Taking Stock / Netanyahu's Options

The Finance Ministry's stock options plan is ready to hit the road. The state will be giving the citizens 35 percent of the shares in Bank Leumi through stock options exercisable at a 50-70 percent discount compared with the share price on the market, which is equivalent to giving the people a gift of NIS 3 billion. We can expect a forest to die for the reams to be written on the options plan. Here is a short guide you'll need to debunk the myths and cut through the jargon.

l The plan is part of the finance minister's broader vision to revolutionize the Israeli banking establishment.

If the finance minister's vision is to create a more competitive capital market and banking system, the options plan won't do the trick. All the options plan does is transfer an asset from the government to the public through the stock market. It will have zero effect on the structure of the banking system or the capital market. It will not revolutionize bank management as a concept. It will not facilitate efficiency or lay the foundations for a healthier capital market.

l The options plan will bolster consumption or accelerate economic growth. Or both.

The public is getting a NIS 3 billion present so logic would dictate that it will have more money in hand to spend. Right?

Wrong. The reality is more complex. The public understands perfectly well who's paying for the check Benjamin Netanyahu is writing - itself. The public itself. The state is selling an asset that belongs to the public, to the public itself, at a discount. Nothing structural is going on here.

The public's tendency to consume depends mainly on whether it feels economically secure enough. It depends on permanent income forecasts. A one-time injection won't change spending habits or spur economic growth.

l The options plan is equitable. Instead of selling the banks to a handful of fat cat families, they are being sold to the people.

That's a double myth. The first message is that when the government sells its companies via tenders, fat cat families or giant concerns always win. But history tells otherwise. The buyers' profit or loss depends on the quality of the goods they've bought. Eliezer Fishman bought Jerusalem Economic Corporation at a ludicrously low price, Shaul Eisenberg acquired Israel Chemicals at a pretty good price too, and they did well. But the families that bought the banks, Bank Hapoalim and United Mizrahi Bank, did not strike a good deal, we can say with hindsight. Their yields over the years have been moderate to miserable.

The second myth is that when the Leumi shares are allocated to the public through stock options, instead of having its controlling interest sold through a tender, the fat cat families are out of the game. But that isn't so. The public will sell its options on the stock market, and if the tycoons think the price is right, and they get the Bank of Israel's permission, they'll simply buy up the options, convert into shares, construct a controlling interest and presto, they've bought the bank. They might even get it for less than what they would have had to pay the state.

l The options plan is based on the lessons of previous privatizations. Is it?

It is not. The Leumi options plan is the result of the state being out of options, so to speak. It was not born of intelligent reasoning seasoned by experience, but of the government's failure to sell the thing.

The Finance Ministry and Bank of Israel would have preferred for some major multinational like Citigroup or UBS to buy Leumi and spearhead reform of the banking system. That was, in fact, the original idea. But the foreign banks have lost interest. Citi has shelved its plan to compete in the retail banking arena. All we have left is a handful of Jews who wouldn't object to owning a bank, but Bank Leumi is too big a bite for them to swallow. So the state was out of choices.

l The options plan is one of the dozens of structural reforms that Netanyahu is preparing.

Um, the options plan is not a structural reform. And it isn't important. The most important structural reform he's carried out is the reduction of the public sector, and that's just starting.

The biggest reform in the banking sphere will be to separate the banks from the mutuals and provident funds. But in that case, unlike this business with the options plan, Netanyahu is facing some very big, very strong interests, and that is where his true test lies. Not with this options plan.