This paper is a wake-up call to everyone who believes that the Israeli government is serious about privatizing the country's large state-owned banks. It's not true. The government has never been serious about privatizing these banks. Sure, it pays lip service to the concept, and even floats off a minority stake on the local stock market. But it has managed for a dozen years to keep ownership in the hands of the government, all the while letting the original controlling shareholders call the shots. The government has excelled at dreaming up one reason after another to stall real privatization. Market conditions aren't ripe. Market valuations are too low and the country's taxpayers must be protected against big losses if the banks are sold too cheaply. The government can't find a strategic buyer who can be trusted with a controlling stake. First the banks must be broken up to increase competition. However, the banks must retain size to compete in global financial markets. Some would-be buyers are convicted felons. The story is one of the great soap operas of the political economy of Israel.

The real reason why the government still owns the banks is simple: Israel's banking and political elites are interwoven in a reciprocal web of interests. Jonas Prager, associate professor of economics at New York University, summarizes his thorough study of the gross failure of banking privatization in Israel in these words: "There is a long-standing cooperative and mutually beneficial relationship between the Israeli government and the banking community, especially the largest banks." Bank Hapoalim, a creature of the Histadrut, faithfully served the interests of the Labor party. Bank Leumi Le-Israel, a creature of the Jewish Agency, did no less. The other banks fell in line. When Likud ran the country, the banks served its interests.

Israeli leaders repeatedly proclaim their commitment to the free-market economy, and their fervent desire to privatize state-owned enterprises. As a result of a banking shares crisis that boiled over in 1983 -- the banks manipulated share prices while the Bank of Israel was asleep at the wheel -- the government took over all of Israel's leading banks to halt a stock market crash and a collapse of the country's credit structure. Then, inexplicably by world standards, the government allowed the original controlling interests to continue to run the banks. The government has since dawdled every step of the way, despite public rhetoric that it wants to privatize the banks. Every economist is familiar with an important maxim: watch what governments do, not what governments say.

Excuses for retaining government ownership are exactly that, and no more -- excuses to maintain the cozy relationship between the government and the banks. The next time you read that the government of Israel has delayed the sale of another state-owned enterprise, look past the official reason. You may not like what you see.