Taking Stock / Sweet Nothings

Searching for soul at the Bank of Israel, the emerging markets and on Fifth Avenue and 82nd Street.

1 Last week, the Bank of Israel did some deep soul-searching following the flood of newspaper reports about its terrible management. It concluded, as TheMarker's Moti Bassok reported, that its main shortcoming lay in public relations, and that the governor wasn't meeting enough with the press.

But perhaps Governor Stanley Fischer would be wise to look farther afield for the roots of the problem. The mountains of dirty laundry coming to light at the Bank of Israel in recent years do not attest to any special deterioration in its management, but to long-standing ills. Very long-standing: The corrupt pay practices and warped management methods didn't start a year ago or even a decade ago, but the ugly face of the Bank of Israel is only now coming to light thanks to diligent action by the Finance Ministry and the state comptroller - and possibly also thanks to changes that Fischer wants to make.

Managers who want to change things often take a lot more flak than cowardly managers who preserve the status quo. Indeed, despite the deteriorating status of the Bank of Israel as reflected in media reports, Fischer himself continues to be held in great esteem in business circles.

That isn't necessarily a contradiction. The private sector and the public can make distinctions. The corruption at the Bank of Israel isn't hindering Fischer from instituting responsible monetary policy, and his failure to solve the reeking labor relations and management methods at the central bank isn't hurting his status as the best possible person around for the highly sensitive post of governor of the Bank of Israel, the person responsible for Israel's economic stability.

But the corruption and labor problems at the central bank are hindering it from carrying out another key role: economic adviser to the government.

In its annual reports and periodic studies, the central bank studiously ignores one of Israel's worst ills: the corruption and poor management norms pervading the public sector and its corrupt, archaic pension arrangements. That's because the central bank officials don't want to - perhaps can't - see the disease because they have it, too.

Unless the Bank of Israel manages to cure itself of the corruption that has marked it for so many years, it cannot serve as government adviser on public sector reform. The government has to find another solution.

After reading the reports and analyses, some readers hastened to reach the conclusion that the American era is over, that the future lies in Asia and the emerging markets and that they should take their money out of Wall Street and invest in the growing economies that are financing the American deficits, such as China and Russia.

Take it easy, people. Even given the corruption, the bubbles and the regulatory shortcomings of America's capital markets, they remain by and large unrivaled. The real face of certain "new" emerging markets remains to be seen. The fact that a country has a big, liquid stock market and that thousands of investment bankers make their living on it doesn't mean that it's a truly free market. A culture of a free, open market that protects the property rights of investors doesn't develop overnight or in a decade or two.

Here are two stories that were underplayed in the world business press, though they apparently deserved higher billing.

One: Two weeks ago, the Chinese securities watchdog sent a circular to all mutual fund managers in China, warning of 20 dangers to avoid. Most are well known throughout the markets of the world, but at least one was rather less obvious: The regulator forbade the managers to make public statements that could cause share prices to fluctuate. Which, in English, means, don't say anything nasty about the stock market.

China is not a free country and its stock market isn't free either, as investors applauding its wonders today are likely to discover in the future.

Two: The Russians are more advanced that the Chinese. You can blast the stock market in general or specific stocks as much as you please. Look! Just last week Vladimir Putin decided that one of its greatest steelworks wasn't being managed as he thought fit. Speaking at an economic forum in Nizhny Novgorod, Putin sarcastically commented, "There is a respectable company called Mechel. We invited the owner and chief executive of that company, Igor Vladimirovich Zyuzin, to today's gathering, but he suddenly got sick," Putin said. "Well, in the first quarter this year the company exported raw materials at half the domestic market price, that is, the world market price. And the margin is where? In the form of taxes to the state? Illness of course is illness," the Russian dictator went on. "I think that Igor Vladimirovich needs to get well soon. Otherwise we'll have to send him a doctor." Putin stopped speaking, Mechel stock collapsed and $6 billion in value vanished.

If you want to invest in a country where the government decides what its mutual fund managers may and may not say, or where the leader openly threatens companies and executives, China and Russia are indeed amazing economies with terrific potential. But we still prefer rather less exciting economies with a rather longer record of freedom.

How exactly does one live on the corner of Fifth Avenue and 82nd Street for nothing? That's one of the most expensive addresses in the world.

Gillerman explains: "The State of Israel, in one of its moments of economic sanity, bought the apartment 35 years ago for $90,000 to serve its ambassadors at the UN. Today it's worth $20 million."

At this point, you're snorting, though the newspaper that printed that evidently didn't see anything illogical. The real cost of Gillerman's Manhattan apartment is not "nothing." It's more like a million dollars a year. If the apartment is worth $20 million, then the economic cost of its possession is equivalent to the state's cost of capital, which is around 5%. If the state were to sell that apartment, it could repay $20 million of its national debt and reduce its interest payments accordingly.

Yes, Israel's ambassadors should dwell in respectable apartments, but the ambassadors and the press shouldn't be telling us that maintaining an apartment on Fifth Avenue costs "nothing."