Taking Stock / The Bankers' Last Hope

At stake: A quarter of a trillion shekels in assets.

On Monday, the prime minister and finance minister approved the main points of reform for the banks and capital market.

The reform, designed by a team headed by treasury director-general Joseph Bachar, centers on totally dissociating the banks from owning and managing provident and mutual funds. These funds manage a combined quarter of a trillion in assets, or NIS 250 billion.

Before Prime Minister Ariel Sharon and Finance Minister Benjamin Netanyahu met to discuss the issue, their respective directors-general, Ilan Cohen and Joseph Bachar, recommended changes to the original Bachar recommendations. Before we get into the fine print of their recommended changes, let us look at the big picture.

The big picture

Flouting widespread apprehensions that the Prime Minister's Office would fold under massive pressure from the banks and quash the reform, the finance minister and his director-general did in fact get it through the cabinet. And this is the biggest financial reform in Israeli history.

The banks had put their money on Cohen helping to surreptitiously enfeeble the reform. But he rose to the occasion and grasped the reform's importance. Together with Bachar, he formulated a compromise that would allow the reform to proceed.

Opponents of structural reforms over the generations usually claim the bureaucrats go too far in their zeal to institute change. Their solution is to offer a moderated, softened version without the bite of the original.

But the case of the Bachar report proves that the opposite is true. One of the reasons the report managed to overcome the obstacles is that its original version was in fact the optimal and most complete one. The Bachar team members went the whole hog. They did not start by pragmatically compromising in advance.

The result was that when the reform met the obstacle of obtaining the prime minister's approval, Bachar and his people had some wiggle room to compromise, without forgoing the main thing - forcing the banks to entirely relinquish ownership and management of their provident and mutual funds.

If the team had begun by trying to find a moderate solution, they would probably have been left with nothing.

What they had to give up

The change involved in separating the banks from their provident and mutual funds boils down to more than reducing conflicts of interest. It is the start of a process in which the capital market will become more diversified, in which the economy and every man and woman in Israel will be freed of the stifling embrace of the banks.

Insurance companies and foreign and local brokers who step into the banks' shoes also suffer from many conflicts of interest. But they will never have the same degree of control over the households as the banks have.

Where did Bachar give in? Over his distribution fees model. The banks will be allowed to collect distribution fees from "manufacturers," namely the new managements of the provident and mutual funds the banks will have to sell. It does tarnish the ideal model that he presented. Remember the fervor with which he lectured about the "beauty" of his "clean," revolutionary model in recent months, and you will realize how painful his sacrifice was.

Mechanisms of supervision and disclosure that will be replacing the blanket ban create an opening for mid-way solutions that minimize the potential for abuse in the relations between the clients, the marketers, the distributors and the managers.

A job not finished

The job is not done yet though. This is the State of Israel, this is the Middle East, and now the reform is moving onto the wildest, most perilous jungle of all - the Knesset Finance Committee, and then to the Knesset plenum.

It is time to shine the spotlight unrelentingly on the banks' friends on the Knesset floor, people who prate of the public's greater good but whose amity with the rich and powerful dictate their actual moves.

Knesset sources already talk about escalating activity by the bankers and their lobbyists among the friendlier of the Knesset members, such as Isaac Herzog and Avraham Shochat.

Keep a close eye on the Laborites, whose party has historically been allied with the banks and is massively in debt to Bank Hapoalim. Having failed to manipulate the prime minister and finance minister, the bankers will try to work their wiles on their covert friends on the Knesset Finance Committee.