Taking Stock / O Give Me a Home Where the Populists Moan

1 Ariel Atias. What a housing minister we have! A gem. Housing prices and the resulting rental prices are possibly the most painful issue for the poor and lower middle classes that Atias portends to represent. How refreshing, how heartening to read in the papers about his snarling attacks on Israel's wicked, exploitative builders, calling on them, slavering hyenas that they are, to lower home prices!

Indeed, why stop there? Atias should expand his call. He should call on share prices in Tel Aviv and Wall Street to rise. He should call on oil prices to drop and the cold snap plaguing the northern hemisphere to cut it out and warm up.

His call on builders to lower home prices is the lowest sort of populism. It won't make housing more affordable. It means nothing because Israel's housing market is actually one of the most competitive markets in the land. Dozens of major companies operate in it, augmented by any number of smaller firms. Home prices are not set by the builders. They are set by the market.

Home prices are based on the price of land (and the supply of land is determined by the state). They're also based on construction costs (which are based on the market of raw materials and labor), on taxes (imposed by the state), and of course, on demand (which is a function of population growth and economic activity).

Atias finds it convenient to aim his tongue at the builders, who are the ones who come into direct contact with homebuyers. He's doing this instead of taking aim at the government, which controls the supply of land, taxation and the horrendous bureaucracy involved in construction that serves nobody but the machers. Atias does not aim at them, or at the givers and takers of bribes.

When can calls by a minister affect prices? Only when the market is a cartel or monopoly. Then the minister can have an effect by frightening the players, lest the minister's words turn into regulatory steps.

Atias should know that, actually. Until a year ago he served as communications minister. The cellular and wireline sectors are cartels, the multichannel television sector is a duopoly (of the Yes satellite television broadcaster and the HOT cable TV company). Yet behold! When Atias was the minister in charge of an insular market with a tiny number of players, he didn't charge out with calls to lower prices.

Rajan seemed to be on the side of the appalled American bankers who are bitterly fighting any regulation that might touch their bonuses and clout.

But when I talked with him after the panel, to further elucidate what he had in mind, Rajan explained that he didn't oppose the Volcker Rule. It is a step in the right direction, he said, but not because it diminishes the risks inherent in banks. He thinks it's right because he doesn't believe any banker who claims that "Chinese walls" separate banks' activities for customers and those on banks' own behalf. Information leaks.

Proprietary investments are investments that a bank or investment house makes for its own profit, not that of customers. Conflicts of interest are practically bound to arise.

Which brings us to Psagot, one of Israel's biggest investment firms, where high-ranking officers are being investigated on charges of illegally manipulating asset prices using Psagot's giant proprietary portfolio. The Israel Securities Authority will soon learn exactly what Psagot CEO Roy Vermus knew and didn't know about the proprietary portfolio. It's highly unlikely that he knew about illegal activities, though we shall see.

But there is one question we can address without waiting for the watchdog to investigate. Why did Vermus allow Psagot to make significant proprietary investments that put it in a conflict of interest with its clients, at least until two months ago, when he wound it down?

That conflict of interest is all the more egregious considering the sheer size of the positions that the proprietary traders built up, and considering that they physically sat inside the same trading room with the brokerage people, the ones serving clients. How could information not leak?

That proprietary portfolio became a monster, worth billions of shekels (including leverage). Even if Vermus personally isolated himself from it so as not to become tainted by conflict of interest, that activity remained his responsibility. The company he runs was tainted by conflict of interest.

In 2009 Vermus spoke powerfully about conflicts of interest in the capital market in general and at investment management companies in particular. He accused his competitors of not giving sufficient weight to clients' interests and branded Psagot a model investment firm with a strong independent management focused entirely on the greater good of clients. Maintaining a colossal proprietary portfolio does not jibe with focusing entirely on the greater good of clients.

Another question that Vermus should answer sooner rather than later is whether he can, and will, continue to spearhead the aggressive stance on behalf of investors against the tycoons and issuing companies. Certainly the uproar about the suspicions against Psagot pleases the big players who hope that the wild child who wouldn't play by the rules of the club will be silenced forever more.

The years passed and I was proved wrong.

Does that mean that Israel's capital market is clean as a whistle? It does not. It means that the watchdogs - the Israel Securities Authority and the capital market supervisory department at the Finance Ministry - weren't doing their jobs.

Corruption has spread throughout the capital market during the last five years following a decade of passivity by the enforcers.

The securities watchdog and the capital market supervisory department avoided taking action. When suspicions arose of criminal activities, for instance the retroactive stock splits at Prisma and Menora, they did nothing to advance an investigation.

Therefore, we should applaud Zohar Goshen, chairman of the Israel Securities Authority. The investigation into Psagot is his first move since taking the job - at least the first in favor of the little man, that is. His two previous big steps acted against investor interests - he proposed bailing out the debt-laden tycoons using taxpayer money and then went to war against the Hodak Commission, which is trying to give institutional investors tools to defend their investors' money.

Goshen's battle against the Hodak Commission threatens to overshadow his crucial role in finally starting to investigate suspicions of malfeasance in the market. The silence of the new commissioner of capital markets at the treasury, Oded Sarig, regarding the Hodak Commission and the conflicts of interest in the capital market is just as worrying. The investigation into Psagot could be the warning shot in a war on corruption and conflict of interest in Israel's capital market. Psagot's proprietary portfolio is just the tip of the iceberg.