Old Dirt, New Brooms

TV producer: We want to run an interview with one of your reporters tonight, right as the news show starts, about the world reaction to the uproar on the stock market because of the suspicions against the finance minister.

Reporter: There wasn't any reaction.

TV producer: But the finance minister ? there are suspicions?

Reporter: The stock market isn't getting into a twist over it.

TV producer: Envelopes stuffed with cash, his son's mountain of debt, millions of shekels, March of Life...

Reporter: Yep. That's how it is. The stock market's powering ahead. We haven't heard a peep from foreign investors. Nada.


Sure enough, the weekend press wailed, on many a page, about the plague of corruption. Unbelievable how high it's climbed, the press moaned. A finance minister ... fat envelopes stuffed with cash ... dreadful.

Yet over on the Tel Aviv Stock Exchange it's business as usual, billions are streaming through the primary market, Matthew Bronfman's investing a billion shekels for a minority share in Super-Sol (TASE: SAE) , and the Israeli startup Microheat is revving its motors ahead of writing a prospectus for another giant initial offering on Wall Street.

And we say, ladies and gentlemen, that for once, the stock market has it right. Cynical investors are right. Those nasty speculators made the right call.

No, corruption has not stepped up a notch in recent years. Most of the filth being uncovered today relates to affairs that happened at the start of the 2000s, and some to the gay 1990s. It was ten years ago that a quarter-million dollars was found in Hirchson's luggage at the airport; only now however is it turning into an Event.

TheMarker readers know some of Hirchson's antics all too well. TheMarker Magazine (Hebrew) questioned him the first time back when he chaired the Knesset Finance Committee. The minister's attempt, effected his via lawyer Eldad Yaniv, to quash the investigation through the courts - failed. Ultimately the investigation was published in full.

A year ago we warned that Hirchson was unfit to be finance minister. We wrote that the gigantic debts of his son, and his close ties with businessmen like Mickey Zoller (who spend their lives in the seam between business and public money), cast grave doubt on his ability to function properly as finance minister.

Keep him away from the kitty

"Ehud Olmert waived the Finance Ministry, forwent direct control over the national treasury, let go the vast power that belongs to the politician who rules that ministry, and deposited it in the hands of a professional finance minister.

"Avraham Hirchson, your friend and crony, is the worst possible appointment as finance minister: his insistence on meddling in banking legislation when chairing the Knesset Finance Committee, even though his son was embroiled in gigantic debts to the banks, proved that he should be distanced from positions of economic power. The ethics committee of the Knesset banished him from the focus of policy making on bank and capital market reforms. Don't put him right back there." (Guy Rolnik, TheMarker, April 10, 2006.)

We wrote much the same about Olmert himself, and about his keen affection for the rich, and money.

But interest in these scandals is, as usual, scanty. The disengagement plan, Condoleezza Rice, Iran, Pakistan, Syria, Lebanon - most of our politicians (assisted by their friends, the generals) - keep us distracted with wars, preparing for war, spin about a "peace process" and the usual relentless political babble.

They do that so they can quietly keep stealing from the public, so they can ignore the need to manage public systems, so they can hand out plum jobs to the boys, so they can tailor giant government tenders for the billionaires of their choice, so they can prepare for the day that the political system will finally sicken and vomit them out, freeing them to openly aspire to make millions, which means - call in all the favors they accrued during their seat in power.

Everybody knows

Prime Minister Ehud Olmert appointed Hirchson to be finance minister even though he knew perfectly well that Hirchson's son Ofer owed tens of millions of shekels, and that the Finance Ministry was deeply involved in reforming the banking system.

Yet the stock market didn't blink. It didn't react in any way, shape or form when the grubby suspicions against the finance minister came to light. Why? Because everybody who invests in Israel knows perfectly well that corruption in government runs deep.

Even the headlines about "paralysis" at the Finance Ministry, overstate the case. Top people at the ministry told TheMarker half a year ago that Hirchson was invisible. "I have no idea what the finance minister does," one of the branch chiefs told us.

Don't waste any pity on the "shepherdless" treasury officials. Many partied in the vacuum created by the finance minister's ineffectiveness. Many used the void to advance their own interests as they saw best. It's an open secret at the ministries (and outside them too) that it's more important to network with Kobi Haber, the Budget Division director, than with the finance minister himself. Regarding certain macroeconomic processes, Haber's two-month absence on advanced-studies sabbatical will be more meaningful than the investigations into the finance minister.

Israel now belongs to that club of countries where everybody, investors and market players, are aware of the high-level filth. But they learned to operate in that environment. China, Russia and India are all far more corrupt than Israel, but foreign capital is massively going there.

Naturally, over time, a corrupt economy is doomed not to realize its potential. It is doubly vulnerable to shocks.

Israel's impressive economic performance over the last three years, and the advance of its financial markets, are due to the worldwide boom, to the steps taken here three and four years ago, and to better management, entrepreneurship, and globalization among Israeli companies.

The root of evil

But over time, the gap between the business and private sectors cannot continue to grow. The bad management of the broad government will ultimately hinder the business sector's ability to exploit its true potential. Gaps between rich and poor will grow even wider.

Corruption is the root cause of Israel's poor economic management. It leads to bad resource allocation, destroys incentive mechanisms, and shackles decision-making processes even among the purest of politicians and bureaucrats.

That is why the investigations being carried out are so important.

Nothing new has come up: they do not teach of any new corruption. But the investigations have opened a window of opportunity: the political and economic climate is right to subject the oafs reveling in the grimy seam of politics and prosperity to the long arm of the law.

If you fear for the future of Israeli democracy and society, you should care about one thing and one thing only: that the investigations into the shenanigans of the rich and powerful be done as professionally as possible, that the investigators be given all the means they need, and that the prosecution and courts handle the cases diligently.

And we hope that each and every suspect is proved pure as the driven snow. We hope that the guilty are named and convicted. Criminal convictions and heavy sentences truly are a deterrent.