Italy's Enron

Does Wall Street Share Parmalat's Blame?


The terrible disaster of the earthquake in Iran calls for some restraint in the language that should be used to qualify any other event. Still, I cannot find any word other than “disaster” to describe the collapse of Parmalat, “the largest corporate fraud in Europe,” according to The Wall Street Journal.
The hole, estimated at over 10 billion euros (US$12.7 billion)—just a little less than one percentage point of the Italian gross national product—makes the crash of Enron a minor event, given its proportion in terms of the U.S. gross national product. It is a disaster from multiple standpoints: financial, economic, moral, and professional. 

On the financial plane, savers in extremely high numbers, once again, have been robbed of their savings; and this was one of the points of strength in our country. No one can avoid the risks connected with the other alternating swings of the economy and the technology markets. But here we find ourselves in a very different situation: the total loss of the capital invested in a company involved in a typically risk-free business, all because of mismanagement, fraud, and embezzlement. 

This type of risk ought to be prevented by the mechanisms that oversee the market and by the agencies charged with these tasks, which apparently and manifestly failed in their duties. This time a significant loss is heading toward renowned foreign banks and funds. If there is a return to the conviction that savings are safe only in government bonds or under the mattress, we are finished as a modern country. (Fortunately, the investment funds that had little exposure to Parmalat are holding their ground.) 

On the economic front, we are faced with the collapse of one more major Italian company, one of the only leading international food companies that is Italian-owned. This cannot be a pleasant thought in a country that can count its international companies on the fingers of one hand—or maybe two—and has witnessed the disappearance of whole industrial sectors in a frantic and senseless race toward deindustrialization.

This aspect is all the more painful because Parmalat plays a pivotal role in the agriculture and food chain and interacts with upstream sectors (such as cattle raisers) and downstream sectors (such as cheese makers). Over the past 10 years, despite European fines on milk quotas and the fury and violence of the dairy COBAS [an acronym for “Comitato di Base,” grass-roots committees that actively oppose certain aspects of globalization—WPR], a major process of modernization has been achieved by producers and breeders who have reached peaks of absolute excellence in production and quality. But in this respect, I am quite confident that Parmalat will survive. I am encouraged in this impression by the swiftness and appropriateness of the government’s interventions and by the efficacy, seriousness, and even the timeliness of the investigating magistrates, both in Parma and in Milan. I am also encouraged by the quality of the new management and the intrinsic value of some segments of the company. True, some cuts will be necessary, but on the whole, Parmalat as a company will be able to weather this storm. 

Some have written that the government, with its decree on Parmalat, has adopted an interventionist policy contrary to free-market principles. In reality, the “too big to fail” label is a reality, and it is something every government should take into account beyond the outlines of its economic principles.

I am convinced that Luigi Einaudi [political economist and socialist who was president of Italy from 1948-55], Ronald Reagan, and Margaret Thatcher would have voted in favor of the decree that allowed for swift action to attempt to save what could be salvaged of Parmalat. The most important thing is that these kinds of measures do not function as a rescue of property and a watering down of the huge responsibilities that are now coming to light. 

On the moral and professional level, there is no doubt that we are faced with a new debacle of an entire interrelated group of entrepreneurs, managers, banking professionals, and consultants who are part of a whole conception of how to run the economy and businesses. Coming on the heels of major difficulties at Fiat and Cirio [an Italian canned-food company that collapsed in the summer of 2003 following suspected fraud, leaving debts of 1.4 billion euros ($1.78 billion) —WPR], it is a new manifestation of a real crisis of the

Italy as a country must come fully to grips with this phenomenon until it gets to the bottom of it. Seeing people like [Bank of Italy Governor Antonio] Fazio, who is a board member, denying any responsibility and claiming to be completely on the outside is a sad and disheartening spectacle. 

But a much more serious charge was made by Will Hutton in the Dec. 28 issue of The Observer:  “At first glance, Parmalat would seem to be a huge Italian family-owned company, built around food products and ham. But this was not the case. Wall Street came together with Italian capitalism to produce an Italian Enron.”

The Parmalat case is Italian only in its origins. It is one more ugly chapter in the moral and operative disaster of international finance. The banks that advised Parmalat came from the same pool as those that advised Enron & Co. The same goes for the auditors and rating companies. They were the ones that invented the tricks and the applicable legal and corporate mechanisms.

The directors and financial advisers of Parmalat came from these places, among others: Alberto Ferraris from Citibank, Luca Sala from Bank of America, and Massimo Armanini from Union Bank of Switzerland. (After a stint at Parmalat, Armanini went on to Deutsche Bank, which last summer underwrote a loan of 300 million euros for Parmalat.) 

Among those that supported Parmalat in programs of acquisitions and frenetic development, often co-investing, were, especially, Bank of America, JP Morgan Chase, Merrill Lynch, and Citigroup (obviously alongside our own ever-present Capitalia, Banca Intesa, and San Paolo-IMI). Andy Smith, a respected analyst with Citigroup, changed his rating of Parmalat from “hold” to “buy” on Nov. 12, 2003.

If I underscore these aspects, it is certainly not to minimize Italian responsibilities, which are huge and leave no room for attenuating circumstances, but only to attempt to grasp the dimensions and the nature of this catastrophe.

Those commentators who speak of this as a disaster typical of Italian—particularly family-owned—businesses are mistaken. Parmalat is not representative of Italian family-based capitalism but rather of entrepreneurs constantly straddling politics and business, who have learned how to ride astride international finance, which has already caused so much harm to our country. The Italian economy is weak, but there are hundreds of businesses of all sizes that have nothing in common with Parmalat’s methods and its international consultants and bankers.