Can an Insurance Company Be Its Own Grandma?

Overlapping ownerships of financial and non-finance companies pose grave danger to the economy.

To whom are Israel's pension managers beholden? To their bosses, who own multitudes of companies, or to us?

One Thursday in August, IDB made a dramatic announcement: the sprawling investment group would put $250 million into a huge billion-dollar fund investing overseas. Company publicists excitedly invited a few journalists to IDB offices in the Azrieli Towers.

Present was Nochi Dankner, who controls the entire group, including Koor, through which the investment was to be made; Lior Hannes, director at Koor; IDB CEO Haim Gavrieli; and Roy Meltzer, a former journalist who advises the group.

The four politely explained to journalists at length that this was an unprecedented alliance with important investors from Saudi Arabia and Qatar and that the fund will invest in emerging markets - Latin America, the Far East, even Africa. They said it could be expected to return gains of 15% to 20% a year, and that Dankner himself would serve as IDB's representative in the fund.

Websites celebrated. Newspapers devoted whole pages to the story. One commentator even gushed that Dankner had figured out how to bypass the diplomatic pitfalls of the region's politicians, and suggested he was close to achieving world peace.

The following Sunday, Ido Dissentchik, head of the Clal Insurance investment committee and the person responsible for the company's investment policy, praised the deal fulsomely. In the name of the millions of Clal Insurance policy-holders he is responsible for, Dissentchik said, "We must thank Nochi Dankner for making this opportunity possible."

But inquiry reveals that the picture is a little more complicated than that. The fund will be managed by the Swiss bank Credit Suisse, of which IDB owns a minority stake. The other investors include the same companies that are IDB's partners in Credit Suisse and some of the bank's managers.

Half of IDB's investment, $125 million, will come from its subsidiary company Clal Insurance, and out of that, $92 million will come from policy-holders' money. Apparently this is all above board and everyone will earn lots of money.

But it is clear that the conflation of Dankner's ownership of IDB, his interests in Credit Suisse and his international business interests, as well as his control over public funds and the people that manage it - in other words, his good friend Dissentchik and the other Clal Insurance managers - could potentially lead to problems.

Dankner is not alone

The managers of Clal Insurance are good, professional people, and Dankner, too, is a worthy man, a man of character.

But are we certain that these same investment managers thoroughly vetted the deal their boss tossed at them? Did they compare alternatives? Did they ask him tough questions? Did they haggle over percentages?

Neither the policy-holders of Clal Insurance, nor their investment manager representatives, nor Dissentchik himself were present at the journalists' meeting. Could this imply that they weren't really there when they were supposed to fight for the rights of the policy-holders, either?

Dankner is just one example of a businessman who in addition to owning multiple companies, controls billions of shekels of the public's money (in Dankner's case, over NIS 160 billion ).

Yitzhak Tshuva, who owns the Delek Group and the El-Ad Group, also has controlling interests in Phoenix and the Excellence investment company, which together control over NIS 90 billion. In the past, Phoenix gave the flailing Delek real estate company a loan using policy-holder money. Would it have extended such a loan if Tshuva wasn't the owner of both companies?

The overlapping ownerships of financial and non-finance companies portend danger that worsens as the large organizations gain in strength, and the small and medium-sized organizations grow weaker.

All the bank owners in Israel own other businesses. Shari Arison owns Bank Hapoalim, along with a major construction company and a large investment company. The Ofer family, owners of Mizrahi-Tefahot Bank, also owns the Israel Corporation and numerous real estate holdings. Liora Ofer, Yuli Ofer's daughter, recently bought a chain of malls owned by British Israel as well as the Ramat Aviv and Savyonim malls, which were previously owned by Lev Leviev's Africa Israel group.

Muzi Wertheim, the Ofer family's partner in Mizrahi-Tefahot Bank, also owns the biggest soft drink company in Israel, the Central Bottling Company (commonly known as Coca-Cola Israel ), and the concession for Channel Two. Zadik Bino, controlling owner of the First International Bank of Israel group, which also includes Bank Otsar Hahayal and Bank Massad, also controls Paz Oil. Matthew Bronfman controls Bank Discount and simultaneously owns the IKEA Israel chain. Bronfman also has a large interest in the Super-Sol chain, which is controlled by Dankner.

These are the people who control roughly a trillion shekels worth of the public's money. And while they may have acquired this control by perfectly legal means, it would seem preferable that this control not coincide with owning vast business empires.

