Goldman's German Revolution

Anxious employees at Germany's huge retail drugstore chain Ihr Platz (Your Place) were braced for the worst a year ago. The $840 million company, based in northern Germany, had seen its sales shrink by over 40% in five years and losses mount as a new generation of family managers blundered and successive chief executive officers failed to stem the decline. The 125-year-old retailer was technically insolvent — a condition that would normally doom a German enterprise to liquidation.

But an unlikely rescuer appeared on the scene: Goldman Sachs Group Inc., the U.S. investment-banking giant. Ihr Platz's woes had hit the radar screen of Goldman's London-based restructuring group, a 30-strong team formed two years ago to develop a European business investing in distressed debts and turnarounds. By January of this year, a Goldman-led consortium had snapped up all of Ihr Platz's $144 million in bank debt and, working with the shareholders' trustees, sent in experts from Alvarez & Marsal, a New York turnaround specialist. When discussions with other creditors bogged down, Goldman bought out the remaining bank debt and in May pushed Ihr Platz into insolvency.

Goldman's maneuver would hardly raise an eyebrow in New York or London. But in Germany it was revolutionary: The American firm pioneering Germany's case of a Chapter 11-style restructuring under a little-used 1999 law — a test case that could well spur many more such workouts and galvanize industrial overhauls in Germany. Unlike Germans, Americans and British use insolvency as a strategic tool to implement a turnaround. They don't see bankruptcy as a stigma but as a viable alternative if out-of-court restructuring fails.

Business Week

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Another Year, Another Scandal

LESS than two years ago, the spectacular bankruptcy of Parmalat, a family-controlled Italian dairy group, sent shock waves throughout Italy. It was the biggest scandal in European corporate history, revealing a E14 billion ($17 billion) accounting hole that had grown over a decade of deception. The saga cast regulators, bankers and auditors in a desperately unfavourable light for not spotting the fraud much more quickly than they did.

Europe's Enron offered a chance for the comprehensive reform of Italy's financial regulation titat it so badly needs. Yet the growing scandal over the contested bids for Banca Antonveneta by Banca Popolare Italiana (ВРГ) and ABN Amro, a Dutch bank, shows that this opportunity was instead comprehensively missed.

In the first weeks after the Parmalat scandal erupted, reforms were introduced at surprising speed. Just before Christmas 2003, new insolvency legislation was pushed through, inspired by America's Chapter 11.

The government was also keen to improve financial regulation. Giulio Tremonti, the finance minister of the moment, wanted to replace the existing hotchpotch — Italy has four financial regulators other than its powerful central bank, all toothless and understaffed-with one strong super-regulator, an Italian equivalent of Britain's Financial Services Authority (FSA). Mr Tremonti also tried to replace the central bank governor's current job for life with a term limited to seven years.

This provoked the first of a series of clashes between Mr Tremonti and Antonio Fazio, governor of the Bank of Italy. Mr Tremonri criticised Mr Fazio for failing to spot the massive accounting fraud at Parmalat. The central bank could have acted on warnings that bankers were financing a house of cards, he said.

Mr Fazio, though, gained the upper hand, and Mr Tremonri was forced to quit. His proposal was reduced to a draft law calling for the replacement of Consob, the securities market watchdog, with an Authority for the Protection of Savings, with various responsibilities and resources pinched from the central bank and the antitrust authority. A limit on the central-bank governor's term remained in the draft law but the law itself is still pending in parliament.

Latest developments in the soap opera that the takeover battle for Antonveneta has become have revived discussion of

Mr Tremonti's proposal. After ANP Amro announced in March that it would bid for Antonveneta, BPI raised its small stake in the bank to 29% in several steps that involved allegedly illegal financial manoeuvres, now the subject of investigation. The central bank approved each step.

At the same time, lawsuits and arrests related to Parmalat came as a timely reminder of the fallout of that gigantic corporate scandal. Did nothing change, then, in Parmalafs wake to prevent this banking mess?

The Economist

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