- The art of the Con
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 bankâ€™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 couldnâ€™t shoot straight”. () 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 bankâ€™s books totaled a staggering $35 billion () 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 bankâ€™s senior management had allowed the
fraud both in France and abroad. The further CDRâ€™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, CDRâ€™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.” ().
Credit Lyonnaisâ€™ banking practices during that period,
can be illustrated by describing the bankâ€™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:
Fraud in connection with the bankruptcy of IL Dirario newspapers, sentenced
to: 3˝ years in prison. Under appeal. March 1990.
Fraud in connection
with the Siracusa soccer team.1975
Fraud in connection
with a Hotel company in Sicily. 1984
Forgery in connection
with savings bonds in Sicily. 1984
Bankruptcy of a newspaper
in Paris named Le Matin, 1986
Judgment, Credit Lyonnais,
June 1997. $1,466 billion, MGM
Convicted perjury and
evidence tampering, Delaware, 1996
Fugitive from justice,
flight to avoid imprisonment, 1996
Parrettiâ€™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 thatâ€™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
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 Italiansâ€™ purchase of
“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 Krollâ€™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
itâ€™s since regretted, since much of the money vanished, along with Parretti
himself” () ()
In spite of Credit Lyonnais being informed of Parrettiâ€™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 Bankâ€™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,
Jean-Jacques Brutschi- head of Credit
In Geneva, a judge eventually charged Credit Lyonnais
Chief Executive Jean-Yves Haberer () 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
Within five months of the time Paretti took over
MGM, with the help of Credit Lyonnaisâ€™ 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 canâ€™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 bankâ€™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.” () 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, â€™90 and â€™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
This wasnâ€™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 Franceâ€™s central
bank has been questioned. Investigators have discussed with other top officials
whether their actions or inactions might have fostered Credit Lyonnaisâ€™ frauds
and losses. Prominent financiers, well-known in global banking circles, face
possible imprisonment, financial calamity and public disgrace.” ()
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 todayâ€™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 worldâ€™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 didnâ€™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.