Israel’s Financial Institutions Reeling Following Scathing Criticism
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Israel’s Financial Institutions Reeling Following Scathing Criticism

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Israel’s financial establishment is reeling from the impact of a report released Sunday night by the special commission set up to investigate the collapse of bank shares and other stocks that touched off a financial panic three years ago.

The commission, headed by Supreme Court Justice Chaim Beisky, was scathing in its criticism of the country’s leading commercial banks and their senior officers, the Stock Exchange and the entire banking system.

It recommended, among other things, that the Governor of the Bank of Israel and the heads of the five largest banks be forced to resign within 30 days, and that few, if any, of them should be entrusted in the future with posts of responsibility in their banks or any other financial institutions, at home or abroad.


The immediate response from the banks and bankers ranged from defensive to “no comment.” The prevailing reaction was that the report, a 550-page document representing 13 months of labor by the commission, deals with past events and the public must now be reassured that the banking system is safe.

The Knesset State Control Committee adopted the recommendations of the Beisky commission Monday and requested the government, the Tel Aviv Stock Exchange management and the securities authority to implement them. The committee warned against rushing to adopt legislation that would give the banks immunity to legal action.

Premier Shimon Peres is known to have consulted with financial and legal authorities, after seeing the commission report, on the need for special regulations to prevent a flood of private law suits against the banks by customers who may claim, on the basis of the report, that they were defrauded.

But State Comptroller Yitzhak Tunik recommended strongly against immunity for the banks. He told the Knesset committee Monday that it would be improper to revoke the basic right of citizens to go to court. Tunik was responding to a proposal by Energy Minister Moshe Shahal to enact protective legislation to preserve the stability of the banking system.


Finance Minister Moshe Nissim, who took over the Treasury only last week in a Cabinet portfolio switch with Yitzhak Modai, said Monday that the banking system was not in danger as a result of the Beisky commission report. He said he would appoint a team of experts from the Finance and Justice Ministries to study the report and draw practical conclusions. Nissim had been Justice Minister until last Wednesday, when he replaced Modai as Finance Minister.

Minister of Economy Gad Yaacobi said Monday that confidence in the stability of the banks should be maintained. He noted that the commission’s report referred to events that occurred in 1983.

Justice Beisky said Sunday that the full record of the commission’s hearing comprising thousands of pages of testimony would be made available to the Attorney General to institute criminal proceedings against individuals if he deems it necessary.


The commission’s report severely criticized two former Finance Ministers–Yoram Aridor and Yigael Horowitz–both of whom held the office in the Likud-led government before the crash. According to the report, they knew the banks were grossly inflating the value of their shares sold on the Stock Exchange but did nothing to halt the practice. The leaders of the Stock Exchange were also taken to task for failing to heed warnings of an imminent collapse.

Among the banks cited in the report, Bank Hapoalim promised “cooperation” Monday. The chairman of its Board, Giora Gazit, resigned and asked that he not be named to any other office at the bank.

Aharon Meir, managing director of the Bank Hamizrachi, criticized the harsh nature of the report and denied its accusations against him. He stressed he was speaking for himself, not his bank.

Ernest Japhet, Board chairman of Bank Leumi, declined to comment as did the heads of the Israel Discount Bank, Bank of Israel Governor Moshe Mandelbaum and former Finance Minister Aridor who is presently in New York.

But Uri Slonim, a legal advisor to the Bank Leumi, thought the report was too hard on the heads of banks and too easy on the former Finance Ministers because the latter no longer hold office. David Shoham, director general of the Bank Klali, likened the commission to “the Romans throwing people to the lions.”


Bank shares were the most popular form of personal savings until 1983 when deteriorating economic conditions and periodic devaluations of the Shekel precipitated a rush to sell them off in order to buy Dollars and other hard currency.

The banks which issued the shares were shoring up their value while keeping the public in the dark. That practice had been going on since the early 1970’s when the Labor Party was in power. It reached serious proportions after the Likud took office in 1977, the report said.

That drew an angry response Monday from Minister-Without-Portfolio Moshe Arens, a Herut hardliner, who claimed the report reflected a situation created not by Likud but by the “leftist parties.” He charged, “This is a Bolshevik economy in which people cannot work but everything is run by an army of officials.”

Ran Cohen of the Civil Rights Movement maintained that if the Beisky report had been publicized during the Likud regime, the government would have toppled. He said the report shows the irresponsible manner in which Likud ran the country, economically as well as politically.

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