A scathing official report on the 1983 collapse of Israeli bank stocks, the event that touched off Israel's present economic crisis, has shaken this country's government at a time when it is seeking a record amount of aid from the United States to help cope with the crisis.
The report, released late yesterday by the state comptroller after months of investigation, estimated that the bank stock collapse would cost the government a total of $2.5 billion, which is almost equal to the amount of economic and military aid Israel will receive from the United States this year.
Prime Minister Shimon Peres and other officials called today for establishment of an official commission of inquiry to fix individual responsibility for the banking crisis. The report by Comptroller Yitzhak Tunik did not name any official as responsible but accused government regulatory agencies of negligence in not attempting to prevent the crisis.
The comptroller's report called the bank share collapse "the inevitable end of a protracted financial adventure" in which Israeli banks had been engaged for nearly 11 years.
When the bubble burst in October 1983, the report said, "it had the force and dimensions of a catastrophe for the economy" from which Israel still has not recovered.
Release of the report came at an inopportune time for the Israeli government, which is seeking almost $5 billion in U.S. aid over the next 18 months to help overcome the economic crisis here. The report was a sharp reminder that many of Israel's economic problems are the result of mismanagement and what the report called "the mass pursuit of the 'golden gods' of easy profits" by the public.
At the time of the bank share price collapse, the government intervened in the crisis to prevent the collapse of the entire banking system. To stem the panic selling of bank shares, the government guaranteed that it would purchase the shares at a fixed price from the public over the following six years, an obligation that increased the government's domestic debt on paper by almost $7 billion.
The comptroller estimated that the final cost to the government from interest payments to the shareholders and redemption of the stock will be $2.5 billion.
The Israeli public, which had engaged in an orgy of stock speculation that was encouraged by the country's large commercial banks, lost millions of dollars in the collapse. Many families had invested all of their savings in bank stocks, which, because of their constantly rising prices, had become the favorite vehicle for staying ahead of the country's rampant inflation.
The stock price collapse severely jolted the economy and marked the beginning of the economic crisis that now plagues the country.
According to Tunik's report, Israeli banks, in desperate competition with each other to expand their operations, particularly abroad, artificially inflated the value of their stocks in order to raise increasing amounts of capital from the public. Between 1977 and 1983, the banks raised $1.6 billion at low cost to themselves through this method, the report said.
During this same period, while Israel's gross national product increased by 3 percent a year, the yield on bank shares averaged 21 percent a year, according to the report.
As the speculation continued, the price of shares in Israeli banks bore no resemblance to their real value. Before the crash, the report said, the market value of the stocks was nearly three times the value of the banks' adjusted capital.
The 1983 collapse occurred a month after the retirement of Menachem Begin as prime minister as a newly formed government under Yitzhak Shamir pledged to take decisive steps to reduce inflation and revitalize the sagging economy.
Fearing a major currency devaluation, and aware that bank stock prices were being kept artificially high, the public began to sell bank shares in order to purchase foreign currency, chiefly U.S. dollars. The selling wave reached a peak on Oct. 6, 1983, when the banks were forced to buy back more than $1 billion of their own shares to shore up their prices, exhausting the banks' reserves.
In the period leading up to the collapse, the Finance Ministry, the Bank of Israel and the Securities Authority, which oversees the Tel Aviv stock exchange, were aware of the bank stock manipulation but did nothing about it, according to Tunik's report.
Yoram Aridor, the finance minister at the time of the collapse, had referred to the bank stock manipulation as a "time bomb" but he did not act to defuse it.
In addition to the possibility of future criminal charges of fraud against bank officials, Israeli banks are also likely to be hit by a wave of lawsuits by shareholders seeking to recover their losses on the basis of the comptroller's findings. This could further weaken the country's already shaken banking system.