Within a matter of weeks in the summer of 1978, interest rates on loans to purchase diamonds went up 50 percent. Moreover, instead of lending money based on what Israeli dealers paid for diamonds, the banks began basing their loans on the official De Beers price for diamonds. If a dealer paid more than the De Beers price for diamonds—and most Israeli dealers were paying at least double the price—he would have to finance the increment with his own funds.

To tighten the squeeze on Israel, De Beers abruptly cut off shipments of diamonds to forty of its clients who had been selling large portions of their consignments to Israeli dealers. As Israeli dealers found it increasingly difficult either to buy or finance diamonds, they were forced to sell diamonds from the stockpiles they had accumulated. Israeli diamonds poured onto the market, and prices at the wholesale level began to fall. This decline led the Israeli banks to put further pressure on dealers to liquidate their stocks to repay their loans. Hundreds of Israeli dealers, unable to meet their commitments, went bankrupt as prices continued to plunge. The banks inherited the diamonds.

Last spring, executives of the Diamond Trading Company made an emergency trip to Tel Aviv. They had been informed that three Israeli banks were holding $1.5 billion worth of diamonds in their vaults—an amount equal to nearly the annual production of all the diamond mines in the world—and were threatening to dump the hoard of diamonds onto an already depressed market. When the banks had investigated the possibilities of reselling the diamonds in Europe or the United States, they found little interest. The world diamond market was already choked with uncut and unsold diamonds. The only alternative to dumping their diamonds on the market was reselling them to De Beers itself.

De Beers, however, is in no position to absorb such a huge cache of diamonds. During the recession of the mid-970s, it had to use a large portion of its cash reserve to buy diamonds from Russia and from newly independent countries in Africa, in order to preserve the cartel arrangement. As it added diamonds to its stockpile, De Beers depleted its cash reserves. Furthermore, in 1980, De Beers found it necessary to buy back diamonds on the wholesale markets in Antwerp to prevent a complete collapse in diamond prices. When the Israeli banks approached De Beers about the possibility of buying back the diamonds, De Beers, possibly for the first time since the depression of the 1930s, found itself severely strapped for cash. It could, of course, borrow the $1.5 billion necessary to bail out the Israeli banks, but this would strain the financial structure of the entire Oppenheimer empire.

Sir Philip Oppenheimer, Monty Charles, Michael Grantham, and other top executives from De Beers and its subsidiaries attempted to prevent the Israeli banks from dumping their hoard of diamonds. Despite their best efforts, however, the situation worsened. Last September, Israel's major banks quietly informed the Israeli government that they faced losses of disastrous proportions from defaulted accounts almost entirely collateralized with diamonds. Three of Israel's largest banks—the Union Bank of Israel, the Israel Discount Bank, and Barclays Discount Bank—had loans of some $660 million outstanding to diamond dealers, which constituted a significant portion of the bank debt in Israel. To be sure, not all of these loans were in jeopardy; but, according to bank estimates, defaults in diamond accounts rose to 20 percent of their loan portfolios. The crisis had to be resolved either by selling the diamonds that had been put up as collateral, which might precipitate a worldwide selling panic, or by some sort of outside assistance from the Israeli government or De Beers or both. The negotiations provided only stopgap assistance: De Beers would buy back a small proportion of the diamonds, and the Israeli government would not force the banks to conform to banking regulations that would result in the liquidation of the stockpile.