The word tycoon comes from the Chinese words tai’kuin, meaning great lord. Until
recently, Israel’s great lords controlled 60 per cent of the net wealth in the
economy and a third of the 500 largest companies’ income.
But today, they
are almost all in trouble.
They acquired great wealth by borrowing
massive sums from banks and pension funds, then used the loans to gain control
of businesses and invest in real estate. Today, deep in debt, they struggle to
redeem their maturing bonds and repay principal and interest on their bank loans
after many of their investments have gone sour in the global recession (see The
Jerusalem Report, October 24, 2011, and February 27).
troubles are also our own, because they owe money to our pension funds and
because their woes threaten the stability of Israel’s largest banks and the
Last May, Moody’s international credit rating agency
downgraded Israel’s banking system outlook from stable to negative because of “a
predicted economic drop-off”.
Part of that downgrade may be related to
the tycoons’ bank loans, at least part of which will not be repaid.
are the tycoons?
They are the heads of a small group of 19 families that have
employed “leverage” (borrowed money) to gain control of a hodgepodge of
companies in finance and industry: Dankner, Ofer, Tshuva, Weissman, Arison,
Bino, Federmann, Borovich, Leviev, Hamburger, Azrieli, Fishman, Strauss,
Wertheimer, Alovich, Zisapel, Shahar, Kass, and Schmelzer families. To be fair,
a few, like Zisapel, Wertheimer and Strauss, built wealth patiently solely
through industrial excellence and entrepreneurship.
Almost no one becomes
super rich using only their own capital. The tycoons use their connections to
borrow huge sums – debts that for some, are proving their downfall.
tycoon now in the news is Nochi Dankner, whose IDB Holdings owe NIS 4.2 billion
($1.06 b.) to bondholders and NIS 2.2 b. ($554 m. ) to banks and financial
institutions, or a total of NIS 6.4 b. ($1.614 b.), including NIS 750 m. ($189
m.) owed to Bank Hapoalim. It is believed the bank has already written off a
large chunk of that loan.
Dankner is battling with bondholders over an
upcoming bond payment, after auditors attached a “going concern warning” (a
technical term implying doubt about the company’s ability to continue to
function as a business entity) to IDB’s secondquarter financial report. IDB
Holdings’ assets are now less than its liabilities and its share price has
plummeted from $1,500 in November 2011 to today’s $571, a drop of almost
Other tycoons are also struggling to pay back borrowed money.
They include Lev Leviev (Africa-Israel Corp.), Yitzhak Tshuva (Delek Real
Estate), Ilan Ben-Dov (Partner), Shaul Alovitz (Bezeq) and Eliezer Fishman
(Industrial Buildings Corp.). Fishman has been in hot water before, after losing
a fortune in currency speculation.
Tshuva and Leviev have used their
personal wealth to pay off debt. But Dankner may not have that capability.
Who is Dankner?
Nochi Dankner, 58, is
the nephew of Shmuel Dankner, family patriarch and leader.
He owns IDB
Group and is a philanthropist, contributing through his companies to
universities and hospitals. He is a major in the IDF reserves and holds degrees
in law and political science from Tel Aviv University.
He became a tycoon
in 2003, when he borrowed funds to take control of IDB. The key loan came from
Amitim, a confederation of former Histadrut pension funds, joined together to
strengthen them and improve their efficiency. Ironically, it is the pension
money of working people, Histadrut labor union members, that made possible
Dankner’s tycoon status. The Histadrut is not a great buddy of the
How did Dankner and the others become tycoons anyway? It’s
pretty simple, actually.
In good times, during inflation, borrow and buy
assets. If you have good connections, it’s easy to get credit, banks even pursue
you to lend you money, pension funds buy your bonds with glee. Then you pay back
the debt, when it matures, in deflated money, when money is easy to get, using
the cash from the companies you bought. Basically, you buy companies with their
For tycoons, like stand-up comedians, timing is everything.
