Taking Stock / The First Rule of the 0.1% Club

Is don't pick fights with the other members. Migdal's Aharon Fogel has been following the rules to a tee, to the detriment of his customers. Not that the treasury cares.

Salutations to Midgal's customers and those who save with the biggest insurance company in Israel. Here are some questions you asked, or should have, during the last decade.

• Why am I paying insanely high management fees on my "profit-sharing" insurance policies? (Over the decades these fees have eaten a quarter to a third of my savings for retirement. I can't say exactly how much of my savings will vanish in this way because the supervisor of insurance over at the Finance Ministry hasn't forced the companies to divulge that figure. )

Aharon Fogel - Michal Fattal - 17012012
Michal Fattal

• Why can't I get out of the "old" insurance policies that the insurance companies used to sell? Why are hundreds of billions of shekels in savings locked up in these schemes, albeit under the supervision of Finance Ministry officials?

• During the last 10 years, executive pay at publicly traded companies has soared. The owners of these companies are milking them dry through salaries, management fees, insider transactions and forced equity buybacks, wherein the public is forced to sell back its shares in companies moments before some large business breakthrough. So why has Migdal, the biggest independent insurance company in Israel, not gone to war on behalf of the devastated shareholders, which include its own customers?

• In recent years, dozens of companies, among them the biggest in Israel, have defaulted on debt, and haven't payed back bonds in full. Yet, in a practice unique to Israel, the controlling shareholders get to keep their controlling interest in these companies. Nor is the management fired, even though the controlling shareholders and managers brought the company to its knees.

So why haven't we heard Migdal (which is owned by the Italian insurance company Generali ) insist that if a company resorts to a debt arrangement, its controlling shareholder must forgo the controlling interest? Why hasn't it insisted that the stiffed bondholders get the shares?

A lot of questions have been asked in recent years, including whether the stock market is a rich breeding ground for corporate growth, or merely a giant razor that a small clique of people use to shear the public.

Now we know the answer, after Aharon Fogel, chairman of Migdal, formerly director general of the Finance Ministry, decided to look for a new job. Fogel's been chairing Migdal's board of directors for 11 years, during which time he took NIS 26 million in wages. At the same time, he also chaired software giant Ness Technologies. When you want to be a player in the tippy toppiest tier of tycoons, it makes good sense not to start picking fights with the other members.

The last decade has made Fogel one of the 0.1%. He didn't invent the wheel, of course. Migdal was already the biggest insurance company in Israel when he took the helm in 2000, and that hasn't changed. The entire insurance company business, especially life insurance, boomed during Fogel's stint at Migdal, thanks to various decisions by the government.

Yet at age 64, Fogel evidently feels that chairing Migdal isn't challenging enough. Now he's in negotiations to chair Partner Communications as well, one of Israel's three big mobile operators and one of the biggest companies in the land too.

In other words, responsibility for NIS 135 billion worth of the public's assets isn't occupation enough for Fogel, nor evidently is the handsome recompense. He has a lot of free time and what better way to spend it than join Partner, a company that for two years has been at the center of a thunderous scandal - the collapsing pyramid of debt built by Ilan Ben-Dov to buy Partner in the first place.

You may have wondered why Fogel hasn't warned the owners of Israel's public companies not to stiff their bondholders. You may have wondered why Migdal, a leader in its sphere, hasn't gone to war on behalf of its savers, who are being robbed in broad daylight. Now you know. Members of the 0.1% club who want to keep their membership mustn't break the club's rules of etiquette. Why pick a fight with a handful of powerful business barons when one can keep quietly milking millions of customers?

Did Fogel not read the draft report written by the economic concentration committee, warning of the dangers to Israel's economy by allowing finance and non-finance companies to be owned by a single group? Did he not grasp that as chairman of an insurance company, he can't also chair a giant company that owes billions upon billions of shekels?

Sure he knows all that. He also knows that he and his buddies in the 0.1% club pull the strings in Israel that control the regulators and much of the press, too. They can take the public's savings and play poker with them if they wish.

The watchdog knows

Where is the supervisor of capital markets and insurance? Why hasn't he summoned Fogel to his office, or at least warned him through the press that the chairman of an insurance company should focus his attention on the insurance company's customers?

He hasn't because he's preoccupied with implementing the "Chilean model" for pension savings, which involves preventing the relatively elderly from investing their money in high-risk financial asset like stocks.

But the Chilean model isn't a panacea for all the capital market's ills, because to have a pension to save using the Chilean model, first of all investors need to invest in high-risk financial asset like stocks and corporate bonds.

Before the Finance Ministry continues to play with the Chilean model, it should hire some real watchdogs with fangs to protect the public's financial assets, worth some NIS 2.5 trillion.

Oded Sarig, the commissioner of capital markets and insurance at the Finance Ministry, should decide once and for all together with Finance Minister Yuval Steinitz that insurance companies and brokerages and pension-management companies aren't just "regular companies." They are public bodies of the utmost importance.

One can't deposit NIS 2.5 trillion into the hands of boards at companies controlled by heavily-leveraged owners, whose fortunes don't depend on the management of that money. One can't deposit that money with directors who have other occupations and conflicts of interest. But they also can't give it to people with no experience in investments.

If the Finance Ministry, Bank of Israel or Prime Minister's Office don't swing into action and reform the management and control over Israel's financial institutions, manning the boards with independent professionals, in just a few years Israel's capital market will turn into a machine that makes a few people filthy rich and leaves millions shorn to the skin.

You think that sounds overdone? Have you noticed what happened on Wall Street during the last three years? Has it come to your attention that Europe's financial system is basically bankrupt? Think again. This is not a cooked-up scenario.