Hard Line / No Succor for the Israelis in Romania

Remember all those plans tycoons and institutional investors were hatching for the state to bail them out by buying corporate bonds? Did you think that once the withdrawals from provident funds stopped, the plans just disappeared? Well, they didn't.

This week we learned of a twist, coming from Securities Authority chairman Zohar Goshen. Institutional investors (provident funds, insurance companies and pension funds) will buy new issues of bonds and place them into a special fund. The state would insure that fund against any drop in value greater than 20%. Thus, says Goshen, the state will fix the broken non-bank credit market.

Don't just sneer. The plan has reportedly won the blessing of Stanley Fischer, and the governor of the Bank of Israel has clout with prime minister-designate Benjamin Netanyahu.

But Goshen's plan has its problems.

The first devil is in the details. Just like all the other plans, it places institutional investors into a moral hazard. Say you manage an investments portfolio and the state promises that if you lose more than 20%, it will compensate you. What would you do?

Obviously, you'd latch onto the riskiest investments in town, the ones with the potential to bring you the highest returns, because the entire competition between institutional investors is based on returns.

Another snag is that Goshen's plan lacks boundaries. There are no restrictions on the type of bonds they could buy. Every bond purchase would be guaranteed, including bonds of fly-by-night hopefuls who plan to build a mall in Hicksville.

It will lead to the same mistakes that the institutionals made before the crash - they were merrily throwing money at every nifty player who'd back his borrowing with assets in some armpit of the world. But this time, their gambles would be backed to the tune of 80% by the taxpayer.

But the biggest problem is that when you look at the list of companies that need to be able to borrow again, in order to revive the bond issuance market, we find it's a short list of the biggest borrowers in town. They desperately need fresh financing to replace gargantuan loans in 2009 and 2010.

These are the very companies whose potential insolvency could destabilize the local banks. That's probably why Fischer has been happy with Goshen's plan: after all, the Bank of Israel is responsible for the stability of the banks.

Shouldn't our companies be eligible for a helping hand?

Supporters of the plan point to developments abroad, where governments do not cavil at pouring billions upon billions into the biggest companies, including the auto industry, which employ hundreds of thousands of people.

But our big companies aren't car makers. They are, usually, holding companies and often enough, their main business is investing in real estate here and overseas. They employ very few people and their impact on the Israeli economy and labor market is miniscule.

The main drawback of the Goshen rescue is that all that government money wouldn't create or save jobs. It would contribute nothing to supporting the local economy. All it achieves, at the expense of Yossi Q. Taxpayer, is to rescue the tycoons and their managers, the big banks and their managers.

"It won't happen," vow treasury chiefs. "We don't have to finance foreign companies."