Vermus, on his lonesome

In August 2009, exactly a year before the IDB-Credit Suisse fund announcement, Lev Leviev admitted that his company Africa Israel couldn't meet its liabilities after 2011. Africa Israel owed the public NIS 7.5 billion shekels.

The man who lead the struggle against Leviev, forcing him to reach a better deal with the public of investors, was Roy Vermos, CEO of the investment house Psagot, which is owned by the investment fund York Capital Management. Just about every investment firm in the land had lent money to Africa Israel (by buying its bonds ). Their managers generally preferred to concede the money to Leviev and sit on the side. Why didn't they fight by Vermos' side?

The Africa Israel incident was merely emblematic of a wider phenomenon that intensified during the 2008 crisis. The conflicts of interest in the capital market grew insufferable.

People owning companies unlikely to repay debt also owned an insurance company, investment company, or bank that lent money to that same company. In other words, a person could become their own creditor and determine the fate of their policy-holders' money, despite having a huge personal stake in the decision.

Just as egregious, this clique of people who borrow and lend money move in the same social circles. One must ask: To what degree will the investment and insurance company managers be willing to come into conflict with their bosses' friends?

Psagot was the first, a few months later in November 2009, to publicly demand that rich businesspeople's ownership of institutional investors be dealt with. "The Bachar reform dealt with the banks' conflicts of interest," CEO Roy Vermus said. "But the latest crisis bared the problem of the conflicts of interest among the people managing others' money. We must deal with rich businesspeople's ownership of institutional investors."

Financial incest

In a vote that Dankner tried to pass a month and a half later, the opponents were independent investment companies like Psagot and DS Apex. Those that supported the deal, among others, were the managers of the Tshuva group investment company.

So when Psagot and Vermus got caught up in an Israel Securities Authority investigation for alleged securities manipulation, few shed tears. The investment company that fought the good fight for the public was weakened and could no longer carry the banner of the battle.

Former Bank of Israel governor David Klein spoke of the capital market as an incestuous pit in 2003, and called for fundamental restructuring.

"Isn't the financial family endangering itself with incest? It's not clear who the parents are and who the children are, who is whose sibling and who is married to whom," Klein said at that time.

"Can an insurance company be its own grandmother? Can a retirement fund be its mother's mother? Can two banks be brothers because they have the same father? Can a trust fund be the daughter of a bank, and at the same time its sister as well, since both are the mothers of the same insurance company?" Klein continued.

"Who appointed the board of directors of a particular financial body, its investment committee members and its managers? Who controls the marketing budget? Who carries out the market sale and purchase of securities? Do the fees imposed on the customers reflect a competitive market structure?

"Is there a connection or dependency on databases? How many financial bodies have the same accountant, and do accountants also perform advisory roles? It's obvious that the stabilization impetus demands of us that we act to minimize centralization," Klein concluded.

His compelling speech laid the groundwork for establishing the Bachar Committee, which severed ties between the banks and provident and mutual funds.

The Bachar Committee was not the first to tackle financial incest. It was preceded by a committee headed by David Brodet, then treasury general manager and today chairman of Bank Leumi. The committee determined that the connection between the bank as a funder of financial companies and the bank as the owner of said companies is destructive, because the bank has obvious conflicts of interest and is likely to make bad decisions.

The Brodet Committee forced the banks to sell their controlling interests in nonfinance companies like Koor, Clal, Delek, Africa Israel, Poalim Investments and Migdal. That recommendation, which was implemented to the letter, was the basis for the formation of the business empires we know today - those of Yitzhak Tshuva, Nochi Dankner, Lev Leviev and others.

The Brodet Committee only did a quarter of the work necessary. The Bachar Committee completed another quarter of the job, and the two together contributed no small amount to the decentralization of the market, helping to create a healthier, more competitive financial environment.

But the division between those that do business and those that fund them is not yet complete. In fact, most of the banks and insurance companies in Israel today are controlled by businesspeople that also own non-finance companies.

Controlling a lender, such as a bank, investment company or insurance company, grants its owner great powers: information on competitors, influence on whole sectors, the ability to fund businesses that they favor, and reciprocal relationships with other funding bodies that can help them circumvent other regulatory restrictions.

In the market jargon of the 1980s, they called policy-holders prepared to take on any assignment "soldiers" - who could be counted upon to salute when the owner needs them. They fulfill orders and don't ask questions.

Now the soldiers want to come home to mom and dad, to parents that will take care of them and only them - and have no other interests but theirs.