As my colleague, Aaron Katsman, opined on just a few months ago, Israel would not be immune to the subprime mess that began in the U.S., and through complicated collateralization, spread throughout the world. At the time, news spread quickly in Israel that a leading developer, Heftziba, was becoming insolvent and that its onerous debt of $400M (large in relative terms) quickly sacked any chance of paying back investors, banks that financed the company, and lastly, homeowners who purchased properties through Heftziba.

Well, Aaron’s prediction was spot on. Haaretz reported today that one of Israel’s largest banks, Bank Hapoalim, is suffering from the US mortgage malaise as well. Says Haaretz:

Hapoalim has a bond portfolio with American mortgage-backed securities valued at about $3.5 billion. So far the crisis has cost the bank $120 million. For the second quarter, Hapoalim had reported only a $35 million loss, but in an immediate announcement to the stock market yesterday evening in response to a demand from the Israel Securities Authority (ISA), the bank said that figure was now much higher.

Hapoalim claims that these bonds are only AAA government-type bonds but hasn’t been fully forthright about what they have on the books. Bank Discount, another large Israeli bank, apparently has some significant exposure.

Look for more banks to follow-suit as over the past few years, many of the Israeli banks and financial institutions were buying large swaths of assets overseas, including in real estate-related exposure.

Investors in the US see how painful having invested alongside poor risk managers, let’s hope (and pray!) that Israeli risk managers have acted more prudently.

Last 5 posts by Zack Miller

• Interview with Shai Wininger, Developer of Kotel Notes - June 19th, 2009
• Interview with Benzi Ronen, Co-Founder of Buddy Runner - June 3rd, 2009
• Israeli security showcased in Papal visit to Israel this week - May 11th, 2009
• What’s behind Sarah Lacy trash talking the Israeli VC scene - March 26th, 2009
• Israel oligarch illiquidity to threaten Israel economy? - March 26th, 2009