediment to stop him. That will change if the Financial Turpitude bill is enacted into law.

Financial institutions managing long-term savings will be barred from lending to companies controlled by anyone who defaulted on debt at any time in the preceding 10 years. Any dividends from the owner's other companies will go to serve debt to bondholders. Also, if a company defaults on more than 20% of its debt to bondholders, the company's owner will lose his controlling interest.

The bill was sponsored by Shama-Hacohen himself together with Meir Sheetrit of Kadima, and Aryeh Eldad of the National Unity Party, who wrote the law with the help of the Movement for Quality Government in Israel. They were joined yesterday by Eitan Cabel of Labor. The bill will be brought for its first vote in May.

Eliad Shraga, chairman of the Movement for Quality Government in Israel, said the organization will be commencing a campaign to promote the bill, and will "out" Knesset members who oppose it. "For years we didn't understand how we were being bilked," he said. "Nobody knew who was managing his pension money. The money is being used as jetons in the casino of the tycoons." Haircut is a cute word for gambling the public's money and losing it, he said.

Sheetrit commented that the tycoons religiously repay the banks every penny, lest the banks demand their liquidation. Also, he'd never met a tycoon who didn't have the wherewithal to repay debt, Sheetrit said. He added that he hopes the government won't torpedo this effort, though it shot down a similar proposal two weeks ago.

The issue isn't a nip here or shaping there, said Eldad. It's that the public is the poor man's "one little ewe lamb": It may not get slaughtered but it is getting sheared. "We want the public to know that if it invests money [with the tycoons], its money is at risk," said Eldad.