Harsh Verdict

Imagine a financial scandal that forces the resignation of Federal Reserve Chairman Paul Volcker along with those of the heads of Citibank, Bank of America, Manufacturers Hanover Trust, Chase Manhattan and the First National Bank of Chicago. Such a massacre of top moneymen might seem farfetched in the U.S., but something very much like it is now going on in Israel.

A commission led by Moshe Bejski, a Justice of Israel's Supreme Court, last week censured 16 people who were top banking and government finance officials at the time of the country's infamous 1983 bank-stock crash. Most of them had left their jobs after the debacle. Now the Bejski panel has recommended that six senior banking officials be fired if they refuse to resign. The six are the heads of five major private banks and Moshe Mandelbaum, governor of the government-run Bank of Israel, which is the country's counterpart to the U.S. Federal Reserve. The commission urged that four of the five executives be barred for life from the industry. By week's end Mandelbaum and Giora Gazit, managing director of Bank Hapoalim, had resigned.

Bejski's 560-page report called for sweeping reforms in the Israeli banking system. The commission suggested that banks be prohibited from managing mutual-stock funds and acting as investment advisers and brokers. In addition, said the report, the Bank of Israel should tighten its regulation of private banks by appointing some of their directors as well as their auditors.

The banks' troubles began in the late 1970s, when many Israeli investors started buying bank stocks as a hedge against inflation, which was then surging higher than 100%. The banks encouraged this speculation and helped drive up the stock prices by buying their own shares on the Tel Aviv exchange. By October 1983, bank-stock prices had reached unsustainable levels. When fear of a shekel devaluation led some investors to sell stocks in order to buy U.S. dollars, the value of bank shares plunged by one-half.

The Bejski commission concluded that the banks' practice of trading in their own shares amounted to illegal manipulation. Its report criticized Mandelbaum and other government officials for failing to take any action to prevent the banks from bringing on the stock crash.

Though Israeli newspapers reacted to the report with headlines like EARTHQUAKE IN BANKING, there were no runs on banks or other financial disruptions. Since many Israelis blamed top bank officials for the 1983 crisis, the implementation of Bejski's harsh recommendations would probably increase public confidence in the financial system.