Taking Stock / A Work of Art

Half a year ago, the Mivtachim pension fund board was in an uproar after then-chairman Shmuel Avital decided to bring the fund's depositors into the biggest, most talked-about deal of 2003 - Nochi Dankner's acquisition of the IDB group.

Avital's eagerness to finance part of the acquisition raised many eyebrows in the capital market, but he was adamant. Dismissing claims raised by Mivtachim's investment committee, the fund cut Dankner's company, Ganden, a check for $55 million in May. Without it, Dankner might not have been able to pull off the takeover.

Avital did not feel any need to share with the public his reasons for investing in IDB or to disclose the loan agreement's terms. He shrugged off the fact that he charged Dankner a very high interest of 8 percent during the first two years, followed by a rate drop to 6.5 percent and later to 6.3 percent.

At first glance, you might wonder what there is to complain about. In the six months since Avital signed the check, nothing but good things have happened to Dankner and Mivtachim's investment. Stocks rebounded mightily, and the IDB group substantially improved its financial condition through bond offerings and asset divestiture. As things stand, Avital's investment smells particularly good.

But a deeper look shows that the reality is exactly the opposite. If you revisit the agreement terms that Haaretz discovered, you find many little details that change the entire picture. It transpires that Dankner has the right to repay the loan after two years on condition of paying a fine of 0.2 percent of the principal. In other words, Avital gave Dankner an exit station.

Why might Dankner want to repay early? If interest rates drop, for one thing, or if IDB's situation improves and its debt rating rises. Or all of the above together. In plain English, when Mivtachim lent Ganden the money, the deal looked risky due to the capital market crisis. But the moment the positive scenario of the Ganden-IDB materializes, Mivtachim will reap none of the fruits because Dankner has an option to repay after two years, while borrowing money from someone else at lower interest rates.

It is a bad deal for Mivtachim's depositors. Why? Look at the alternatives. If Avital were to have bought 12-year government bonds bearing a 6 percent yield, instead of lending Dankner the money, he could sell them for a huge capital gain of 24 percent today. Yields on 12-year government bonds have since dropped from around 6 percent to 4 percent, and when the yield on a long-term, 12-year bond drops by 2 percent, then its price rises by 24 percent.

The repayment station Dankner received will cost Mivtachim's depositors their share of the capital gain generated by the drop in interest rates and improvement in IDB's situation, because the mechanism effectively reduces the loan's duration from 12 years to two.

Mivtachim's board reached its decision based on an "opinion" from Leader & Co, controlled by Yair Fudim and Itschak Shrem. But when we asked Shrem how he'd come to posit a positive outcome for the deal that was clearly a bad one, he smiled, and said: "We didn't say it was a good deal, and didn't say it was a bad one. We pointed out its good points and bad ones."

Asked why he was smiling, he answered: "That opinion was a work of art."

By which he meant? That he didn't explain, but we can posit a hypothesis of our own: The opinion freed Avital to pass the deal through the Mivtachim board, but didn't state that the deal was a good one. It was an opinion that, on the one hand, spelled out all the disadvantages of the deal, while on the other hand, enabled Fudim and Shrem to maintain their good relations with Dankner and not become the ones to torpedo the financing from Mivtachim.

Mivtachim's Ganden deal and the Berkovitz deal written about yesterday ("Hey that's our money," Haaretz, Jan. 13) are two random examples that beg the question over how Israel's institutionals manage other people's money.

The treasury's capital market and insurance commissioner, Eyal Ben Chelouche, and Finance Minister Benjamin Netanyahu are firm believers in the free market. They would like all Israel's institutionals to manage their investments on the free market, completely independent of any governmental apron strings.

If so, Ben Chelouche might do well to lay down appropriate reportage rules for the era of freedom in which anything goes. He should require all the institutionals to provide detailed, accurate reports of each investment carried out.

It is our money at stake. Usually, the institutionals wind up managing it either because our employer put it there, or because it's the only way to get tax benefits under the new tax regime. And even if we aren't satisfied with the way the money is being managed, it is all but impossible to withdraw it from the provident funds or managerial insurance policy in which it is invested.