Israel Crushed Its Business Barons, but They Never Were the Problem

Israel contains elements of Startup Nation and Lower Slobovia all at once, including tycoons who confused their skill at schmoozing for business acumen.

Business baron Nochi Dankner (center, in light blue shirt, blue eyes, smiling with closed lips) in court with his lawyers, at the concluding stage of his stock-running trial. (He was convicted on all charges.)
Ofer Vaknin

The scene in the Tel Aviv court on Monday was the populist’s fantasy comes true: A powerful, audacious tycoon who has lost his empire and is being hounded by creditors undergoes the humiliation of hearing his criminal offenses recounted one by one. His defense is rejected and a guilty verdict is pronounced on each charge. All that’s left is the sound of the steel door slamming shut and the dangling of keys as his sentence begins.

Mere years ago, Nochi Dankner was among the most powerful of Israel’s tycoon class – a gaggle of businessmen who controlled vast swaths of the economy through an array of holding groups. At his peak, enthroned at the top of the IDB group, Dankner controlled Israel’s biggest cellular company, its biggest insurer and its biggest supermarket chain, not to mention a host of other businesses, some of them, like the Maariv publishing group, aimed at exerting control over media and politics.

It all came crashing down in a tidal wave of debt that saw Dankner lose control of IDB in a bailout three years ago. Last month he made a deal with banks over some 500 million shekels ($128 million) of personal debt that he stands no realistic chance of ever repaying, and that will keep him in hock to them for the rest of his life. Then Monday, District Court Judge Khaled Kabub found Dankner guilty of manipulating IDB’s share price and a clutch of other securities violations in connection with a 2012 share offering in the company. Dankner now faces several years in prison.

Sound of a Mercedes being towed

Dankner was the epitome of an Israel of another era, like the robber barons of America’s Gilded Age. His downfall is particularly ignominious, but the fact is, the majority of his fellow tycoons have been cut down to size, and the handful who remain have nothing like the swagger of a decade ago.

Moti Zisser, who died last month, not only lost control of a multinational real estate empire but was forced last year to sell his home to make good on debts. Ilan Ben-Dov’s communications group Partner was taken from him, and last month his Mercedes was towed away after he got into an altercation with police. Eliezer Fishman is still standing, but this spring he lost control of his crown jewel, the Jerusalem Economic Corporation, and he owes banks personal debt of 4.5 billion shekels. Lev Leviev is now in the throes of a second debt bailout for his Africa Israel Investments, and a Russian bank may take control of much of his Russian property holdings for failure to repay debt.

Some of the tycoons are still around, but they no longer ride high over the economy. Yitzhak Tshuva has survived thanks to the fortune of being part of a consortium that found two giant natural gas fields, but he's unloading the rest of his business empire to focus on energy. Eduardo Elsztain is now presiding over a diminished IDB, devoting most of his time to keeping its creditors at bay. Idan Ofer is still at the helm of the Israel Corporation, whose holdings include Israel Chemicals and Oil Refineries Ltd., but he’s gradually bailing out of Israel.

Mistaking success for talent

The rise of the tycoons in the first decades of the century was something of a historical aberration, like the renewed popularity of LP records.  The phenomenon – whether it’s Russian oligarchs or Korean chaebol families – is usually seen in developing economies, not advanced ones where corporations tend to be faceless bureaucracies led by professional executives and without a controlling shareholder.

But the Israeli economy, unfortunately, contains elements of Startup Nation and Lower Slobovia all at once.

Tycoons were part of the second economy and, tellingly, never got much involved with the first, which is part of a global, highly competitive and dynamic business that requires the kind of acumen they never had. Instead, the tycoons profited from Israel’s Lower Slobovia-like other economy where cartels were the norm and your ability to maneuver among politicians and regulators was more important than your business skills.

The regulations were easy and before 2008 the money was, too. But when the tycoons went abroad, mistaking their success back in Israel for talent, they got tripped up like a squad of Keystone Cops in things like Russian real estate, Las Vegas casinos, Swiss bank shares and the like. And then, in Israel the mood changed and the cartels and the pyramid-style holding groups through which the tycoons did their business came under legislative attack. The game was over, but the debts were still there.

AP

The tycoons’ downfall has created a lot of headlines and social-media buzz, but their impact on the economy was never anything proportional to the attention they received. 

Dankner, Fishman, Leviev and others have had to reschedule and write off billions of shekels in debts, but they didn’t take a single bank down with them. The government didn’t have to bail anyone out. The economy grew and unemployment fell in the years that the tycoons were riding high and in the years when they have been laid low.

Of course, they exploited cartels and a weak regulatory regime, but they didn’t create it – it was there for the taking.

Their political power was greatly exaggerated, too, as evidenced by how the government and regulators (finally) crushed them, with things like the Business Concentration Law that does away with pyramids, the cellular telephony reforms, and the restrictions of bank lending to big holding groups.

The Dankner trial shows why tycoons became the focus of populist rage over everything wrong in the Israeli economy – and make no mistake, plenty of things are wrong.

Dankner is a face – a person with a story full of wrong turns, criminal and otherwise, that makes more dramatic reading than abstract and complicated issues such as Israel’s low labor productivity. You can plaster his face on the front page of the newspaper or hang him in effigy at a rally. Like the biblical scapegoat that was sent off to the wilderness to die with our sins, Dankner could be tried, convicted and jailed. Justice was done. But, the truth is, the problem hasn’t been solved.