The banker of last resort: The Credit Lyonnais chief whose ruinous reign shook France was the product of a flawed system, Nicholas Faith argues (CORRECTED)

CORRECTION (PUBLISHED 15 MAY 1994) APPENDED TO THIS ARTICLE

The four-year reign of Jean-Yves Haberer as chairman of Credit Lyonnais, France's third largest bank, ended late last year. The final bills won't be in for a couple of years, and a forthcoming parliamentary inquiry may well uncover further horrors. But one thing is already certain: his reign is proving to have been the single most expensive disaster in modern French financial history, putting into the shade the losses of other nationalised businesses, such as Air France or Bull, the computer company.

Officially, the bank's write-offs in 1993 amounted to FFr25bn ( pounds 2.9bn), a tenth of the yield of France's income taxes. But a further FFr18bn has been written off the property portfolio, and it is widely assumed that further write- downs will be required in the next couple of years. Although the property write-off is the biggest single disaster in the CL story, there are plenty of others. They range from lending to Bernard Tapie, the disgraced tycoon and friend of Francois Mitterrand, to two Italians who lured CL into a series of manoeuvres that ended in the bank owning MGM, the troubled US film studio.

CL's problems can be traced back to the total unsuitability of the French educational system for preparing its elite for a financially competitive environment. The contrast between academic success and financial helplessness is most obvious in the 50 or so students who graduate each year from the Ecole Nationale d'Administration. The 'ENArchs', as they are called, enjoy a quasi-monopoly of France's top jobs, not just in the civil service and state-owned industries, but also in politics. The links between ENArchs transcend mere political boundaries. When the Gaullist Jacques Chirac handed over the prime minister's job to the Socialist Michel Rocard in 1988, the two men addressed each other by the familiar 'tu', for they had been in the same year at the ENA, the year the lean, distinguished Haberer, now in his early sixties, was top of the class.

There is a tendency in France to assume that the ENArchs can do no wrong. But they can, and regularly do, when they are confronted by financial reality. They are normally shielded by the French capacity to protect so much of the economy from what they call competition deloyale - literally 'disloyal competition' - which signifies the intrusion of outsiders into their carefully organised system.

Anyone who survives the intensely competitive decade moving through this elevated educational system is bound to have displayed not only a capacity for consistent hard work but also considerable academic brilliance. But the system is geared to the examination of individual case studies - 'dossiers'. The process encourages a type of tunnel vision unsuited to the world of financial markets, where everything connects and often the single most essential requirement for success is a sense of smell, an intuition - precisely the sort of attribute stifled by the French educational process.

Haberer was simply the most extreme case of the ENArch's ability to exclude or reinvent reality, although over the past few years a number of others have also come a cropper. Perhaps the most high- profile case was Alain Minc, who ran Cerus, the holding company grouping the non-Italian interests of the Italian financier Carlo de Benedetti. Since his dismissal he has re-emerged as a social-cultural guru, with a much-praised apocalyptic volume entitled The New Middle Ages. The best-known international example is the controversial Jacques Attali, former head of the European Bank for Reconstruction and Development, remembered more for his marble halls than the loans he made.

But Haberer stands out from the crowd. Not only were the losses he accumulated, the mistakes he made, more spectacular than those of any of his confreres, he was the very model of the French meritocrat. He was top of the class at 'Sciences Po' (Ecole Libres de Sciences Politiques), the French equivalent of the LSE. More impressive, he was first in his class at ENA.

He then embarked on a career noted for precocity, brilliance and ruthlessness. By 1978, in his late forties, he had become Directeur du Tresor, the French equivalent of permanent secretary of the Treasury - and as such was one of the creators of the European Monetary System. When Mitterrand was elected president in 1981, a right-wing colleague lamented: 'We have lost' - to which Haberer replied icily, 'You have lost'. A former colleague says Haberer has no political philosophy - 'he is simply Habererian'.

Haberer failed in a bid to become governor of the French central bank, the Banque de France, but found consolation as chairman of the investment bank Paribas. Thrown out when a right-wing government was elected in 1986, he got his revenge when the left returned in 1988. At the instigation of Jacques Attali, he was awarded the chairmanship of CL.

