Taking Stock / Day of Atonement on the Capital Market

Yes, our memory did not fail us: It all happened between last Yom Kippur and this year's.

The global financial system collapsed and much of it wound up being nationalized. Then governments streamed unheard-of sums into the economies. Finally, by the time Yom Kippur 2009 rolled around, the world's capital markets were back in business, unprecedented amounts of money were being raised and prices staged their fastest recovery in history: Most stock exchanges gained anywhere from 50% to 80%.

With the spirit of the Day of Atonement still fresh in memory, let us sum up this insane year that was. Let us ask who should ask for forgiveness and who doesn't deserve to be forgiven.

Our comfort on Yom Kippur 2009 is the satisfaction that the capitalist pigs in Israel didn't manage to pull off the plan they concocted during the previous Yom Kippur, namely to rob the taxpayer. The robbers were caught red-handed en route to their bank (otherwise known as "you"). As the markets stabilized, the smoke lifted, exposing the cunning "help the bond market" plan to the glare of daylight and revealing its true significance: It was a plan to eliminate the capital market and rob the taxpayers on behalf of a handful of tycoons and real estate gamblers.

But the losses were caused by the global economic crisis of 2008. The reform they were complaining about, called the Bachar reform, severed the provident funds from the banks, even though major capital market reforms actually started in 1988. In any case, sudden, steep losses create a terrific opportunity to whip up panic and find scapegoats. Never mind the facts, they're too complicated.

They won't ask for forgiveness, of course, even though the battered savers of yesteryear have recouped most or all of their losses. Just as the losses had nothing to do with the Bachar reforms, neither did these gains.

The Finance Ministry and Israel Securities Authority failed, and are still failing, at tackling the corruption and conflicts of interest riddling the institutional investors in Israel's capital market, led by the insurance companies. The corruption today is more sophisticated than the bankers' thefts in the 1980s and 1990s, but the outcome is the same. Savers' money is winding up in the pockets of a few. Some is stolen by criminal means. But most is robbed by "legal" methods such as conflicts of interest or billions placed each year in illiquid investments based on back-scratching buddies, not cold-eyed analysis of economic merit.

Even after the carnage of the last year, Africa Israel's leader, Lev Leviev, remains one of the most prominent entrepreneurs in the Israeli scene. Unlike some of the scene's shooting stars, Leviev didn't build his success on cartels, monopolies, government handouts or buying politicians, regulators or journalists. Leviev proved his mettle in the rough-and-tumble international marketplace. He is the man who in the 1990s broke the De Beers cartel and built a diamond empire with his own two hands.

Leviev's very success led to his failure with Africa Israel. At some point, he evidently began to believe his own hype. He thought he could do no wrong. He borrowed too much to invest in properties, mainly in the United States, which is what brought Africa Israel low. He did not foresee the real estate bubble and failed to hire talented management. He took too much risk. More than two years ago we warned in this column that Leviev's investments in Russia were tremendously risky ("Lev Leviev presents: How to make billions in Russia," published on July 1, 2007).

None of that detracts one whit from what we are due from the managers of our provident and mutual funds, which invested money in Africa Israel bonds on our behalf.

The first mistake they made when buying bonds from Africa Israel and dozens of other companies is failing to price the risk properly. They didn't demand enough compensation. They charged bloated management fees even though they'd gotten D's on their analysis and controls. The only mitigating factor, which only applies to some cases, is that they bought the bonds during a period when risk premiums were at rock-bottom worldwide.

But their second mistake is the bigger one, and not only is it still material, it's unforgivable. If they bring the mistake to completion, they will destroy the capital market. The mistake is to let Lev Leviev and the other tycoons reschedule their debt without demanding adequate compensation for their savers, whether through higher interest rates, allocations of bonds or stocks, or both.

If Leviev, who currently owns 75% of Africa Israel's share capital, is allowed to escape the debt arrangement with more than 10% of the company's stock in hand, it will mean the people managing our money have violated their duty toward us, for reasons of their own.

The only investment manager who's thrown down a gauntlet is Roy Vermos, the chief executive of Psagot. His rivals in the capital market sneer that he's doing it for the public relations and to distract the public from his own bad investment choices. Another explanation could be that Psagot is the only major player in the Israeli scene that remains independent - not controlled by one of the tycoons.

But it doesn't matter what Vermos' motives are. All that matters is outcome. If Vermos folds and allows Leviev to keep more than 10% of Africa Israel's stock, it will be a sign that Israel's capital market remains as rotten as ever, and that the people managing our money aren't motivated enough to do it properly.

Why 10%? Because a good manager should get stock options for 3% of the company's stock. An excellent manager should get stock options for 5%. A legendary manager with extraordinary skills and knowledge of the company and markets in which it operates should get 10%. It's up to you to decide to which category Leviev belongs, but in any case, it's clear that 10% is the limit.