Ernst Israel Japhet: A Banking Titan's Rise and Fall
Ernst Israel Japhet, born on May 8, 1921, and passing away on May 22, 1997, left an indelible mark on the Israeli banking landscape. He served as the CEO of Bank Leumi Le-Israel from 1970 to 1977 and chaired the bank's board of directors from 1977 to 1986. Simultaneously holding both positions was an unconventional move. Japhet was a key figure in the banking stock crisis and faced allegations of various financial wrongdoings.
The court that charged him stated that he was "considered by the authorities and central figures in the Israeli economy and international banking as an expert of the highest caliber, with extensive and critical connections to Israel's economy. He played a pivotal role in raising funds and foreign currency for the State of Israel."
Early Life and Career
Japhet was born in Germany in 1921 to Jacob Japhet, scion of a banking family, and Eliza, a member of the Feuchtwanger banking family. When he was 12, his family immigrated to Israel from Germany. His father founded Bank Japhet in Jerusalem and Haifa in partnership with Alfred Feuchtwanger and Robert Loewy.
Although Japhet began his education at the Hebrew Gymnasium in Rehavia, Jerusalem, he did not complete it there and instead started working at the bank his father had established, following his father's passing.
In 1941, Japhet enlisted in the British Army, serving for five years in the Royal Engineers and rising to the rank of sergeant. Upon his discharge in 1946, he managed the Jerusalem branch of Bank Japhet and later the Haifa branch. However, due to disagreements with Feuchtwanger, now a senior partner in the bank, stemming from Japhet's opposition to merging the bank with Bank Agudat Israel, he was dismissed.
From 1952 to 1963, Japhet worked at Bank Agudat Israel, eventually attaining the position of co-CEO. In 1961, control of Bank Agudat Israel shifted to Bank Leumi, and in 1963, Japhet joined Bank Leumi as deputy CEO. In 1965, he became the co-CEO alongside Dr. Ernst Lehman and Heinrich Greenbaum. In 1970, he was appointed CEO of the bank. In 1977, he was elected as chairman of the board of directors by the majority shareholders, while continuing to serve as CEO.
Before Japhet's leadership, Bank Leumi had limited international banking operations with branches in Switzerland, London, and a representation in New York. Japhet expanded the bank's international footprint, establishing branches in Germany, dealing with investments, and in South America, creating connections between wealthy Jewish individuals and the bank. Japhet strengthened relationships with key figures in the global banking system, ultimately facilitating Israel's international trade and the bank's overseas operations.
His most notable international accomplishment was the acquisition of dozens of bank branches in New York, which were integrated into Bank Leumi New York. During his tenure, the bank in London also expanded, with additional branches and the establishment of a new branch in Paris. The banks' operations abroad did not solely focus on Jewish clients.
Japhet aimed to create a banking system based on local clientele. In foreign branches, the bank couldn't solely decide to extend credit to selected clients, as was the case in Israel. Instead, local clients were the primary focus, leading to difficulties for Bank Leumi branches in France and the United States in certain high-risk sectors.
Japhet was responsible for credit management within the bank's leadership. During a time when financial statements lacked historical value and didn't reflect the companies' true worth, banks had to rely on the expertise and knowledge of their bankers for credit assessments. Japhet set the bank's credit parameters based on his understanding of the client's role in the economy. He took a personal interest in the financial well-being of the bank's clients, often meeting them personally.
Banking Stock Crisis
Following the banking stock crisis in 1983, it became public knowledge that Bank Leumi Le-Israel, like other major banks, had entrusted its actions solely to the CEO. The board of directors, elected by majority shareholders and "governors" appointed by the Jewish Agency, did not fulfill their roles. In practice, decisions regarding the bank's actions were based on the CEO's recommendations, as he was perceived as an expert in modern banking.
During this time, Japhet's management deliberately boosted the trading of bank stocks. This gradual increase in stock prices led the public to perceive bank stocks as a safe investment. The desire to raise stock prices encouraged public buying. In the stock market, especially in the secondary market, strong demand can drive the sale of new securities in the primary market.
As a result, banks succeeded in raising significant capital from the public during these years. The increased capital provided banks with a financial boost, leading to branch expansion and increased profits. However, this prosperity came to an end at the close of 1983.
Due to an extraordinary surge in stock sales, especially bank stocks, banks were unable to stabilize their stock prices. Initially, the banks turned to the Bank of Israel for credit to purchase these stocks from the public.
When the Bank of Israel refused to provide credit, the Israeli government intervened. Trading in bank stocks ceased temporarily, and only after a new regulation on bank stocks was introduced was it resumed on the stock exchange. This regulation safeguarded the interests of the stockholders.
Banking Stock Crisis and Japhet's Resignation
As a result of the stock market turmoil, Ernst Israel Japhet was compelled to resign from his positions at the bank. A royal commission, the Baisky Commission, determined that Japhet was a senior executive responsible for the stock market volatility and the inflated prices of bank stocks.
In January 1987, Nahum Sternseler of Haaretz published the salary and retirement terms of top bank executives. Although the "governors" from the Jewish Agency approved these terms, having been appointed for this purpose, the public was not receptive to this argument. Consequently, the salary and retirement terms were revoked.
The controversy surrounding his salary and retirement terms led to widespread public backlash, and Japhet found himself isolated by the bank employees in his office in Beit Gibor Eliyahu, which had been transferred from Bank Leumi to the Jewish National Fund.
Despite the controversy, Japhet continued with his other business activities. He relocated abroad while his family remained in Israel, a move that did not sit well with the Israeli public, who viewed him as one of the individuals responsible for the banking stock crisis.
Ernst Israel Japhet's life and career are a complex tale of success and controversy, leaving an indelible mark on Israeli banking history.
- ארנסט יפתhe.wikipedia.org