Taking Stock / Hair Today, Gone Tomorrow: The Scissors Are Running Riot

There is a reason for the flaccidity of the institutional investors and regulator when it comes to dealing with the controlling shareholders of the big companies; they're looking toward personal future employment at gorgeous terms.

1Suddenly everybody's an expert on haircuts.

hodak - David Bachar - December 6 2011
David Bachar

It's been 25 years since the government stepped out of the capital market with the intention of creating a free market. But it seems the Israeli public only got the idea this month. Only now have people truly understood what it all meant.

Members of the public have learned a bit of market argot: Now they know that when a controlling shareholder proposes a "haircut," that means he isn't going to pay the them back. Not in full, at least. He is proposing to repay some fraction of what they're owed, plus this and that sweetener.

But mainly, only now is the public grasping the true cost of the warps and distortions in the market that the government and regulator neglected to resolve.

Right now the business baron in the spotlight is Yitzhak Tshuva, thanks to the radical haircut that he and his company Delek Real Estate are offering investors. It's quite a daring style that the real estate and energy tycoon has in mind, no question about it.

You can't say investors were blindsided. They knew what was coming, judging by the yields at which Delek Real Estate bonds had been trading in recent years. For years Delek Real Estate bond yields had been deep in junk territory, attesting that investors felt quite sure the company couldn't repay them in full. For years they'd suspected the company was a walking corpse.

Why then did the public only just now wake up and start to howl? Maybe because in the last decade, Tshuva has become quite the Israeli symbol. There was the ostentatious wedding he threw for his son, which some say cost in the range of NIS 6 million to NIS 7 million. There was the battle he fought against the government over the royalties he'd have to pay on natural gas his companies found and will be extracting from Israeli territorial waters in the Mediterranean Sea. This same man is proposing that bondholders waive a big part of the money Delek Real Estate owes them - somewhere from 30% to 70%, depending on who you ask.

Now investors have finally digested what a "bad investment" really means.

The anger may be aimed at Tshuva and his company specifically (at this point in time ), but it has created a generalized opportunity for the legislator to institute structural changes in the capital market. The wait does not necessarily need to be long: At least some of the problems can be handled through the presently-sitting, government-appointed "economic concentration" committee.

tshuva - Emil Salman - December 6 2011
Emil Salman

For instance, the committee could ask: Why exactly did the insurance companies and provident and mutual funds that manage the public's money merrily lend billions upon billions to Tshuva and other tycoons, without demanding appropriate interest and collateral? Why do they sit about flaccidly, rather than aggressively negotiate on the public's behalf to regain as much of the money that they'd lent as possible?

The reason is clear. It's because the people managing these insurance companies and provident and mutual funds feel they're part of that small "concentration" club, sitting pretty on a pile of the public's money. They don't want to rock the boat. They like the boat.

There is a reason for the flaccidity of the institutional investors and regulator when it comes to dealing with the controlling shareholders of the big companies. They're looking toward personal future employment at gorgeous terms with these companies, if they behave according to clubhouse rules.

Most of the people speaking out against a haircut at Delek Real Estate continued to buy the company's bonds after it was clear that it was a dead horse. But they share another characteristic too: They don't belong to the concentration club, where people scratch each other's backs using the public's fingernails.

David Hodak, the lawyer representing the big business groups in their fight to preserve economic concentration exactly as it is, is the same lawyer who chaired a committee two years ago that recommended changing the rules of the game in Israel's bond market. Why? Because the very economic concentration that he is now fighting to preserve led the institutional investors to lend billions and billions of shekels to a handful of heavily leveraged business groups, which put the public's money at risk.

Ridding the economy in general and the capital market in particular of economic concentration would not only dash the scissors from the hands of the tycoons proposing to cut our hair. It would end the excruciating haircuts that the public suffers from every direction - from cellular companies, banks, credit card companies, retailers, food manufacturers, the cement monopoly and all the other monopolies and oligopolies that charge the Israeli "consumption tax," and that stifle innovation, competition and the concept of meritocracy.

The social protest this summer over the cost of living, and the financial crisis unfolding in Europe, have created a golden opportunity for the economic concentration committee to courageously tackle the diseases of the capital market and broad economy. If the prime minister and his finance minister fail to rise to the occasion, their names will go down in ignominy. If they rise to the occasion, they could turn the global economy into the impetus for true change.

2Snipping a billion shekels from the public's investments in Delek Real Estate bonds is quite the feat. The amount is impressive, yet it pales into insignificance compared with the haircut given by the monopolies and oligopolies each year. And that sum pales into insignificance compared with the haircut the public sector gives the taxpayer year-in and year-out.

The perfectly justifiable fear that has gripped Israel's pension-savers in the last year is their opportunity to recall the tens of thousands of pensioners who live off the fat of the land on "budgetary pensions." They didn't save a sou: Their pensions are paid in full by the government - i.e., the taxpayer. Their pension income doesn't depend on the vagaries of the cruel markets.

Unsurprisingly, most of these people on budgetary pensions are among the best-paid in the public service sector in general, and in the military in particular. The government's actuarial liabilities to the most powerful people in the public sector comes to hundreds of billions of shekels. The burden of their pension schemes will mushroom in the decade to come. To pay them in full, the government will be forced to slash every other service it provides, from education to health care to welfare. The fact that the best-paid people in the public service sector will be getting billions upon billions of shekels at the expense of 7 million taxpayers is outrageous. Yet the gargantuan waste in the public sector continues year after year, largely unremarked upon.

This is the time to open the debate on all the haircuts the public is given against its will. We need a freer, fairer market. We need a more efficient, fairer public sector. The road to both passes not only through economic reforms, but through change in our values and culture. This is the time. There is no more apposite one, as the economic models of the entire global village are rethought.