Staying steady through the storm

The chairman of the board of TASE tells the 'Post' about the market amid the global crisis.

saul bronfeld tase 248 88 (photo credit: Courtesy)
saul bronfeld tase 248 88
(photo credit: Courtesy)
Financial markets around the world are facing one of the worst crises in recent history, but the Tel Aviv Stock Exchange has fared better than many of them. On Monday, Saul Bronfeld, chairman of the board of the Tel Aviv Stock Exchange, explained why the Israeli economy is different than that of the US and many other countries. As we speak, markets continue to head downwards. What do you think has helped the Tel Aviv Stock Exchange weather the storm better than many of its overseas counterparts? Well, I think that this is the first crisis in the history of the Israeli capital markets that wasn't our doing, which is a nice change. This time it has to do with problems that erupted in America and Europe, and it so happened that the crisis erupted at a period when Israel's economic fundamentals are very strong and healthy. The shekel is strong, our foreign currency reserves are plentiful, inflation is low, unemployment rates are very low, and the government budget is practically balanced. So, if we are doomed to have an international crisis, the backdrop is the best you could wish for. The outcome is that the Israeli market wasn't hit as badly as in America or Europe, which is a consolation to some extent. But still, the hurricane is leaving damage in its wake as it hits the Tel Aviv Stock Exchange. Not so long ago, the TASE introduced circuit breakers to deal with volatility on the market. How have those devices fared during the recent turmoil? We introduced circuit breakers a couple of years ago following the practices of advanced exchanges abroad. We didn't know at the time when the crisis would come, but we knew that eventually we would have to face a crisis. Our ultimate circuit breaker is supposed to kick in when prices jump or fall by 12 percent, but that hasn't happened yet. The most that we've had is a 45 minute suspension of trade on October 12, and I think it worked very well. Prices fell about 8.25%, and then they started climbing back up. At the end of the day the fall was no more than about 4% - which was a very pleasant surprise for everybody concerned. Did you at any stage consider a ban on short selling? Short selling is not so common in Israel as in other markets, and frankly speaking I don't believe that the problem in other markets was short selling. I think that was a very convenient scapegoat for regulators and for investment managers stuck with considerable positions in securities that went down. The easiest thing is to blame short sellers, no matter whether it's a real phenomenon or not. In Israel the magnitude of short selling is rather small so there was no point on touching this subject. We feel that if you start amending laws when it is not absolutely necessary then that adds an element of confusion and unrest. If it ain't broken, don't fix it; certainly not when you have a storm going on. How do you ensure the stability of your members during a time of crisis, and could the exchange be affected in any way if one of the members went under? Well, we have very strict regulations in place covering capital adequacy and liquidity of our members. In this crisis, as in previous crises, the members are quite safe and sound. I think that the crisis at the Tel Aviv Stock Exchange in the early 1980s taught our members to be cautious and not to be greedy - like some of their opposite numbers overseas. What is the uniqueness of the Tel Aviv Stock Exchange in the eyes of the global investor? What attracts investors is, I'm sorry to say, not the stock exchange but rather the listed companies on an exchange, the economy as a whole, the domestic investing community, the laws and regulations of a country. People are not going to invest in companies when the economic environment is not stable, when there are inflationary pressures, when there are irresponsible government policies, balance of payment problems and so on and so forth. The last five years have been exceptionally good for the Israeli economy; the annual rate of growth was more than 5% per annum. We had a consistent five years of very healthy growth, and that is basically what attracts money from abroad. Over the last 20 years, more and more institutional investors, first in America and then in Europe, have been seeking new avenues for investments. They were looking at emerging economies with high rates of growth, and from their point of view Israel was in a very beneficial position because of its hybrid economy. Our rate of growth was similar to emerging economies, but with political and economic stability similar to that of the Western world. So you had the benefits of the dynamic economy of an emerging market together with the stability and security of an established economy. In addition, Western investors, and for that matter investors from the Far East, discovered Israel as a haven, or a heaven, for high-tech. We have a highly impressive high-tech industry, which is the sort of industry that attracts quite a lot of money. Obviously, it's a high-risk industry, but there have been many successful and profitable exits by Israeli high-tech companies that make the averages look very nice. We have fairly rigorous regulations here. Our securities law was modeled after the American securities law. We have very proactive regulators; our accounting industry is very, very good. We never had an Enron or a WorldCom or that sort of thing here in Israel. Since we are not yet a mature capitalist economy we have the advantage that most of the public companies are still managed by controlling shareholders. It's very unlike what you see in America - and to some extent in England - where hired managers and boards are running the companies. They don't hold serious stakes in the company; they are officers of the company and sometimes that stage of developed capitalism creates a lot of problems, like we saw in America in the recent crisis and in previous cases where there was no owner to stamp down his authority and the CEOs can act without restraint. In Israel, in most of the companies on the TA-100 the owners are very present. There are no officers who can put them at risk with all sorts of adventures. That is a very important thing. That is something that grants relative security to the stock exchange. American, British and European banks are now undergoing what we went through 25 years ago, albeit for different reasons. In 1983, the Israeli government had to intervene and save the banks from bankruptcy. The reasons that we don't have similar problems to what you see today in America is that our regulators and the banks themselves learned the lessons of the '83 crisis and vowed 'never again' in Israel. Our banks were not involved in lending money to people and to corporations without adequate collateral. We do not have in Israel a sub-prime market. The collateral and the securities that Israeli banks get from their borrowers are outstanding. One can expect that the volume of bad loans will increase in the near future, but not dramatically. What is your vision for the Tel Aviv Stock Exchange? My vision is one of a stock exchange that serves the interest of the economy and knows how to adapt itself to the needs of the economy. We must run our operations faultlessly, no matter how volatile the markets. We need to identify the needs of the economy, whether they be new or better services, or improved regulations. We are part of the global economy and therefore we have to make the stock exchange more accessible to foreigners and to make it easier for Israeli companies to raise money overseas. That is something that is very central to our agenda. Not just to attract money - which is, of course, very important - but also to assist Israeli companies that have floated in Israel, grown and matured and now wish to raise capital overseas, or for companies whose IPO was overseas and now wish to be listed in Tel Aviv as well. It's a very simple vision. We are a service provider and I believe we do our job quite well. We have a team here with a lot of experience, a lot of knowledge and a lot of motivation.