BULL STREET - The art of the Con

Credit Lyonnais gets Lied to

Credit Lyonnais was and is a chattel of the French Government, the victim of the biggest measured internal bank fraud in history. Today, over a decade after the French public decided that the bank’s mismanagement had gone on far too long, most of the pieces to the puzzle are still missing and investigations are still continuing.

For decades the officials of Credit Lyonnais were literally “the gang that couldn’t shoot straight”. ([107]) Everything they ever did was wide of the mark, and it took the resources of the French Treasury to bail out the sinking ship. Bad loans on the bank’s books totaled a staggering $35 billion ([108]) when originally reported, but recently discovered indicate that even this number is far too conservative.

An in-house newsletter published by the Consortium de Realization (or “CDR”), said: “investigations into Credit Lyonnais and its subsidiaries had shown how the bank’s senior management had allowed the fraud both in France and abroad. The further CDR’s team goes…the clearer it becomes: There was organized financial fraud until 1993. The fraud was concentrated in seven subsidiaries….which acted as the unbridled horsemen of this financial apocalypse. The real figures involved are substantially greater than those recently quoted, already huge.”

In March 1997, CDR’s Chairman, Michel Rouger, was quoted by a French legislator as telling a parliamentary commission that about five billion francs had been embezzled by bank executives and businessmen with links to the bank.” ([109]).

Credit Lyonnais’ banking practices during that period, can be illustrated by describing the bank’s relationship with an Italian thug by the name of Giancarlo Paretti, whose rap sheet was almost unlimited. The Bank, whose senior officers had been bribed by Paretti, knowing his criminal background, extended over $2 billion him, enabling him to acquire and run companies. His primary acquisition was MGM.

The crimes of which he was convicted included:

1.                                            Fraud in connection with the bankruptcy of IL Dirario newspapers, sentenced to: 3 years in prison. Under appeal. March 1990.

2.                                            Fraud in connection with the Siracusa soccer team.1975

3.                                            Fraud in connection with a Hotel company in Sicily. 1984

4.                                            Forgery in connection with savings bonds in Sicily. 1984

5.                                            Bankruptcy of a newspaper in Paris named Le Matin, 1986

6.                                            Judgment, Credit Lyonnais, June 1997. $1,466 billion, MGM

7.                                            Convicted perjury and evidence tampering, Delaware, 1996

8.                                            Fugitive from justice, flight to avoid imprisonment, 1996

Parretti’s partner in his dealings with the bank was Florio Fiorini, currently serving time at Champ Dollon prison in Geneva. According to Fortune Magazine (7/8/1996), “[Fiorini] has figured in every major financial and political scandal in Italy in the past two decades—and that’s saying a lot. He learned political bribery and global money laundering at the knees of the notorious Vatican-connected Italian bankers Michele Sindona and Roberto Calvi, whose violent deaths in the wake of banking scandals in the 1970s and 1980s remain unsolved.

His mentor was Bettino Craxi, the former Prime Minister of Italy and Socialist Party chairman; and Gianni DeMichelis, the former Italian Foreign Minister, who spent his nights in discotheques. According to Fiorini, Craxi and DeMaichelis took bribes from Paretti and Fiorini to induce the French government and its bank (Credit Lyonnais) to back the Italians’ purchase of MGM.

“According to Jerry Brodsky (head of due diligence for Drexel Burnham Lambert) Giancarlo Paretti asked Drexel in the late 1980s to help raise the money he needed to buy MGM. When Kroll’s (private detective agency) agents reported that Parretti had been convicted of fraud in Italy, Brodsky nixed the deal. Instead Credit Lyonnais loaned Parretti the money—something it’s since regretted, since much of the money vanished, along with Parretti himself” ([110]) ([111])

In spite of Credit Lyonnais being informed of Parretti’s background and associates on numerous occasions, the Bank continued extending him credit, which exceeded $2 billion when it had had enough. The reason Paretti had been able to continue using the Bank’s money for his schemes was simply that he had bribed the senior Bank officers.

Georges Vigon - head of European lending for Credit Lyonnais until his “departure”.

Jacques Griffault - head Credit Lyonnais, Milan branch.

Jean-Jacques Brutschi- head of Credit Lyonnais, Holland.

In Geneva, a judge eventually charged Credit Lyonnais Chief Executive Jean-Yves Haberer ([112]) and General Manager Francois Gill with fraudulent complicity. Haberer credentials were superb. He went to all the right schools, graduated at the top of his class, knew all of the right people, and did all of the right things. There was only one thing wrong; he just could not legitimately run a bank or probably anything else for that matter:

“An arrogant man, Haberer held himself aloof from everyone at the bank except his immediate colleagues, an inclination symbolized by his installation of a “floating floor” of felt, rubber and cork under his lavishly appointed office to insulate it from the noise of the street, the Metro, and, his detractors said, the real world. They started calling him “le megalo”—the megalomaniac.” ([113])

Within five months of the time Paretti took over MGM, with the help of Credit Lyonnais’ loans, it was bleeding at the rate of $1 million per day and was a bankruptcy candidate within five months. The Bank ultimately took over MGM and was forced to sell it at a staggering loss.