Before the bad times hit, before the onset of deflation, when money becomes hard
to come by, you have to sell assets and pay off as much of the debt as you can.
This is very tricky, because you have to anticipate when to get out of the
markets, when to sell, and this is hard to do for two reasons. First, some
projects are not “liquid” or easy to sell. Second, it’s tough to leave a
rip-roaring party when it is in full swing, before the cops come. Few business
leaders seem to have that knack. Dankner certainly doesn’t. Nor did many of the
What is IDBH’s problem?
IDB Holdings control a grab bag of
companies, in insurance, mobile phones, biotech, retail apparel, cement, real
estate, financial services and chemicals. There is little rhyme or reason to
this conglomerate, very little synergy, and the very notion of a conglomerate
went out of fashion in America three decades ago.
When IDB companies make
money, they can pay their debts. When they don’t, they can’t. And lately, former
cash cows like Cellcom, Super-Sol, Clal Insurance and Nesher cement have faced
increased competition and sharply reduced profits.
problem is linked to three very bad business decisions, all driven by Dankner
himself. First, Dankner bought a large block of stock in the global Swiss bank
Credit Suisse. At first, he looked like a genius, as the stock price soared from
a low of about $20 in 2008 to nearly $60 in 2009.
But Credit Suisse
shares have now dived again, back to $21 and Dankner’s IDBH has lost heavily as
Second, Dankner partnered with tycoon Tshuva to buy land in Las
Vegas for a staggering $1.24 b. The deal was paid for with borrowed money. The
land is now worth far less than the original loan.
And third, Dankner’s
IDB, through its subsidiary Discount Investments, bought a newspaper, Maariv,
with a bloated work force of 2,000 and enough red ink to drown the Chinese Navy,
with cumulative losses since 2000 amounting to NIS 800 m. As a result, Discount
Investments shares fell by 60 percent in 2011. Maariv was recently sold to a
publisher, Shlomo Ben-Zvi, but IDB is still responsible for Maariv’s
Maariv fiercely defended Dankner against mostly hostile print and
TV media, but has proved to be a costly ego trip. Two minority shareholders of
Discount Investments filed suit against IDBH and Dankner, claiming that buying
Maariv “lacked any business or economic logic.” As business daily Globes writer
Stella Korin-Lieber noted, “[Dankner] didn’t pay attention to the changes that
were taking place in the business world. He had a lot of arrogance and
conviction [that] ‘we will be fine.’” How will the struggle between Dankner and
his creditors be resolved? The battle is a game of “Chicken”. Each side
threatens the other with huge losses, even if they themselves lose. In the end,
Dankner is playing for time, hoping that his investments improve enough over
time to generate cash to pay his debts. But as the clock ticks, more and more
debt comes due.
When the dust settles, Dankner may no longer be a
Who is to blame for this mess?
There is more than enough blame to
go around. Dankner himself made horrendous mistakes. IDBH’s Board of Directors
failed to rein him in. Bank of Israel regulators were lax. Pension fund heads
and banks lent him money without due care.
In the end, we voters are all
to blame. If we do not organize protests and push to make illegal the kind of
pyramids that enable a tiny Dankner company, Genden Holdings, to control a huge
chunk of Israel’s economy, if we allow tycoons to borrow irresponsibly large
sums just because they can, we deserve the mess the tycoons have brought
A social protest group called Yisrael Yekara Lanu (Israel is dear to
us) claims that “the banks take billions of dollars that we Israeli citizens
deposit, then use that money to provide loans to tycoons, so that they can
monopolize the market.” Then, says the group, “the tycoons make their products
more expensive to repay the debts to the banks.”
There may be some truth
The only consolation, very small indeed, is that the global
recession that now is impacting Israel and hurting ordinary working people may
help reduce the enormous economic power wielded by the tycoons. •
The writer is
senior research fellow, S. Neaman Institute, Technion-Israel Institute of