Bank bailouts for failed tycoons have cost the Israeli public billions, MKs find
Knesset commission of inquiry lambastes ‘negligent’ financial sector for ‘systematically’ extending or writing off loans for rich while pursuing small debtors ‘to last cent’
Sue Surkes is The Times of Israel's environment reporter.
The head of a cross-party parliamentary commission of inquiry has issued a blistering condemnation of the systematic way in which Israel’s banks cozy up to business tycoons by giving them outsized loans, writing off hundreds of millions of shekels’ worth of their debts, and then balancing their own books by charging their regular customers more for everyday financial services. Over the years, the inquiry indicated, the bank’s untenable practices, and the failure to effectively regulate them, have cost the public billions of shekels.
In a report issued on Tuesday, commission chairman and outgoing Labor party lawmaker Eitan Cabel (who failed to make it into the 21st Knesset in the elections earlier this month) also castigated the banks for doing everything in their power to hide information from the committee.
The committee found a “regulatory vacuum” with no sanctions and no deterrents for “severe negligence” in the granting of credit. Regulators, especially those supervising the banks, were being “held hostage” by the very bodies that they were supposed to supervise.
“The regulators did not supervise, did not check, did not investigate, did not use their authority to impose sanctions, and did not report to the public as they should have done,” the report said.
The parliamentary committee was set up in July 2017 in the wake of several high-profile cases involving business moguls sinking into massive debt, and then having significant proportions of those colossal debts written off.
Among other things, it probed how banks and other financial sector bodies such as pension and investment funds made decisions to grant large loans, what guarantees were demanded, what sanctions were implemented if loan conditions were broken, and how regulatory bodies enforced the rules to protect the stability of the financial system.
In the report’s introduction, Cabel recalled the country’s financial crash of the 1980s, writing that decades on, the entire financial system was still a “black hole,” a “closed exclusive club” to which even Knesset members were not granted access to review the way things were being managed.
In 1995, the Brodet Commission exposed the way close relations between banks and large companies were distorting the economy. In 2004, the Bachar Committee revealed conflicts of interest at the banks. And in 2016, the Strum Committee focused on the lack of competition in the banking sector.
“It’s as if time has not changed a thing,” Cabel wrote. “The doors of the banks were sealed off from the Knesset’s mechanism of inspection. The banks, armed with legal opinions and with the support of the Bank of Israel, refused to give the committee of inquiry the information they were requested to provide.”
Despite these limitations, the picture that emerged “without any shadow of a doubt” was of a banking system beset by deep-seated problems that had huge social and economic implications for every Israeli, the report said.
“The fact that the banks are generous to a particular sector and give credit without a thought to a particular tycoon — those with a ‘halo,’ in the words of the Bank of Israel” — meant that others were disadvantaged and that competition was hit hard, it said.
A reality in which the banks “shaved tens and hundreds of millions of shekels” off tycoons’ debts meant that somebody else was providing the funds, according to the report. That “somebody else” was the general Israeli public.
“Look, how amazing. While the banks are forgetting about huge debts incurred by the people with halos (a nickname invented by the supervisors of the banks), they don’t lose money and they preserve their profits. And why don’t they lose? Because they have other sectors from which they can draw more and more profit and raise prices again and again, bank charges, interest, and so on.
“We are not talking about one or two cases, but about a systematic pattern of behavior. For years the banks have been shaving hundreds of millions of shekels from the debts of tycoons.”
It was not just Eliezer Fishman and Nochi Dankner, but also Motti Zisser, Yitzhak Tshuva and many others, the report went on, and it was the public that was funding “free lunches for tycoons” while the banks pursued ordinary debtors to the last cent and sent in the repossessors.
Real competition between the big banks would solve part of the problem, he wrote, but competition was weak.
Debts were rolled over from one year to the next, snowballing and growing in a way that was “below every red line,” and had to be dealt with immediately.
“We were particularly concerned by the power of the controlling shareholders and directors of banks and financial institutions vis-a-vis their own systems of internal supervision — boards of directors, internal comptrollers, accountants — not one of them raised a red flag about any extraordinary event.”
In the capital markets, valued at NIS 7.1 trillion ($1.989 trillion), the lack of regulation was even more serious, the report charged. Citizens did not realize that every family had an average of NIS 600,000 (around $170,000) invested there, for example via pension funds.
The Israel Securities Authority was “groping in the dark” as the banks did not even share their audits with the authority. Nor did the Antitrust Authority investigate whether the banks constituted a cartel.
The commission’s recommendations include creating a Knesset committee to oversee the financial supervisory authorities and interview top officials once a year; regulating specifying “revolving door cooling off periods” before regulators join financial institutions and vice versa; increased information-sharing between the various supervisory bodies; and strengthening corporate governance within the financial institutions, the powers of regulators and the ability of a parliamentary commission of inquiry to obtain the information it needs and summon individuals to give testimony under oath. In the latter case, an empowered commission of inquiry would only act with the consent of all Knesset factions.
Media and real estate mogul Fishman was declared broke in June 2017 in Israel’s largest ever bankruptcy case. The ruling came after creditors refused to agree to a deal that would have wiped out 92 percent of his personal debt, estimated at some NIS 1.5 billion ($425 million).
In October last year, Dankner, the former controlling shareholder of IDB Holding Corp., began serving a three-year prison sentence for stock manipulation and other securities-related convictions.
Dankner had sunk into massive debt with the banks and hit a brick wall trying to raise cash or get further loans. He was found guilty of carrying out millions of dollars’ worth of fraudulent transactions in an attempt to influence the share price of the troubled company.
In 2016, real estate mogul Zisser died of cancer after racking up NIS 2.5 billion ($705 million) of debt, of which NIS 1.8 billion ($507 million) was written off. Zisser was forced to give up control of holding company Elbit Imaging, of which he was the biggest shareholder.
In 2012, the Marker business daily reported that during the previous year, far from the public eye, Bank Leumi had written off 48% of a NIS 270 million debt owed by Tshuva, owner of the Delek Group of companies, as part of a debt restructuring deal.
Tshuva, valued by Forbes at $4.3 billion, is an energy and real estate tycoon.
In 2015, Cabel, then head of the Knesset Economic Affairs Committee, went head-to-head with Prime Minister Benjamin Netanyahu over the controversial gas agreement that handed control of Israel’s substantial newly discovered gas fields to two corporations — Delek Group, in which Tshuva is the controlling shareholder, and Noble Energy.
Responding to the inquiry committee’s report, the Bank of Israel said in a statement to the Marker that the report ignored “material facts and many changes that have already been made, arrives at mistaken conclusions and makes recommendations that involve risk, without analyzing the future implications.” It added that Israel’s financial stability has proved the effectiveness of its supervisory mechanisms.
The Association of Banks in Israel told the paper that the banking fees paid by customers in Israel were similar to those paid overseas.