Sat, Dec 27, 2003 page9

• Parmalat underscores the ethics of capitalism

  • By William Keegan
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  If they turn it into a movie, how about: Enron -- Italian-style? The news that the financial cupboard of the Parmalat dairy group in Italy contains a bare corner where there should be US$4.8 billion in cash and securities certainly livened up the pre-Christmas financial pages.

  According to Parmalat, the US$4.8 billion was deposited with the Bank of America in New York by -- wait for it -- a subsidiary (Bonlat) based in the Cayman Islands.

  According to one Italian banker: "This is all financial engineering cooked up by US banks. Parmalat raised cash with bonds, then took the cash and put it all in these offshore accounts in order to borrow yet again off the balance sheet."

  It remains to be seen what share of the cooking was done by whom, but the episode has immediately escalated into an Italian political crisis, involving a power struggle between the Italian treasury and the Bank of Italy as to who should be controlling financial supervision (at present it's the Bank), with Prime Minister Silvio Berlusconi promising a bail-out even as the administrators sharpen their red pencils.

  There are question marks over other accounts, with some US$8.7 billion gone missing, according to the London Financial Times.

  Wall Street and Italian banks involved with Parmalat are reported to be "bickering among themselves" and, as it were, running for cover.

  Modern capitalism depends heavily on trust and goodwill, but this is a timely reminder during the season of goodwill that trust in business affairs sometimes hangs by a thread. With the Maxwell pension fund scandal in the UK and the Enron affair the anti-globalization movement should, perhaps, be paying less attention to globalization per se, and more to that very old-fashioned issue, the ethics of capitalism.

  Lord Acton is often quoted on political power -- "Power tends to corrupt, and absolutely power corrupts absolutely" -- but the same applies to financial power. Often, of course, the corruption begins before the first penny is raised. There is no shortage of crooks out to deprive the public of its money.

  But sometimes the rot sets in later, in apparently honest enterprises, where charismatic financiers and businessmen retain trust long after they have ceased to deserve it -- Robert Maxwell was a classic example. Indeed, in Maxwell's case, he almost certainly did not set off intending to deprive pensioners of their cash -- he just gambled on being able to use it to rescue his company. In different circumstances he might have got away with it and have been able to replenish the pillaged pension fund.

  But often outside investors just don't want to know that something might be amiss. Already the Financial Times is saying: "With hindsight, signs that Parmalat might not be a good company to invest in had been growing ever since it was first quoted on the Milan stock exchange in 1987, nearly 20 years ago."

  Apparently Parmalat was not too forthcoming in explaining its results, and far from keen to meet analysts. As long as the results, however dependent on financial engineering, looked good, investors did not ask too many questions.

  It will be interesting to watch how the credit and blame for this fiasco is shared out between the Italian end of the job and Wall Street. It has all the makings of a great movie.
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