They share a love of lavish surroundings. 'Haberer is a brilliant interior decorator,' says one former colleague. 'When I arrived at Credit Lyonnais, there were workers beavering away around the clock to tranform the fifth- floor dining-room into the most elegant in Paris.'

Haberer's ambitions were fuelled by an article in Euromoney in January 1989, accusing him of being a 'do-nothing chairman'. The article apparently acted 'like a red rag to a bull', in the words of a colleague. He embarked on a two- prong strategy: to anticipate the opening of a single European market in 1992 by becoming a great European bank, and to follow the German example by accumulating a substantial portfolio of investments in industrial companies.

He was lucky that his dreams fitted perfectly the desire of France's then minister of finance, and future prime minister, the late Pierre Beregovoy, who was looking to the state-owned banks to bolster the private sector and act as centres of industrial development.

Haberer conceived a grand strategy: to transform what was only the third biggest bank in France into the biggest in Europe. So he went on a buying spree: in Spain with Banco Comercial Espanol with its 250 branches; the Credito Berganesco, with 95 branches, in Italy; Chase Manhattan's 30 branches in Belgium, and the Bank fur Gemeinwirtschaft, a troubled subsidiary of the big German insurance company AMB. By and large, this part of Haberer's vision worked well. By the end of 1993 CL's operations in France accounted for only just over half its banking income and after depreciation (and even before provisions) under a third of operating income.

Ironically, after success in these foreign sorties, Haberer's strategy ran into trouble on home ground. Haberer spent money like water on French investments, increasing CL's share portfolio almost five-fold in four years, to total nearly FFr50bn.

Some of the investments were blatantly political - designed, say Parisian cynics, to ensure that he remained in favour. The most prominent 'political' connection was with Mitterrand's former favourite, Bernard Tapie, now under investigation for sundry financial deals. The connection dates back to the 1970s. Although the loss, at FFr500m, was not huge, it was politically sensitive. CL even went so far as to buy a chunk of shares in Tapie's sports shoes company, Adidas, when the tycoon first got into difficulties.

Bigger, but less prominent losses came from Altus, formerly the over-ambitious financial arm of the (state-owned) electronics giant Thomson-CSF. Haberer took it off Thomson's hands in 1992, and within a year it was reporting losses of FFr2.7bn. Indeed, CL seemed to be the ubiquitous instrument when troubled nationalised industries required support. It took a one-fifth stake in Aerospatiale, the aeronautics firm, and paid FFr2.5bn for a 20 per cent stake in the loss-making steel giant Usinor-Sacilor. And it behaved like a charitable foundation, rather than a financial outfit, when it saved from bankruptcy VEV, the remains of the Prouvost textile group in northern France, with its 10,000 employees.

In the purely private sector his attempt to imitate the Deutsche Bank involved serious investment in hundreds of companies, to buy power and influence even more than profit. In a few cases, he was merely following his predecessors. Bouygues, the biggest French construction group, had been a client for 20 years. He was also lucky to have inherited Bernard Arnault of LVMH as a client and thus benefited from his continued rise. He also backed Francois Pinault, who built up a prominent if heavily indebted retailing empire thanks to help from CL.

CL's investment subsidiary Clinvest, created by his predecessor, Jean-Maxime Leveque, expanded enormously with the purchase of shares in such industrial giants as Alcatel-Alsthom, historically a client of the rival Societe Generale, and the heavily indebted drinks giant Remy Cointreau.

Investment based on the chairman's friendships, however, bred disasters. Critics cite, in particular, Haberer's connection with Robert Hersant, the press baron, which led to loans to the now-bankrupt television channel Le Cinq, where CL ended up as a shareholder of an insolvent company.

Inevitably, Credit Lyonniais suffered from many of the same type of bad debts as its competitors. Yet it is characteristic of CL that it suffered worse and was more reluctant to admit its errors.

When a final balance sheet is established on Haberer's reign, the biggest losses will be seen to have come from property investments, mostly in Paris. As so often, his predecessor, Leveque, had started the ball rolling, but Haberer went on a spree, lending more than his two bigger competitors, the BNP and the Societe Generale, combined. And when Michel Pelege, a big client (and one in which CL had a substantial stake) ran into trouble, Haberer obliged by buying his head office at an inflated price. In the end, however, CL had to put Pelege's group into receivership. To make matters worse, Haberer wrote down his property portfolio far less than his rivals, leaving further losses to come.

