Twilight of the tycoons

In the dramatic final scene of Richard Wagner’s opera, “Twilight of the Gods,” the gods of Valhalla are consumed by fire and the newly cleansed world renews itself. The scene in the Tel Aviv District Court on Monday, January 5, was not quite as dramatic, but rather similar nonetheless.

Announcing his ruling, Judge Eitan Orenstein awarded final control of IDB Holding – a company controlled by tycoon Nochi Dankner, which once held a major chunk of Israel’s economy – to a group led by Moti Ben-Moshe and Eduardo Elsztain. A day later, the State Attorney’s Office announced it would indict Dankner for manipulating stock prices.

Dankner, 59, was born in Tel Aviv. He served in the Israel Air Force, studied law and then founded a law firm. He began building IDB over a decade ago. Once Israel’s most powerful capitalist, Dankner, together with his empire, has gone up in flames.

What is IDB? IDB Holding Corporation is part of a pyramid, a group of companies stacked one atop another, in which a small firm holds 50 percent of the shares of a larger one, which, in turn, owns half of other companies, which own half of others, etc.

Built and controlled by Dankner during the past decade, the four-tier IDB pyramid enabled him to control huge swathes of Israel’s economy, while owning only a small minority of company shares. By holding half of a half of a half of a half, Dankner could own only, say, 6 percent of the main group’s shares but control it all. The pyramid was built through leverage ‒ large amounts of debt and borrowed money, provided by banks and pension funds. Much of that debt was unsecured, i.e., had no collateral or backing.

At his peak, Dankner, through IDB, owned or controlled leading companies in various sectors – communications (Cellcom, NetVision), newspapers (Maariv), insurance (Clal), technology (Elron, Given Imaging), industry (Koor, Makhteshim), real estate (Property & Building, Gav-Yam), finance (Discount Investment Corp.) and retailing (Super-Sol). In addition, IDB owned a large chunk (2.5 percent) of a leading global bank, Credit Suisse.

At the height of their power in 2008, Dankner and IDB controlled half a trillion shekels ($142 billion worth of publicly listed stocks and bonds, equal to half of Israel’s GDP. Today IDB Holding, broke and mired in debt, has a market value of only 70 million shekels ($20 million).

Is such a pyramid legal? It was, but is no longer.

Under the Business Concentration Law passed by the Knesset on December 9, multi-tiered business pyramids are banned.

No group may have more than two tiers of publicly listed companies. Nor can holding companies own both financial and nonfinancial enterprises. (This is to prevent a pyramid from lending public money to itself.) Groups that do must divest one or the other – financial interests or industrial interests.

The law takes effect in a year. It gives existing pyramids (there are several apart from IDB) four years to consolidate into three tiers, then another two years to eliminate one more tier. In general, only two tiers of companies will be allowed.

According to MK Nissan Slomiansky (Bayit Yehudi), chair of the Knesset Finance Committee, who pushed the bill to approval, “From now on, you will see pyramids only in Egypt.”

The reason for the delayed introduction is simply to allow time to liquidate companies without swallowing fire-sale prices.

IDB seems like a multi-tiered hodgepodge of companies with no real synergy, or logic, linking them. It seems to have been created to generate economic rent stemming from monopoly power and influence.

Are all such conglomerates bad? No. The most famous one is Berkshire Hathaway, the holding company built by the so-called Wizard of Omaha, Warren Buffett, the man who bought the Israeli firm, Iscar.

But there is a huge difference between Buffett and Dankner. Buffett buys companies, choosing them carefully according to the quality of their management, and then leaves them alone. Dankner installed his own managers and meddled and muddled.

Buffett is one of the world’s richest persons.

Dankner crashed.

Why did Nochi Dankner lose control of the business empire he created? There are several reasons – mainly bad management and bad luck.

A CEO in a Dankner company told the business daily, The Marker, about “Danknerism” or crony capitalism, management without proper governance, in which Dankner eliminated true boardroom debate and made solo decisions supported by yes-men.

IDB cash cows like Cellcom and Super-Sol were victims of increased competition in the mobile phone and supermarket businesses that slashed profit margins drastically. And then there was the 2008 global financial crisis, which helped ruin dubious, speculative Las Vegas real-estate investments and a rash decision to bet on Credit Suisse stock that rose, and then fell sharply.

