Getting Rich on Other People’s Money

‘Twenty major business groups control … close to half of total stock market capitalization.’

By SHLOMO MAITAL
“WE CAN HAVE DEMOCRACY IN THIS COUNTRY,” wrote the great American Jewish jurist Louis Brandeis in 1914, “or we can have great wealth concentrated in the hands of a few, but we can’t have both.”
These words are from Brandeis’s book “Other People’s Money and How the Bankers Use It.” As a key adviser to US president Woodrow Wilson, Brandeis’s wisdom shaped progressive era legislation that broke the stranglehold of billionaires on America’s economy and banks.
Brandeis was instrumental in initiating the Federal Reserve Act, which regulated the banks; the Clayton Act, which greatly restricted monopoly capital; and the Federal Trade Commission, which enforced competition.
Interlocking (pyramid) directorates were banned, and rules of fair trade were established. In 1916, Brandeis became a Supreme Court justice, where his brilliant decisions helped create a free competitive business environment.
A century later, Israel desperately needs its own modern version of Brandeis. A study by Bank of Israel economist Konstantin Kosenko revealed that “20 major business groups control … close to half of total stock market capitalization [i.e. total market value of all shares], while the 10 largest groups’ segment of the market capitalization is among the largest in the Western world and amounts to 30 percent.
These groups are family-controlled and highly diversified across different industries with common pyramidal structure of ownership. Roughly 80 percent of all group-affiliated companies belong to business pyramids.
“Business groups are dominant especially in the financial sector, where half of banks and insurance companies are group-affiliated,” wrote Kosenko. These same 20 families – Arison, Tshuva, Dankner, Ofer, Steinmetz, Wertheimer, Zadik, and others – control companies that generate about half of the country’s Gross Domestic Product. Forbes magazine lists 10 Israeli billionaires in the world’s top 1,000, which means that while Israel has 1/10 of 1 percent of the world’s population, it has proportionally ten times that many billionaires.
How precisely did these 20 families gain control of the economy? And what is a business pyramid? Let us start with the pyramid. Suppose you gain control of Company A, holding half its shares. Company A, in turn, buys and holds half the shares of Company B. Company B does the same for Company C, then Company D, and finally Company E, a major global corporation. This is a five-story pyramid. Whoever controls the base of the pyramid, Company A, controls all five.
The fraction of the total company shares you hold is therefore onehalf raised to the fifth power (a half of a half of a half, etc.) or 1/32 (about 3 percent). Yet you control all five businesses. And this is what the 20 oligarch families have done. Moreover, they did it with other people’s money – our money, by gaining control of the country’s two largest banks. (Sheri Arison, for example, owns Bank HaPoalim.) Those banks lent them the money to buy industrial businesses. And the government actively cooperated, believing wrongly that an economy where companies have strong controlling majority interests is more stable than one where stock ownership is diffuse and widespread. I believe the precise opposite is the case. So did Brandeis.
In Chapter Three of “Other People’s Money,” Brandeis wrote, “the practice of interlocking directorates is the root of many evils. It offends laws human and divine… interlocking directorates must be effectually prohibited before the freedom of American business can be regained.”
Thanks to Brandeis, they were. We should do the same in Israel. Let us recall what happened when America forgot Brandeis and let Wall Street wizards manipulate other people’s money for personal gain.
The result was the global financial collapse of 2008-9.
Ironically, one of the culprits was J.P. Morgan, the eponymous bank founded by the oligarch whose wings Brandeis helped to clip.
Last October Prime Minister Benjamin Netanyahu asked the director general of the Prime Minister’s Office, Eyal Gabai, to head a task force, charged with examining the concentration of wealth, its implications and ways to reduce it. The committee will report on its findings in February. I hope they are reading Brandeis’s book.
There is no mystery about how to take back control of Israel’s money and economy from the 20 families. Just follow Brandeis’s blueprint.
It requires only political will – two-thirds of Israelis believe the concentration of wealth is tightly linked to the state’s high 20 percent incidence of poverty – and the courage to overcome vicious lobbying in the Knesset by the billionaires.
Enormous natural gas fields were recently confirmed to be present off Israel’s coast. Netanyahu accepted in mid-January the recommendations of a committee, headed by Hebrew University Professor Eitan Sheshinski, which concluded that the profits from them should be taxed at a reasonable rate. A fierce lobby campaign had been mounted by Yitzhak Tshuva, whose Delek company will earn many billions of dollars from developing the gas fields, to defeat these recommendations.
The campaign included personal smears against Sheshinski, a top world expert on taxation.
As a result, Bank of Israel Governor Stanley Fischer recently commented, “I respect the gas entrepreneurs [but] they do not have the right to try to impose a veto on the government’s decision. We must not allow interested parties to interfere with the committee’s work with irrelevant arguments, and the Israeli public must not be allowed to be affected by them.”
Brandeis was right. Concentrated wealth is inimical to political democracy. This is what Fischer meant.
The oligarch families use other people’s money, our money, to build untold wealth. They now seek to use other people’s natural gas (ours) to further expand that wealth. Let us hope the Gabai Committee and the government will heed the century-old words of Louis Brandeis and take back control of our money and our economy. At stake is our precious political democracy.
The writer is senior research fellow, S. Neaman Institute, Technion.