Now, too much of this kind of thing can give banking a bad name. These were trusted employees splitting the loot. If you can’t trust trusted employees, who can you trust? Credit Lyonnais, during a substantial period of time, was not just out of ratio; it was bankrupt, but doing business. Had the Government of France bet the country on a successful bailout, a true international debacle would have ensued. The French People will be paying a staggering price for many years to come. The only saving grace was that the Credit Lyonnais scandal occurred in the 80s rather than the late 90s.

And yet, in the midst of attempting to put a badly mangled house back in order, Credit Lyonnais again went on the offensive and found a way turn victory in defeat. Few felt that the bank’s management had anything but a death wish when, in Asia, they started lending everybody and anybody that they could find, knowing that the situation was perilous. Among a portfolio of bad investments, one item stands out, Garuda Airlines. Credit Lyonnais was there with the fastest check in the west and now, payments have stopped and the bank is “sucking wind.” “While the (Asian) loan problems are not expected to severely damage any of the banks, one bank could have serious problems: Credit Lyonnais, a long-troubled French financial institution.” ([114]) This is an ill-stared institution and the French would probably be better off pulling the plug and putting the bank out of its misery.

In the meantime, looking for a patsy, recently, Credit Lyonnais has filed an action against the Dutch subsidiary of KPMG looking for about $2 billion. The suite indicates that when the bank (Credit Lyonnais Bank Nederland) lent money to MGM, KPMG had already discovered a large-scale fraud in 1989 but provisions for loans in 1989, ’90 and ’91 were not only adequate but no addition investigation was necessary. In the action in question the Dutch apparently feel so strongly that they got the shaft from KPMG that they are also holding 160 KPMG employees responsible for the action as well as the KPMG parent. Major league!

Now the bank is facing serious problems in the United States. A French whistleblower informed various parties that the transaction consummated in the early 1990s between the California Commissioner of Insurance acting as the liquidator of Executive Life and Credit Lyonnais was fraudulent. Executive Life was the largest American Insurer to go out of business to that time. It was taken down because of a combination of a proliferation of junk bonds in its portfolio and a bad market for debt instruments in general. The California Department of Insurance put the company and the portfolio up for joint bid and the winning bid was ultimately made by a consortium consisting of a group put together by Credit Lyonnais and a handful of ex-Drexel Burnham executives.

This wasn’t even a fair battle, the insurance commission was advised that the transaction put forth by this group was inferior to others that the background of the people was questionable to say the least, but he made the transaction anyway much to his long-term regret. Among the nuances of the transaction was the that neither the government nor bank; Credit Lyonnais could own an American Insurance Company under the existing Glass Steagall prohibitions. Furthermore, under California law, a foreign government could not own an California domiciled American insurance company. The California Department of Insurance and the Executive Life policy holders were still smarting over the mistakes of almost a decade ago committed by an Insurance Commissioner who was indirectly running for Governor of California the entire time he held that office.

He seemed more interested in making boisterous statements of how well he was doing than actually doing anything of consequence that would help anybody. When the whistleblower blew his whistle in California it seemed like an opportunity for the State to undo that entire transaction because of its illegality and they have filed lawsuits against the bank and just about everyone else that had anything to do with the matter. In the meantime, the Commissioner has called out just about everyone but the National Guard in an attempt to investigate the matter. The Federal Bureau of Investigation, The Justice Department, and Department of the Treasury are all conducting investigations into what will soon turn into a very serious matter. We believe that this is the second coming of Daiwa Bank who folded its tent in the United States after actions were filed against it for, in effect, lying to the Federal Reserve.

This case make may that one pale in comparison. It appears that Credit Lyonnais lied about their position from the very beginning to take advantage of something that they knew was illegal. Daiwa got themselves into a fix by accident and just did not know how legally to extract themselves from the problem. Two very different matters. The French Government is so concerned about the matter that they. The overall inquiry of what has occurred at the French Bank has been called the largest investigation of its kind ever conducted in France.

“…Even a former governor of France’s central bank has been questioned. Investigators have discussed with other top officials whether their actions or inactions might have fostered Credit Lyonnais’ frauds and losses. Prominent financiers, well-known in global banking circles, face possible imprisonment, financial calamity and public disgrace.” ([115])

Interestingly enough, Credit Lyonnais as already had been hit with a substantial fine in the MGM matter. In that settlement, the bank agreed to refrain from committing any felonies in the United States. If they violate that settlement, the penalties in that case skyrocket almost 400%. It would seem that there is no question that this has already occurred.

In today’s banking system, the presence of a BCCI along with a savings and loan scandal and/or a long-lead time disaster like that at Credit Lyonnais, could bankrupt the healthiest sectors of the world’s economies. The same court in Paris is hearing the claim against KPMG that years earlier fined Paretti one million francs for fraud in the same deal. When he didn’t show up to pay the fine, he was given an additional gift of four years in a French prison. With this kind of history, KPMG had probably better start getting its checkbook out of the drawer.

 

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