Who are Moti Ben-Moshe and Eduardo Elsztain? And why move IDB control from one tycoon to two others, rather than liquidate its parts? Moti Ben-Moshe is a 38-year-old entrepreneur.

His parents immigrated to Israel in the 1970s from the then-Soviet republic of Georgia and settled in Beersheba. His father, Jacob, managed a branch of Bank Mizrahi in Ramle for many years. Ben- Moshe spends most of his time in Germany, where he serves as chairman of Extra, a large energy and telecom group. He returns to Israel once a month. Judge Orenstein’s experts checked out his background and found it impeccable.

Eduardo Elsztain is chairman and CEO of IRSA, Argentina’s biggest real-estate company. IRSA latest quarterly revenues were $93 million. Elsztain is also chairman of Cresud, a major agriculture producer.

Its quarterly revenues were $173 million.

Elsztain initially supported Dankner and invested money in IDB to help him, but later bailed out and chose to partner with Ben-Moshe.

Ben-Moshe and Elsztain promised to inject NIS 650 million into IDB and pay IDB creditors NIS 300 million. It seems they are capable of doing so. They have appointed a new chairman for IDB, Aharon Fogel, one of Israel’s most experienced and capable business leaders and former chairman of Migdal, a leading insurance company. They promise a new management style, including modesty; Dankner’s IDB offices on the 44th floor of Azrieli Tower were sumptuous.

Elsztain and Ben-Moshe are black and white in terms of business experience and philosophy. Elsztain has experience in leading public companies; Ben-Moshe runs privately held firms. Elsztain is South American; Ben-Moshe knows Israel and Europe.

How well they collaborate will determine the fate of the remnants of IDB and its pyramid.

In the long run, it may have been better to sell off the separate parts of IDB. But 75 percent of the IDB creditors (including Bank Leumi) voted to shift control to Ben-Moshe and Elsztain. They seemed impatient to rescue whatever they could now, write off the loss and just move on.

How much money will the general public lose because of IDB’s collapse? And why was so much public pension money invested in IDB bonds in the first place? Large amounts of pension fund money have indeed been invested in stocks and bonds linked to IDB and related companies.

IDB Holding owes NIS 2 billion ($570 million) to bondholders; and its subsidiary, IDB Development, owes another NIS 5.8 billion ($1.66 billion), making a total debt of NIS 7.8 billion ($2.23 billion). Orenstein said that creditors would likely lose 30 percent of this debt, or $669 million. This includes unsecured loans given to IDB by leading banks (Hapoalim, Leumi, Mizrahi/Tefahot).

Why did pension funds invest in IDB bonds? Mainly because such funds had little choice. They need to earn strong returns in order to pay monthly pensions for an increasingly aging society, and IDB assets were pervasive and unavoidable. There were few better alternatives. Ironically, reduced government deficits in recent years slashed the amounts of new government bond issues and led in part to the dubious pension fund purchases of IDB bonds. The government no longer sells dedicated implicitly subsidized high-interest bonds only to pension funds, as it once did.

Have other tycoons incurred losses, too? Indeed. Lev Leviev’s Africa-Israel conglomerate lost fortunes. Yitzhak Tshuva’s real- estate group lost money, offset by his clever and profitable investments in natural gas.

The latest tycoon to fall is Moty Zisser. In 1999, Zisser bought Elbit Imaging, a hi-tech medical imaging company, and turned it into a holding company with real-estate investments.

Huge losses have led to an NIS 1.8 billion “haircut” or debt write-off, in which the courts wrested control of Elbit Imaging from Zisser and seized some of his personal assets. Elbit Imaging should not be confused with Elbit Systems, an unrelated profitable global Israeli defense contractor with annual revenues of about $3 billion.

Zisser is a prominent philanthropist, as are virtually all the tycoons. Dankner set up the IDB Foundation, which gave millions to charity. All the charities supported by the former tycoons will suffer.

Is Nochi Dankner a crook, or a villain? He is not a crook (yet), and perhaps not even a villain.

