Commentary: Don’t let them strike again

We can only pray that the local capital market will embrace a thorough spring cleaning in its own halls and offices.

By NITZAN COHEN
April 7, 2010 06:38
money 88

money good 88. (photo credit: )

Pessah is also called the “holiday of spring” and it represents the joy of renewal, the shift from the cold sleepy winter to the warm lively spring.

It is also the time of the year when millions of Israelis are busy cleaning and polishing their homes, from top to bottom and in the most obscure corners. The removal of every bread crumb is often just an excuse for a general campaign against dirt and dust, a very intense battle that leaves us very tired but nonetheless satisfied.

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We can only pray that the local capital market will embrace such a thorough spring cleaning in its own halls and offices. After the shock of the 2008 crisis it seemed to many that the massive collapse of financial markets could be a great opportunity to clean the markets and get rid of the foul, greedy and risky methods that characterized the behavior of the major players in the years that preceded the crash. Well, it didn’t happen.

Not in the US, where regulators rushed to rescue failed banks with trillions of taxpayers’ dollars, without demanding any significant change or bringing any of the big crooks to justice. Not in Europe, where problems were elegantly swept under the rug, and not in the UK, which suffered the biggest blow of them all, but still hasn’t taken any notable measures toward a more balanced economy that is not totally reliant on the dangerous financial sector.

Here in the Holy Land, nothing extreme really happened and we were lucky enough to get through the crisis with only a few scratches. Bismarck once said that a wise man is not the one who learns from his own mistakes, but the one who learns from the mistakes of others. Here is a great opportunity for local institutional investors to learn from other people mistakes and embrace new rules of behavior in the capital markets, mainly in the biggest and most important of them all: the bond market.

It is money time. The time of redemption has arrived for many of the companies that recruited capital through debt auctions in the good years of the first half of the decade. During 2010, public companies are supposed to pay back a fantastic sum of NIS 25 billion to bond holders, namely institutional investors. There is no chance on earth these firms can pay this debt, which is equivalent to about 3 percent of the nation’s GDP, from their own cash resources. The only way to do it is by refinancing, or in more plain words: by issuing new debt to replace the old.

Institutional investors are the people who run our pension money in the form of pension funds, life insurance policies and provident funds; they are the ones who run our short-term savings such as mutual funds. It has been said so many times before and it cannot be said too often: It is our money they are playing with, not their own.

What we, as the real owners of these piles of money, should demand from the guys who have received a government monopoly to manage our savings (let us not forget that all of us are compelled to save through these institutions) is not so simple, but it is crucial.

First, our savings managers should insist that the roll-over process be partial and that at least 20% of the debt that comes due be paid in cash and not be refinanced.

The second issue is the quality of the collateral against the debt that the public companies need to raise. When the bubble burst two years ago, we suddenly found out how miserably our money was being managed and what a poor level of collateral had been required from the companies so they could to get ahold of billions of our savings. No more!

Each and every company that asks for fresh capital should be thrown out of the window if it dares to come without bringing adequate security. And when I talk about proper security, I am talking about adequate value of assets to be put against the new loans. The entire foul IFRS (International Financial Reporting Standards) valuation method should be thrown in the garbage. Assets that are given as collateral should be priced the old fashioned way: at the lower of actual cost and market price. Moreover, as in a loan given by a bank, institutional investors should demand that the value of assets being attached as collateral should exceed the value of the loan.

The third rule for the approval of a loan from our money should entail an increase in the commitment of the owners of those public companies to paying back the debt they need to issue. That means that no loan should be given if the people behind the companies refuse to extend a personal guarantee at least for a portion of the debt. This is definitely an unorthodox measure and it will surely ignite a wave of wrath and frustration from the big bosses of the Israeli economy. But if the crisis has taught us anything, it is the lesson of the importance of personal responsibility. When no one is responsible, not the lender who just rolled the loan over to third parties, and not the borrower whose ability to pay back isn’t checked and who can always walk away from a loan, you get the worst financial crisis in 80 years.

A fourth condition that should be disclosed in the loan prospectuses is a severe restriction on dividend payments during the period of the loans. We have seen far too many companies in the past few years, such as Africa Israel, raise an enormous amount of debt and then pay huge dividends that cripple their ability to pay back these loans.

The fifth requirement is similar to the fourth. It is about restricting the payments to top executives. Since it is easy to pump up fictitious profits on paper, whether by revaluing assets, counting future income as current profit or employing various other maneuvers, it should be clear that as long as a company has debt it cannot have a free hand in compensating its executives.


You want to offer a salary of millions a month? Go ahead. Just don’t think of doing so while your company is alive only thanks to loan made out from my pension money.

Institutional investors are facing the moment of truth. The temptations out there are big. On the one hand, you have tons of money flowing each month from our salaries to their accounts. On the other hand, you have the government retreating from the bond market and leaving a surplus on capital for the private sector (more state paybacks than new debt) of NIS 7b. in April and a similar amount expected in June in its own debt-raising plan. The manager of our savings once again faces the dilemma of what to do with all this money flowing to his direction.

It is the job of the regulators, from Dr. Zohar Goshen, chairman of the Israel Securities Authority, Prof. Oded Sarig, the Finance Ministry’s supervisor of savings and capital markets, to Prof. Stanley Fischer, governor of the Bank of Israel, to make sure that the young men and women who are in charge of our pensions will behave in a more professional manner this time around.


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