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Credit Lyonnais & L.F. Rothschild Ready to Topple

by J. Orlin Grabbe


Les vertus se perdent dans l'interet, commes
les fleuves se perdent dans la mer.
--La Rochefoucauld

What will happen when the world's largest non-Japanese bank topples? The repercussions will ripple throughout the world banking system. Get ready to see Citibank, Chase, and the Chicago Mercantile Exchange hammered.

Credit Lyonnais has long relied on two simple mechanisms to ensure its bloated growth: a ready supply of money-laundering deposits from the Cali cartel and similar sources, and financial infusions from the French government (which owns most of the bank) when all else fails.

Meanwhile the bank has frittered away its assets in an endlessly array of non-performing loans. Representative of this is Credit Lyonnais' financing of Giancarlo Parretti's purchase of Metro-Goldwyn-Mayer from Kirk Kerkorian in 1990 for $1.3 billion. Later, in 1992, Credit Lyonnais acquired the assets of MGM, which it then sold to a Kirk Kerkorian-backed group for $1.3 billion earlier this year (the same price for which Kerkorian originally let the movie studio go), after having poured millions of dollars into the company.

Parretti, for his part, is suing a Dutch affiliate of Credit Lyonnais--Credit Lyonnais Bank Nederland NV--for $3.9 billion because he says they conspired to take MGM away from him. At the same time, Parretti is on trial in Delaware for forging evidence in a another trial related to his ouster as MGM studio chief. Credit Lyonnais booted him out when, they say, he failed to disclose a MGM obligation to repurchase certain movie rights for $150 million.

Last week, on Sept. 25, the European Commission supposedly approved French franc 3.9 billion (about $767 million) in emergency government funds for Credit Lyonnais--the third such bailout in three years. (Last year's bailout was French franc 45 billion.) But will these funds really be forthcoming? Some members of the Commission are beginning to realize they have simply been pouring money down a sinkhole or into the leaky pockets of L.F. Rothschild.

For months Credit Lyonnais had been begging the world for a capital infusion, including seeking emergency cash from the Cali cartel. But the cartel views the bank as a dying dinosaur, and has gone elsewhere with their money. The big private loser so far is L.F. Rothschild, much of whose fortune is tied up in Credit Lyonnais. Rothschild would love nothing more than to have the French government reimburse him for Credit Lyonnais' lending mistakes.

More bad loans on the books involve real estate in France and the U.S. Many of these will be necessarily disposed of at a small fraction of their book value. (Also included in this category is Credit Lyonnais' 51 percent stake in Germany's Bank fur Gemeinwirtschaft.) In last year's restructuring, Credit Lyonnais transferred French franc 135 billion worth of bad loans to a French government-backed entity, the Consortium des Realisations. But the Consortium was financed by a loan from Credit Lyonnais at below market interest rates.

Credit Lyonnais is trying to finagle its books so it can announce a first-half "profit" on October 3, to prove to its benefactors their miracle cure has worked. But the simple fact of life is that Credit Lyonnais is already bankrupt, with a negative net worth of about $2 billion. (That is, give me $2 billion dollars, and I will take the bank off the hands of the French government, and call it square.)

Other French banks, who do not have the same government largess privileges as Credit Lyonnais, have raised a storm about the most recently announced bailout. The Chairman of Societe Generale, Marc Vienot, has called Credit Lyonnais a "dirty dossier", and filed an anti-competitive complaint with the European Court in Luxembourg.

Meanwhile the European Commission has launched a series of investigations into a number of suspicious transactions associated with Credit Lyonnaise. These include its repurchase of a former subsidiary, Societe de Banque Occidentale on advantageous terms. The other bidders for Societe de Banque were apparently not informed of its recapitalization to the tune of French franc 247.5 million by the Consortium des Realisations in January. Credit Lyonnaise then purchased Societe de Banque for French franc 50 million in February.

The French Justice Minister, Jacques Toubon, has asked the Paris prosecutor to look into accounting irregularities at Credit Lyonnais that occurred under Jean-Yves Haberer, who was chairman of Credit Lyonnais from 1988 to the time he was fired by the French government in 1993. These are mostly related to the balance sheets of Altus Finance, a Credit Lyonnais unit under Haberer. This probe itself promises to open up a nice can of worms. The current head of the French central bank--Banque de France--is Jean-Claude Trichet, who was head of the French Treasury and supervised Credit Lyonnais during the period in question.

Finally, there is the usual assortment of dead bodies that often appear in the banking world when millions of dollars are at stake. One of these is Amschel Rothschild, who until his demise was the chairman of British mutual fund group Rothschild Asset Management. Amschel committed suicide by a very innovative method back in July. He took the belt from a hotel robe, tied one end to a towel rack, and the other end to his neck. He then hanged himself by, well, let's see, "jerking back suddenly".

Hmmm.

October 1, 1996
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