One day after Orenstein wrested IDB from Dankner’s control, Dankner was told that he and associates would be indicted for securities fraud, involving the manipulating of IDB stock. This relates to an episode in February 2012 when Dankner issued new IDB stock on the Tel Aviv Exchange with the purpose of raising money to pay IDB debts, and also, it is alleged, artificially pumped up IDB’s stock price by secretly paying others to buy IDB shares, which is against the law.

With his high-priced legal talent, Dankner may well wriggle out of this charge and avoid the crook label. As for villain ‒ Dankner simply used what the law and the regulators allowed to build his pyramid empire.

The real villains are those who allowed, even encouraged, pyramid-building in the first place.

What role did public opinion and the media play in dismantling IDB and making similar pyramids illegal? If there is a hero in this bleak story, it is Guy Rolnik, an entrepreneur and journalist who founded The Marker, the business daily of Haaretz. At a time when other major newspapers, such as Yedioth Ahronoth, and later Maariv, which Dankner bought, were supporting Dankner, Rolnik led a campaign against the tycoons, the pyramids and Dankner. A milestone was Rolnik’s July 2, 2010 article on US Supreme Court Justice Louis Brandeis.

Brandeis, an ardent Zionist, led an effective campaign against America’s robber barons, both as a lawyer (“the Robin Hood of the law,” he was called) and Supreme Court justice, in an illustrious career that lasted from 1890 through his death in 1941. His book, “Other People’s Money and How the Bankers Use It” (1914), showed how robber barons used access to unlimited amounts of bank credit to build their monopoly empires, gaining control of an unprecedentedly large proportion of American wealth – precisely what Dankner and others did in Israel a century later.

As an activist judge, Brandeis and his decisions helped dismantle America’s monopolies and pyramids. Among other achievements, he broke the railroad monopoly of banker J.P. Morgan.

Rolnik invoked Brandeis to claim that similar vigorous action was needed in Israel. His article ended with a quote from Brandeis’s book, in turn drawn from a speech by former US president Woodrow Wilson. “No country can afford to have its prosperity originated by a small controlling class.

The treasury of America does not lie in the brains of the small body of men now in control of the great enterprises… [but] depends upon the invention of unknown men.” In other words, transform Tycoon Nation into truly Start-up Nation.

Another unsung hero is Daniel Doron, founder of the Israel Center for Social and Economic Progress, a think tank. Early on, Doron blew the whistle on pyramids and showed how they defeat free market competition.

And the Neaman Institute, where I work, held a day-long seminar two years ago that presented massive evidence against excessive wealth concentration and monopoly power.

Will Dankner join the ranks of the 1.7 million Israelis who are below the poverty line? No, not quite. But he has a personal debt of NIS 1 billion, owed by his personal investment companies, Tomahawk and Genden, and lacks sufficient assets to pay it. Some of his assets will be seized by his creditors, including the banks. His shares in IDB can no longer fund this debt. His palatial home, a mansion in Herzliya is worth NIS 40 million and he has transferred half-ownership to his wife to keep the banks at bay.

As Wagner’s opera ends, fierce flames flare up and entirely consume the gods, who disappear. Economics and finance, though, are not opera. And the thin lady – the skinned public – has sung, but a bit too late. We have not seen the last of the tycoons. Hopefully, however, as the public licks its wounds and tallies its massive losses, we have seen the last of the robber-baron pyramiding that made them so rich.

America is watching Israel’s anticoncentration experiment closely. Writing in The New York Times, columnist Steven M. Davidoff notes that the US lacks pyramids, but still has concentrated wealth; 44 percent of all financial assets in the US are controlled by the five biggest banks. This proportion was less than 10 percent in 1990.

“With a single bill and a few big changes in its corporate law,” Davidoff wrote on January 9, “Israel is looking to overhaul its economy and reduce income inequality… The real question is whether [this] is all it takes? “Are there any lessons for the US?” Davidoff asked. There are, he responded.

“While we await the outcome of Israel’s great experiment, it is clear that where there is the perception that harm is being done and where there is the will to change, a democracy can overcome even the most powerful corporate lobbyists – in Israel, at least.”

Hopefully, with implementation of the Business Concentration Law, we have seen the last of the pyramids of the robber barons.