Haircut? Or rip-off?

Why don't billionaires use some of their assets to pay their debts?

By SHLOMO MAITAL
Haircut 521 (Do not use) (photo credit: Avi Katz)
Haircut 521 (Do not use)
(photo credit: Avi Katz)
In Shakespeare’s “Romeo and Juliet,” Juliet asks Romeo, “What’s in a name? That which we call a rose by any other name would smell as sweet.”
Juliet means that she loves the person Romeo, not his Montague family name.
Most admirable, Juliet, but alas, quite detached from reality. In today’s world, the name you give things makes a huge difference. Things that stink to high heaven tend to smell better when given a sweet name. Things that smell sweet tend to stink, when given a bad name. And unscrupulous people manipulate this human weakness for personal gain.
Take for instance the euphemism “haircut.”
In the world of finance, a “haircut” has traditionally meant a discount attached to the market price of a stock or bond, informally, to account for risk that market forces are ignoring. “New York Times” columnist William Safire traced the first use of “haircut” to the chairman of the Securities & Exchange Commission (SEC), in 1955, who wanted to give brokers’ inflated assets a more realistic reduced valuation to protect investors; lower assets meant the brokers would have to set aside more capital for reserves.
Ironically, during the current global financial crisis, “haircut” has been distorted to mean the opposite: The attempt by those who owe money to escape paying some of it back. For instance, several Israeli business tycoons and their companies – Ilan Ben-Dov of Tao Tsuot, Yitzhak Tshuva of Delek Real Estate and Yossi Maiman of Ampal-American Israel Corp. − are seeking “haircuts” by asking to defer or reduce payment of principal and interest on bonds held by the public.
It's a rip-off
This is no “haircut.” It is a rip-off. When you and I owe money to the bank, there is no mercy or forgiveness. Suppose I tell Bank Leumi, “Hey, I’m having a spot of money problems, so let’s say I’ll pay you half of what I owe. Deal?” The response is predictable and probably unprintable.
But when billionaires owe money to you and me, after our pension funds’ purchase of their bonds, and say the same thing, they generally get their way. Why?
Bonds are not vague promises to pay.They are legal, binding and contractual.But often, bondholders are fragmented, divided and are played one against the other, threatened with bankruptcy (total non-payment) and buckle one by one.
Tycoons borrow our money to make massive profits. They don’t share those profits with us. That’s why they are billionaires.
They have enormous personal assets. When they lose money, why don’t they use some of those assets to pay their debts, instead of forcing us to bear their losses? It is unjust.
And the problem is huge. According to daily “Haaretz” reporter Ami Ginsburg, in the past three years NIS 16 billion ($4.2 b.) in bond debt has been given a “haircut,” in one form or other, and another NIS 20 b. ($5.3 b.) in bond debt awaits similar “haircuts.”
The problem is not confined solely to the debts of tycoons. According to Ginzburg, “there are nearly 100 mid-size and smaller companies… formulating such arrangements.”
The contagion begun by tycoons is spreading. Since the bonds in question are held by pension funds, the result will directly impact pensioners and other small savers. When the risk of haircuts and default rises, interest rates rise because risk premiums balloon, meaning that ordinary people pay more for their mortgages, and lose money when the value of their bond investments falls. (Bond prices fall when interest rates or yields rise.)
Knesset to the Rescue?
A solution may be on the way. On January 25, the near impossible happened.A bill sponsored by Knesset Members Zehava Gal-On (MK for Meretz, a leftwing anti-religious party) and Deputy Speaker Yitzhak Vaknin (MK for Shas, a right-wing ultra-religious party), and previously approved by the Cabinet, passed its first reading in the Knesset.
The bill requires both court and government approval for any “haircut” in which creditors receive 90 percent or less of what they are owed. Basically, this levels the playing field, giving creditors additional weight against the tycoons’ monopoly power. A partnership between Meretz and Shas, which intensely dislike one another, is quite amazing and may herald a new messianic age. It reflects the widespread abhorrence, across the political spectrum, of “haircuts.”
I’d like to propose an amendment to this bill. Ban the term “haircut.” Replace it with “rip-off.” Because that is what it is. Otherwise, why would State Comptroller Micha Lindenstrauss announce in December that his office is investigating them?
Israel’s tycoons resemble the Greek government, or in fact any large debtor.Debtors pay their old debts by borrowing new funds. When they have trouble borrowing new funds, because their businesses are struggling, they cannot pay back old debts, just like Greece. But for Greece, private banks impose massive suffering on the Greek people, insisting the debt be paid.
In Israel, tycoons get comfy “haircuts,” filching our hard-earned pension investments.
It is said that the world’s most expensive haircut (the real comb and scissors kind) was bought by the Sultan of Brunei, who flew a London barber, Ken Modestou, 7,000 miles to Brunei in a private suite on a Singapore Airlines flight in 2009. The price tag: £15,000 (NIS 88,330).
That is pocket change compared to what financial “haircuts” cost ordinary people.
Someone needs to protect the public’s savings assets of 1.2 trillion shekels ($318 b., twice the Gross Domestic Product). It is not, alas, the Finance Ministry's Capital Markets Commissioner Oded Sarig. In August, he said that only a small part of our pension funds are invested in bonds subject to “haircuts,” and that that proportion fell as the bonds lost value.
This is true. But it’s like saying cancer is not a financial problem because those who have it die and no longer need treatment.
“Haircuts” have driven down the value of all bond assets held by the public. Capital markets fell sharply in 2011, owing to global recession, euro uncertainty and falling profits; savers do not need “haircuts” to add to their problems.
In researching “haircuts,” I recalled an episode in American politics. Political consultant Frank Luntz advised Republicans how to fight the inheritance tax. Call it “death tax,” he advised, “death is something the American people understand.”
He was right. Between 2001 and 2010, the maximum inheritance tax rate fell from 55 percent to 35 percent, as voters abhorred taxing “death.” Luntz manipulated the political agenda, but it is not death that is taxed, it is the fortunes of the rich. Unwittingly, those of us who use the term “haircut” are falling victim to Luntz-style manipulation.
Let’s call “haircuts” what they really are – rip-offs. They may still occur.
Tycoon Romeos may still bamboozle their creditors. Ordinary pensioners, savers and working people may still lose. But at least we will call this “rose” by its real name − theft in broad daylight. 
The writer is senior research fellow, S. Neaman Institute, Technion.