Outside France, the most bizarre example of banking a la Habererienne is the bank's involvement with two Italian financiers, Giancarlo Parretti and Florio Fiorini, which resulted in the bank's ownership of MGM and its embarrassing role in the biggest fraudulent bankruptcy in Swiss history, that of Sasea (see below).

Haberer's scatter-gun approach meant that CL was known outside as well as in France as a soft touch, the banker of last resort for ailing businesses. Unsurprisingly, CL figured prominently in the list of lenders to Robert Maxwell, whose companies ended up owing CL more than FFr1bn ( pounds 116m) - it even bought shares in Maxwell Communications after Cap'n Bob's death. It also lent an estimated FFr2bn to the Reichmann brothers. All these investments, adding up to more than FFr50bn, went against the grain of CL's historic culture, the prudence imparted by its founder, Henri Germain, who preached against the injection of bank deposits into long-term investments.

Almost from his arrival at CL, Haberer had been the subject of consistent criticism by a member of parliament, Francois d'Aubert, who became obsessed with the bank as the symbol of what he perceived as unhealthy links between Mitterrand (and the Socialists) and state-owned business. Haberer tried to shut him up, even threatening libel proceedings. But d'Aubert has now got his revenge as part of the parliamentary inquiry into Haberer's reign.

In the end it was the business climate that led to his downfall. He had never concealed that he needed a favourable economic climate in which to operate. 'Give me a flourishing economy, and I'll give you a flourishing bank' was a favourite saying. Indeed, net profits almost doubled to FFr3.7bn in the first two years of his reign. But he completely ignored the signals warning of the decline of the French economy, although, given the scale of his mistakes, it is doubtful even the fastest economic growth rate could have saved CL.

Finally, last autumn, as the bank's losses became too huge, and with the political climate changing after the arrival of a right-wing government, Haberer was replaced by Jean Peyrlevade, previously head of the giant (state- owned) insurance company UAP. Even then, his fellow ENArchs could not bear to see Haberer humiliated, and he was given the chairman's job at another, albeit much smaller, state-owned financial institution, the Credit National. It was only earlier this year that the full horror emerged, and he retired at the end of March.

Since Haberer's departure frantic efforts have been made to clean up the bank's balance sheet sufficiently to enable it to be privatised within a couple of years. The government has been forced into a capital injection of FFr4.9bn, to the fury of CL's less profligate competitors. In addition FFr40bn of property loans have been parked off the balance sheet, and the government has already written off FFr18bn of them.

Peyrlevade is proposing to sell FFr20bn shares from CL's share portfolio, which he reckons to be worth FFr50bn - it was only FFr12.6bn when he took over. Peyrlevade is also playing hardball with former favourites - if Bernard Tapie does not pay back his loans, all his possessions, including yachts and pictures, will be sold up.

Despite the horrors, Credit Lyonnais remains an immensely strong bank. Indeed, Haberer was not the first chairman of CL to have accumulated horrendous losses. Under Leveque, its 1983 provisions of FFr11.9bn were higher than those for 1993, allowing for inflation, although Leveque did manage to make a profit even in 1983. Thanks to government support, CL's solvency ratio has actually risen from 6.2 per cent when Haberer took over to 8.3 per cent last year.

In his public statements, Peyrlevade has been consistently upbeat. Profitability has been either restored (as in the UK), maintained (Far East) or increased (Belgium and, especially, the United States). But he still has to tackle the central problem: reversing a policy that has left CL's smaller corporate customers decidedly disgruntled. They are feeling neglected in favour of larger and less sound concerns.

In fact, the story of Haberer's ill-fated reign provides a summary of all the ills that can result from the French system. These include an over-readiness to sway in the political wind, but the fundamental flaw is an unwillingness to admit that one of the Establishment can do any wrong.

CORRECTION

THE WRITE-OFF of Fr25bn which was incurred last year by Credit Lyonnais included Fr18bn from its property portfolio. The two amounts were not separate items, as indicated in last week's Inside Story in the Independent on Sunday.

(Photograph omitted)