Taking Stock / A Good Trick's Worth Repeating

Next week, Tel Aviv University's Faculty of Management will host its annual conference onbanking. It is expected to stir up a lot of interest this year - for the first time in quite a while, the dire straits of the banks interest not only bankers but all business people.

They will talk about the banks' 2002 results, their capital adequacy ratios, the role of the banking supervisor, the commissions, the dividends, insurance of deposits and the banks' industrial relations.

But, on one issue, possibly the most interesting of all, there will be no debate - the billions of dollars they lent in recent years to dodgy people for dodgy deals.

No sirree, the bankers and professors, economists, accountants and analysts do not like talking about this credit. They prefer to talk about "a worsening in quality of the credit portfolio as a result of the slowdown, terror and the high-tech crisis." They generally prefer to ignore that most of the falls that have occured and will occur in banks' credit did not originate from the state of the economy but from the failure to recognize the risks inherent in a business deal or ignoring the business past of the borrower.

The running gag on the lips of those who talk about how the banks handed out their credit is, of course, the Peled-Givony group. They managed to raise around NIS 700 million from the banks to furnish their dodgy deals, which ended with their collapse and a stern rap from the Securities Authority's investigation department.

But another saga that tells the story of how the banks and the players in the Israeli capital market grant credit is that of the Gibor Sport company and the duo of entrepreneurs Roi Gil and Eitan Eldar.

The rise and fall of this pair is similar in its shock value to that of Peled-Givony; Businessmen move in on a good, profitable company, use it to pursue a string of highly leveraged deals during which they channel millions of dollars to their own pockets, finishing up with the banks and debt-holders holding the can, and the entrepreneurs holding the cash.

But the most important thing is that nothing here is particularly surprising: On the day that Roi Gil appeared at the Tel Aviv Stock Exchange seven years ago, all the city knew exactly who he was and what he grew up on. His father was Yoram Gil, the king of the electronic product and the bourse who fled Israel in 1984, leaving behind debts of millions of shekels to the banks and creditors.

The media was very cautious in mentioning any family ties with Roi Gil because he was only 5 when his father cooked up the dodgy deals on the exchange, and he is not responsible for his father's acts. But, over time, the similarities were frighteningly clear between the string of deals the son did at the end of the `90s with the banks and investors on the TASE and the deals the father did at the beginning of the `80s with the same banks and exchange. Then, in 1998, when the son was in his heyday, the father clinched a deal with the state prosecutor, turned up in Israel, announced he had come "to prove his innocence" and settled down in his young son's offices.

Two months ago, Gil and Eldar's group of companies formally announced that the merry-go-round was over: After a year of trying to keep 1,000 balls up in the air, Gil and Eldar were forced to throw in the towel and admit the group was insolvent. Now it is trying to reach a "debtors' arrangement" - which in everyday language means the banks and the public must say good-bye to millions of their invested shekels.

But, in contrast to Peled and Givony - who were forced to give up control of their companies and are clearly washed up and now kept busy with the criminal investigations - Gil and Eldar continue to run their companies, make deals and wallow in their lovely money, which they made at the expense of the banks and investors.

The bottom line from the Gil-Eldar saga is simple: The two raised hundreds of millions of shekels from the banks and share investors, lost hundreds of millions of shekels in failed deals, but have become very, very rich thanks to the major deals and the fat salaries they drew from the companies over the years.

Of course now, when the banks and the debt holders are forced to write off hundreds of millions of shekels because of them, no one asks why Messrs Gil and Eldar don't put their hands in their own pockets and pay the debt holders the money they took out of the companies over the years. These companies are limited, and all parties know the risks in advance.

That is, while Yoram Gil was forced to flee the country after leaving behind debts of hundreds of millions of shekels and to stay away for 14 years until he could turn up again to work in Israel, the son will go scot-free from this headache. He took loans from the same banks, lost the money in the same fashion, got rich in the same manner but now he need only wait a few years until the banks and investors will stand him new loans.

It goes without saying that most of the big borrowers that will cause the banks and the investors on the exchange to write off are those on their second round with the same banks and investors.

Now we need only wait for the next round, when the shares and debt certificates rise by tens of percentage points, to see them come back with the same tricks, same issues, same loans, selling them to the same people who are supposed to manage our money in a reliable manner.