Some of Israel’s leading businessmen are suffering a backlash – an Article from The Economist
(This article was Originally published at the printed version of The Economist – http://www.economist.com/news/business/21586330-some-israels-leading-businessmen-are-suffering-backlash-turning-against-tycoons)
Business in Israel
Turning against the tycoons
Some of Israel’s leading businessmen are suffering a backlash
A CORPORATE saga has filled Israel’s newspapers for months: the struggle of Nochi Dankner, one of the country’s leading businessmen, to keep control of IDB Holding Corporation, a debt-laden conglomerate. Mr Dankner came to prominence when he bought IDB in 2003. If he fails to devise a viable rescue plan soon, the firm’s bondholders will gain control; Mr Dankner may lose much of his fortune.
Few tears would be shed by his countrymen. Mr Dankner has become the most disparaged of Israel’s “tycoons”, the term used widely—in the same spirit as “oligarchs” in Russia and “robber barons” in Gilded Age America—to describe a group of businessmen who have built corporate empires over the past decade or two.
These tycoons are a disparate bunch. Some, like Mr Dankner, are flamboyant, relishing the limelight; others flee it. Some, again like Mr Dankner, were born into rich families. Others worked their way up from humble beginnings, such as Yitzhak Teshuva, who built a global property empire that nearly collapsed in the financial crisis of 2008, before resurfacing as an energy mogul after his business discovered massive offshore natural-gas fields. He is doubly criticised, for sharing his real-estate losses with the country’s pension funds and for enriching himself from what invariably are referred to as “the nation’s natural resources”. Several other tycoons, though not on the scale of Mr Teshuva, rose and fell with the global property cycle, often—like Motti Zisser, who is now in danger of losing his own home—thanks to forays into central and eastern Europe.
But the defining characteristic of a tycoon, for the Israeli public, is not how much money he made or lost, but whose money he lost and how he responded to a crisis in his corporate empire. The tycoon phenomenon, in its negative sense, is the bastard child of the crash. The Israeli economy, including its banking system, emerged largely unscathed. Yet many corporate empires created in the boom years were plunged into existential crisis because of their large debt.
The tycoons had mostly leveraged up in the recently deregulated Israeli capital markets, and found themselves overextended after the crash. Because their creditors were not commercial banks but institutional investors such as insurers and pension funds with no previous experience of big losses from corporate lending, debt-restructuring talks often became more emotional than rational.
Israel’s financial media, abandoning earlier support for free-market policies, began warning the public that hard-earned savings were at risk. Pension funds had let the tycoons enrich themselves in the good times; in the bad times shares in holding companies plunged as the tycoons passed their liabilities to their hapless creditors.
This led to public outrage and pressure for reform in Israel, spearheaded by a grassroots social-protest movement that swept the country in 2011 (with much greater impact than the parallel anti-one-percent “occupy” protests elsewhere). In particular, demands to protect savings and investments led Israeli lawmakers to bring in intrusive and burdensome regulation of the financial system. The protests also prompted the government of Binyamin Netanyahu to abandon plans to cut direct taxes and instead swing back towards redistributive fiscal policies.
The public mood remained ugly during the general election in January, in which all the established parties suffered. Of the 120 members of the incoming Knesset, 48 were new. Populist themes dominate Israeli politics, with anti-business sentiment so common as to be almost a form of political correctness. This in the country renowned as the entrepreneurial “start-up nation”.
Yet this is not all bad. An antitrust “concentration law”, now moving through the legislative process, is seen by economic liberals as a reform that should revitalise the corporate sector by forcing conglomerates to separate their financial and non-financial businesses. It will also make it harder for tycoons to use “pyramid” ownership structures, in which their holding companies own stakes in a cascade of intermediary firms, allowing control to be retained with only a minority of the equity.
Nor is the public’s antipathy towards business entirely undiscriminating. Israelis continue to respect and admire those businesspeople they see as exemplary: the Wertheimers, for example, who in May banked another $2 billion by selling to Warren Buffett’s Berkshire Hathaway their final 20% stake in Iscar, a machine-tools firm they grew into a global leader. This made them Israel’s richest family—but it is rare to hear a bad word spoken about them, in the press or in the pub. The same is true of the multimillionaires that Israel is minting via its many technology start-ups. When Waze, which developed a free mobile navigation app for smartphones, was bought by Google in June for around $1 billion, its suddenly enriched founders were celebrated by the public like members of a successful national sports team.