Best scenario: Incompetence

Again the Bank of Israel has to intervene and save the customers. This case isn't like Trade Bank, which collapsed after a lowly clerk stole a quarter-billion shekels. No, this is a story of mismanagement over years and irresponsible lending, that ultimately caused Israel's seventh-biggest bank to write off a tenth of its equity.

Industrial Development Bank (TASE: INDD.G ) is expcted to shortly report a loss of NIS 100 million in a single quarter. That is some feat.

Its problems started to surface only recently, as its borrowers stumbled into trouble and started defaulting on interest payments, at best, or on returning the whole enchilada, at worst.

Enter Industrial Development Bank's brand-new chairman, veteran politician Ra'anan Cohen, who whipped up an emergency meeting with none other than Israel's prime minister and top economic leadership to save the bank.

The meeting's conclusion underscores just how terrible the bank's condition really is. The Bank of Israel agreed to extend tens of millions of dollars in credit, which can mean only one thing: that Industrial Development Bank's condition is critical. It is out of money and cannot lend anything more to customers. It is paralyzed, in a word. All it can do at this stage is collect debts and sell its credit portfolio, while working on a rehabilitation plan.

Cohen, a seasoned politician, couldn't have known into what waters he so gaily leapt. Now he knows, and realizes that his efforts to heal the bank may not work. One purpose of the meeting with the PM & Co, in which the bank's woes were "outed", is to share out the blame.

Prime Minister Ariel Sharon, Finance Minister Silvan Shalom, Bank of Israel governor David Klein, accountant-general Nir Gilad they were all there, all learned of Industrial Development Bank's dreadful plight, and were forced to cook up an instant solution.

Yet its situation is not new. The bank has been operating below its minimal capital adequacy ratio for about a year. The Bank of Israel ordered it to maintain a capital adequacy ratio of 15%, but since then Industrial Development Bank has been steadily retreating. At the end of the first quarter, its adequacy ratio stood at 13.8%. Now it's down to 11%.

Assuming the bank doesn't suddenly start making money, its diving capital adequacy ratio can be handled in two ways. One is a capital infusion by the government, which is the "brilliant" concept of the new chairman, Cohen. The other way is to cut back its risk assets by selling its credit portfolio.

Klein and the Supervisor of Banks, Yitzhak Tal, rejected the option of infusing more money into the stumbling bank, possibly assuming that the contribution might scratch an itch, not cure the disease. Extending the credit line gives Industrial Development Bank some breathing room, but also forces it to regain profitability and return the credit.

The bank's worsening condition forces the government to finally understand that it has to grapple with its weird equity structure, too, a problem first pointed out by the State Comptroller. Industrial Development Bank has no less than nine kinds of shares, for one thing.

Today the prime minister and others decided to launch a special term to make a plan for the bank's privatization. At first the state will buy the shares held by other banks - Bank Hapoalim (TASE: POLI), Bank Leumi Le-Israel (TASE: LUMI) and Israel Discount Bank (TASE: DSCT), and then it will tackle the strange multi-tiered equity structure. And finally, it will look for a buyer.

Focusing on how to save the bank may stave off a fatal run on it. Fine. But to prevent history from repeating itself, the causes behind the bank's decay must be examined.

Who was responsible for lavishing credit on unworthy borrowers? Or without examining their quality? Were the associations between the bank officers and borrowers nothing but vendor-client relations?

At best, an inspection might find no criminal abuse of power, but mere incompetence of political appointees. At worst, the real deal behind the bank's bizarre habit of lending money to companies that had been rejected by the other banks will come to light.

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