A new scandal at Crédit Lyonnais
Jan 11th 2001
From The Economist print edition
http://www.economist.com/displayStory.cfm?Story_ID=476662
The latest scandal over Crédit Lyonnais suggests that more needs to be done
to clean up the bank—and France
FEW recent financial scandals rival the Crédit Lyonnais affair. In the 1980s
this profligate French state-owned institution grew into one of the world’s
biggest banks, following a lending spree unleashed under Jean-Yves Haberer,
its then chairman. Crédit Lyonnais became notorious as the bank that could
not say no. It helped several shady entrepreneurs to buy assets all over the
world. But then its aspirations all went horribly wrong. When recession hit
in the early 1990s, large sums disappeared after much of Crédit Lyonnais’s
exuberant lending blew up in its face. The bank began to record huge
losses—and to fiddle its accounts to disguise them.
By late 1993 the French government had had enough. It threw out Mr Haberer
and replaced him with Jean Peyrelevade. Mr Peyrelevade was given an urgent,
but simple, mission: clean up the bank and prepare it for a privatisation
that would take it out of the state’s hands for ever. On the face of it, Mr
Peyrelevade has delivered. Shorn of its most controversial and
worst-performing loans, which were hived off into a “bad bank”, and boosted
by successive taxpayer bail-outs, the good bank Crédit Lyonnais was
privatised in July 1999. Surely this marked the end of the scandal?
A new chapter
Unfortunately for France’s politicians and officials—and for Mr Peyrelevade
himself—the story is far from over. Over the past few months, The Economist
has been looking into a complicated deal that Crédit Lyonnais undertook in
America between late 1991 and 1995. Our investigation suggests that the bank
may be embroiled in a new and even more embarrassing scandal, which
implicates not only the former managers who have long been saddled with the
blame for landing the bank in trouble, but also some active senior
figures—including Mr Peyrelevade himself (see article).
We understand that the United States Department of Justice is preparing to
issue criminal indictments naming both Crédit Lyonnais and some of its
managers. In a related inquiry, the Federal Reserve Bank of New York, which
oversees the activities of foreign banks in America, is in the process of
deciding whether it should suspend Crédit Lyonnais’s banking licence. This
penalty, which is rarely invoked, is the most serious that can be inflicted
on a bank. It would normally be accompanied by large fines.
The new scandal stems from a deal involving Executive Life, a failed
Californian insurance company. A clever financial coup over Executive Life’s
junk-bond portfolio produced big profits for its acquirer. But in late 1998
it emerged that Crédit Lyonnais had failed to disclose its direct involvement
in taking over both the portfolio and Executive Life itself. Documents
obtained by the American authorities suggested that the bank had knowingly
broken the law, both before and after Mr Peyrelevade became chairman in
November 1993. Full details of the Executive Life deal were sent to Mr
Peyrelevade within days of his appointment. Yet he now claims not to have
known about any of these possible wrongdoings until late 1998, when he was
informed by the Americans.
Follow it up
This claim is vital both to the future of Crédit Lyonnais and to Mr
Peyrelevade personally. If it could be shown that he did in fact know, then
the American authorities would probably have no choice but to inflict the
toughest sanctions on both him and the bank. Even a reasonable suspicion that
he should have known might justify closing down the bank in America.
Whatever punishment Crédit Lyonnais receives, it will be horribly
embarrassing for the French government and for the Bank of France, which have
invested both financial and political capital in rescuing the ailing bank.
Jean-Claude Trichet, governor of the Bank of France since 1993 (and, before
that, head of the French treasury), is already under investigation over his
handling of Crédit Lyonnais. This inquiry has put a cloud over his hopes of
becoming president of the European Central Bank when Wim Duisenberg leaves,
as planned, some time next year. The new scandal over Executive Life is
surely enough to justify postponing Mr Trichet’s accession unless and until
further inquiries exonerate him.
There is another worrying dimension. In order to clean up Crédit Lyonnais,
the government created a “bad bank” into which all of its most problematic
assets were parked so that they could be sold or managed until they expired.
The “clean” remainder of Crédit Lyonnais was then on track for
privatisation. This has proved costly for French taxpayers, who have footed
an endless series of bills from the bad bank. Would successive French
governments (to say nothing of their electorate) have tolerated this had they
known that the bank was heading for trouble over Executive Life? Surely they
would have insisted that this should be cleared up before any further
bail-outs would be forthcoming? Or, perhaps worse still, did dozens of French
officials and politicians, including some quite senior ones, actually find
out about, and then agree to cover up, the bank’s persistent wrongdoings?
Such questions will reverberate throughout the country—and indeed anywhere
that companies, especially banks, remain owned by the state. This scandal
occurred in France, but it could have happened almost anywhere where state
ownership or government cronyism muddies lines of accountability and
transparency. Like much of the rest of the world, France is in a painful, yet
wholly desirable, transition towards greater accountability in its public
sector and in its financial institutions. In the past, politicians and bosses
of state-owned companies were content to sweep any nastiness under the
carpet, confident that they would not have to answer for it. Today’s mood is
different. From Jacques Chirac, embroiled in his own scandals, to Jean
Peyrelevade, senior establishment figures are under pressure to embrace
higher standards. Their response to the latest Crédit Lyonnais scandal will
be a big test of how far in that direction they have moved.
