During the 1970s,
Bank Hapoalim, and its manager, Yaakov Levinson, began attempting to control the bank's stock price on the Tel Aviv Stock Exchange by recommending to their customers that they invest in the bank's stocks by fraudulently providing guarantees that the prices of shares in the banks would rise indefinitely. These investments allowed the bank to increase its available capital for investments, loans, etc. The bank also gave out generous loans to allow the customers to continue their investments, also profiting from the interest. In practical sense banks loaned out the capital for clients to buy bank's own stocks, increasing bank capital to loan out. While being a loop rather than the "pyramid", this scheme is similarly precarious, as nominal volumes of capital and loans grow very large in proportion to the actual capital in the system. This very high
leverage - called over-leverage - at the bare minimum requires a very strict risk control based on transparency. However, because the capital changed hands multiple times between banks and their clients-investors, the actual degree of leverage was masked from involved parties as well as from government regulatory bodies. Other banks joined the practice, called
adjustments. Eventually all major banks manipulated their stock price this way, among them
Bank Leumi,
Discount Bank,
Bank Igud,
Bank HaMizrachi, and Bank Clali (
General Bank, now
U-Bank). The only prominent bank not to join the adjustments frenzy was
First International Bank of Israel (FIBI). The adjustments were performed through the use of other companies. For example, Bank Leumi used the "
Jewish Colonial Trust Holdings and Development Company". The funding for these actions originated in loans from the bank's pension funds and similar sources. Sometimes the banks would practice mutual purchases – one bank would sell its stocks to a second bank, and buy the second bank's stocks for a similar sum. Under pressure from the
Israeli Securities and Exchange Commission, the banks reported the adjustments in their reports, but these reports were partial, misleading, and sometimes even false. Toward their clients the banks acted in a manner later described by the
Bejski Commission as based on their own interests, ignoring the clients' interests. The adjustments were made possible, in large part, by the banks' ownership structure. Bank Hapoalim was controlled by the
Histadrut labor union's Workers Company (Hevrat HaOvdim), and Bank Leumi by the "Jewish Colonial Trust". The
Hapoel HaMizrachi organization had almost none of Bank HaMizrachi's ordinary stocks, but all of its controlling shares. The owners' representatives were usually members of the ruling political parties (especially the
Alignment, and the
National Religious Party, or close to them). The banks' managers ran the banks for owners who understood little of banking and did not involve themselves in these actions. The fourth major bank to join this practice,
Discount Bank, was different, insofar as management and control had not been ceded to outside managers. Also contributing to the possibility of the adjustment was the capital structure of the Israeli market. During the years following the establishment of the State of Israel, the governments used the banks as a channel for procuring capital, and instructed them on how to invest their funds. This level of control, coupled with the control of interest rates, allowed the government to effectively "print money", by getting the banks to buy government bonds. Additionally, the banks usually assumed that since their investments and loans in major players of the Israeli market, such as the
kibbutzim, were according to the government's wishes, the government would guarantee these loans. Due to these reasons, the banks used the adjustments to issue more and more stocks, until, during the 1980s, bank stocks accounted for more than 90% of all issued shares on the stock market. They used the capital thus gained to give out loans and make investments. The banks also grew exponentially, building hundreds of new branches and hiring thousands of new employees. The large banks got addicted to the easy capital, but this method soon became a trap. Like the government, fearing recession, the banks avoided any move to limit their expenses. They feared for the pockets and jobs of the managers, but also the fact that the first bank to make such a move would appear inferior compared to the other banks. All of the regulatory bodies were well aware of the adjustments regime, but aside from slight warnings, easily dismissed by the banks' managers, they did nothing, failing even to warn the public. The
Minister of the Finance,
Yoram Aridor, even remarked on television that had he had the funds to do so, he would invest in the stock market. The adjustments were based on the promise of a constant rise in the banks' stock prices, irrespective of the economic situation. The artificial prices thus achieved created an
economic bubble, where everyone involved continued to invest increasing sums of money for lesser returns. Every new issue of bank stocks further destabilized them, since more of the capital was invested in maintaining the adjustment regime instead of profitable loans. Also, as the market share of bank stocks grew, the adjustments became weaker, as every cent (
agora, actually) invested by the banks became a smaller part of the total invested capital. The real return (i.e. over and above the
Consumer Price Index) on investment in the banks' stocks diminished, from a 41% return in 1980, to 34% in 1981, to 28% in 1982. Other investment options, especially purchasing
U.S. dollars became more appealing, and the banks had to transfer more and more funds from their offshore tax havens to keep maintaining the illusion of safety of investing in their stocks. ==Crisis==