Prime Minister Ariel Sharon lost no time in marking his scapegoat. In the cabinet's late-night debate on Sunday, he pointed at the Bank of Israel's Supervisor of Banks. Yitzhak Tal is the one responsible for the collapse of

Industrial Development Bank (TASE:

INDD.GG

): "You don't know how to handle crises, and don't know how to take responsibility," the prime minister railed at Tal.

First of all, let us recall the prime minister's own record of economic crisis management.

He and his finance minister led the economy to an abyss. They failed in handling the crisis caused by the global slump and the

intifada

. They dawdled over taking crucial steps, they rammed their heads in the sand, they submitted preposterous budgets and, mainly, they lost the faith of the public, inducing domestic and foreign investors to flee.

As for Industrial Development Bank, the central bank's Supervisor of Banks, Yitzhak Tal, is responsible for maintaining the stability of the banking establishment. Therefore, if a bank collapses or closes, he is responsible. But, a bank's failure need not attest to a supervisory failure. Some banks have no right to exist in the first place, due to insubstantial size, for instance, or because of the way they are managed, or because of the composition of their income sources.

It is hard to claim that the watchdog slumbered in the case of Industrial Development Bank. Tal carried out several inspections of the bank. He demanded that increase its provision for doubtful debt, and directed it to maintain a higher capital adequacy ratio than the rest of the banks.

Inarguably, he could have done more. He could have forced the Finance Ministry to terminate the bank months ago, or publicly objected to the political appointment of Ra'anan Cohen as its chairman.

But there are a number of elements that should be scrutinized before the supervisor's performance.

It wasn't Cohen.

Let's start with the prime minister. He is the man behind the appointment of Ra'anan Cohen as chairman of Industrial Development Bank. Sharon approved the appointment three months ago, even though he knew the bank was in trouble.

Sharon ignored the widespread public criticism of the appointment. He ignored the warning that naming a man totally deficient in banking experience, when the whole banking sector was in such difficulties and that bank in particular could sap the depositors' confidence.

Appointing Cohen did not bring down the bank, though it clearly accelerated the process. His appointment, at such a bad time for the banking establishment, transmitted a negative message to the marketplace in general, and to the bank's customers in particular.

The initiator of his appointment was Industry and Trade Minister Dalia Itzik, who also disregarded the bank's situation, and the clamor her choice aroused. Itzik was busy sewing up her appointment as Israel's ambassador to London, and shrugged off warnings of the perils inherent to Cohen's appointment. As soon as she won the PM's nod, it became fact.

That is all recent history, whereas the roots of the bank's failure lie in history. Industrial Development Bank is actually the mutated relic of the days when the government controlled all credit. Its convoluted equity structure kept its management and ownership separate, turning it into a source of jobs for the boys and a source of easy credit, too.

The State Comptroller had tongue-lashed the Finance Ministry and Industry Ministry for failing to resolve the bank's weird equity structure, involving no less than nine kinds of shares. If they had done so, the bank could have been privatized, or easily liquidated.

The real cause was:

Then, of course, there are the bank's managers. The spotlight fixated on Cohen's predecessor as chairman, Shlomo Borochov, and the departing CEO, Yehoshua Ichilov. But the truth is, there was another factor, a person who may have been the alpha dog in managing the bank, a person who'd been there longer than the rest.

That would be deputy chairman Richard Armon, who also chaired the bank's credit committee. Armon had worked for

Bank Hapoalim (TASE:

POLI

) when it was lavishing billions on the kibbutzim. He also worked for the Hasneh insurance company before its collapse, and fought over his seat at pension management company Gmul. He even chaired the Romanian bank set up by the king of Israeli stock market bubbles Yuval Ran (before he fled Israel).

The thread linking many of Armon's jobs is Hapoalim and Amiram Sivan, who managed Hapoalim's managerial board for years. A decade ago Hapoalim appointed Armon as its director at Industrial Development Bank, in which it held a minority interest. Five years ago Armon was promoted to chairman of Industrial Development Bank's credit committee.

Armon took a page from Sivan's book, who as chairman of Continental Bank (a Hapoalim subsidiary) disowned responsibility for credit extended to the Peled-Givony group, which has since crumbled. This week Armon claimed that Industrial Development Bank's management by-stepped decisions made by the credit committee he had headed.

Which is a ridiculous statement. Mr Armon: If the management exceeded its authority, why didn't you oust it? Why didn't you shout to the rooftops, or at least peep? Was it for the same reason you voted for Cohen's appointment and even defended it: to keep your cozy job, and the power it afforded you?

Let's not forget all those directors representing Israel's big banks, which owned chunks of Industrial Development Bank two of whom quit this week after the bank collapsed.

The control and equity structures of Industrial Development Bank, and the series of events unfolding there over years and in recent weeks, epitomize many of the ills of Israel's governmental and regulatory practices. Rolling the blame over to the Supervisor of Banks may serve the prime minister and certain Finance Ministry officials too, but it does not serve anybody seeking to understand what really happened here.