Cerberus Capital Management LP-Gabriel Capital Management consortium, which acquired control of Bank Leumi (TASE: LUMI), is reviewing alternatives for solving the problem of the bank’s wholly owned subsidiary, Bank Leumi USA. One possibility is obtaining from the US Federal Reserve Board a temporary exemption from reporting under banking laws for two or three years, during which Leumi USA will be held by a trustee and the consortium will have more time to solve the problem.
The Bank Leumi USA issue was problematic since under US banking regulation laws, an entity which has an equity share, or an effective controlling interest of more than 10% in a US bank is subject to a number of regulatory requirements. These also cover holdings in real assets, and require the entity in question to meet a raft of reporting and auditing rules designed to prevent conflicts of interest. As a consequence, most investment companies and institutional investors, such as the Cerebus-Gabriel consortium, do not have controlling interests in banks in most states in the US.
The trusteeship option does not require a change in law, but approval by the Fed. Bank Leumi USA is intended to be Bank Leumi’s foundation for expanding activity in the US. Bank Leumi’s activity in the US is negligible at present, especially in comparison with Bank Hapoalim (LSE: BKHD; TASE: POLI) and Israel Discount Bank (TASE: DSCT) subsidiary Israel Discount Bank of New York. Bank Leumi is now rapidly expanding its business in New York and the US in general.
Handing Leumi USA over to a trustee for a limited period raises the question of who will actually be in charge of the bank’s business.
Sources close to Cerberus said that Leumi USA is a margin business compared with the acquisition of Bank Leumi by a financial group as big as Cerberus. The sources believe that, within weeks, progress will be made on obtaining a banking license from the Bank of Israel for Cerberus’s controlling shareholders, which will include the disclosure of their names. If the Bank of Israel does not approve the Cerebus-Gabriel proposal, or the private partners in the controlling interest or the funds themselves as an institutional entity do not receive a permit from the Bank of Israel by May 24, 2007, Cerebus-Gabriel will forfeit the option granted it after it won the tender to acquire a further 10.01% from MI Holdings (State of Israel Properties).
Cerberus Capital Management is headed by Stephen Feinberg, and Gabriel Capital Management is headed by general partner J. Ezra Merkin. The consortium won the Bank Leumi tender in November 2006 with a bid of NIS 2.47 billion for 10% of the bank. The consortium later obtained an option for an additional 10.01% of the bank at a reduced price of NIS 14.70 per share, plus linkage and 2% interest a year. Bank Leumi is currently traded at NIS 16.50 per share, which means that the consortium is in the money.
Published by Globes [online], Israel business news - www.globes.co.il - on January 11, 2007
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