Friday, January 09, 2004

Zitto italiano se no, pompare tutta la notte


Things are seldom what they seem, skim milk masquerades as cream. W. S. Gilbert

There is an old Venetian story about a sailor who takes ship on a leaky Greek schooner. That night, he wakes to find the water pouring in through a gash in the hull. Alarmed, he shakes the Greek sailor in the bunk next to him “zitto italiano” mutters his companion, “se no, pompare tutta la notte” (shut up Italian, otherwise we’ll be pumping all night). ” And he turns over and goes back to sleep.

As far as Parmalat is concerned, the ship has actually sunk and there must be bankers and regulators of many national hues who acted just like that Greek sailor. One American banker who on the contrary must be feeling pretty smug today, asked Parmalat three questions five years ago. What is the corporate structure of the company? Why do you want to borrow $7bn when you have $5bn in the bank? And finally, why does a milk and yogurt business need so many offshore subsidiaries? He received no satisfactory answers and to the chagrin of his superiors refused to OK a loan and his bank does not appear in the top ten losers. A Bologna relation of the young man, also a banker declared bluntly that he would “rather give a dollar to a beggar than lend one to Calisto Tanzi”, Parmalat’s founder.

These stories were told me off the record; on the record Mr. Tanzi threatened to sue any bank that even suggested Parmalat’s finances might be shaky. In March last year, he made a formal complaint to the Milan Stock Exchange and the Consob, the regulatory body. For the rest of last year, investigations moved slowly forward but as the world now knows, by then, it was not a question of pumping, the ship was already full of water; it just had not sunk yet.

The immediate financial consequences are huge losses for big banks and small investors. The Milan prosecutors have opened a link (Procura della Repubblica di Milano) inviting reports by anyone who feels they have been cheated or lost out over the Parmalat collapse. There will be a raft of civil litigation as well as the criminal cases in all of the countries where Parmalat either operated or where it borrowed money. The globalisation of the fraud is another reason why comparisons with Enron are weak (the other as the FT pointed (29 December), is that Parmalat is missing about €10 bn “This is about 0.8 per cent of Italy's gross domestic product. In terms of relative GDP, the Enron case in the US is peanuts by comparison”.

But there is one connection with Enron; one of the consequences of that case was the Sarbanes-Oxley Act which makes no distinction between American and foreign companies. Banks and accountants who have had dealings with Parmalat could well be liable under the act’s anti-fraud provisions.

The Italo-American divide is visible in the long term consequences too. In the US, when there is a crisis, visible action is taken immediately. Sometimes it works, sometimes it does not. In Italy, partly through the mechanics of coalition government, partly through the intangibles of national culture, there is much talk and little concrete action. These differences will clash over how to deal with Parmalat.

Credibility and confidence in Italian business and business practice has taken a terrible bashing this last year. For very different reasons, two other giants of the Italian corporate world got into trouble, Fiat and Cirio. The fact that this government reduced penalties on false accounting and the Prime Minister’s own companies and employees have been convicted of bribing tax inspectors clearly does not inspire confidence in Italian capitalism either. As Marco Vitale (ex-member of the Consob) hoped for in a series of articles in Corriere della Sera 31 December, 2 and 6 January), now is the time for major reforms.

He knows, though, that they are not going to happen; at least not on the same time span as Sarbanes-Oxley.

The Parmalat fiasco has engendered a turf war between part of the Government and the Bank of Italy. Economics Minister Giulio Tremonti wants to set up a new regulatory authority taking power from the Bank and Consob promising that it would be operative by March Super-authority operativa entro marzo. He is supported by the Prime Minister and his usual ally, Mr. Bossi, but other coalition members are lukewarm and the issue is adding serious strains to the alliance, not critical yet, but they could develop. The opposition is strongly against the proposal “The independence and autonomy of the Bank of Italy are for us a constitutional value” said the DS’s leader Piero Fassino. And indeed in the whole post-war period, the Bank of Italy was one of the few institutions not part of the political spoils sharing.

If put into effect, whatever real or possible efficiency it might have, the new body would be a further concentration of power under the executive’s control.

Finally, a month after the first explosions, there have been almost no suggestions of political involvement but it is difficult to believe that no politician or party had dealings with Mr. Tanzi. The sparring has begun but the real battles are to come.

This is a business story which is going way beyond the dairies of Emilia.

Next week: “Media pluralism? Or how to make money and win elections too” The Gasparri Media Bill back in Parliament and programming control in RAI.

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