"We know that we don’t know, but we don’t know how much we don’t know," said Roubini General Economics chairman Dr. Nouriel Roubini and economics professor at the New York University's Stern School of Business. He made the comment at a seminar on the damage caused by the US sub-prime crisis at the World Bank-IMF Annual Meeting in Washington last October.
While we like to think that Israel has no sub-prime mortgages, it turns out that reality is somewhat different. Look at the banking sector for example. The exposure of Israel's banks to the US sub-prime crisis is $9.7 billion. The financial reports for the third quarter of 2007 of the five big banks indicate that they have written off NIS 900 million in their aggregate shareholders' equity because of exposure to structured securities. The banks have been forced to recognize $222 million in write-downs in shareholders' equity, and $37 million in losses.
If the market climate does not substantially improve, the banks will have to report much greater losses. Sources believe that some banks - and the name of Bank Hapoalim (TASE: POLI; LSE:80OA) comes up frequently in this context - will have to transfer a large part of these write-downs in fair value from their balance sheets to their profit and loss statements in their financial reports for 2007.
We at least have some idea about the potential damage and risk levels in the banking system, thanks to Supervisor of Banks Rony Hizkiyahu, who ordered the banks to list their exposure and to provide fair disclosure in their financial reports.
This is not the case for provident funds, pension funds, and participating life insurance policies, which manage an aggregate NIS 420 billion, in essence, the entire pension savings of the Israeli public. There zero transparency here; there is a black hole of information. There is damage here too, but it is concealed from view.
"Globes" has uncovered the cracks in Kahal Employees Supplementary Training Fund, jointly owned by Migdal Insurance and Financial Holdings Ltd. (TASE: MGDL) and Bear Stearns (NYSE: BSC) unit Bear Stearns Asset Management through Migdal Capital Markets. Kahal has written off $5 million on investments in two Bear Stearns' leveraged hedge funds. The loss to Kahal's members is 0.2% in return.
Last week, Sapphire 1 Financial Instruments Ltd. announced that it lost NIS 75 million on structured bonds which invested in sub-prime mortgage-back securities. Sapphire's investors include Bank Hapoalim's Gadish provident fund and fund management company Gmulot Ltd., Prisma Investment House Ltd., DS Securities & Investments Ltd. (TASE:DSIN), Excellence Investments Ltd. (TASE: EXCE), Meitav Investment House Ltd., IDI Israel Direct Insurance Ltd. (TASE: IDI), and Tamir Fishman & Co.
What's next? We have no idea. Nor do the millions of members of these funds, depositors, or the policyholders. Institutional investors tend to follow the herd when making investments. Since no one knows provident and pension funds' exposure to structured securities, it cannot be ruled out that we're only seeing the tip of the iceberg, and that the exposure is far greater than the losses reported so far.
In short, we simply have no idea. One morning, depositors will wake up and read in the press that there are losses, or will read in the funds' quarterly statements to members (those who actually bother to open the envelopes) that their provident fund has generated a low yield.
What should the Ministry of Finance Capital Markets, Insurance and Savings Supervision Department do now? Quite simply, look at what the Bank of Israel has done and copy it exactly. Supervisor of Capital Markets, Insurance and Savings Yadin Antebi should issue sweeping guidelines to every pension management company ordering them to provide full fair disclosure about their structured securities and every other asset exposed to the sub-prime crisis.
Published by Globes [online], Israel business news - www.globes-online.com - on January 6, 2008
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