I am a bit surprised there has not been more attention paid in the blogworld to the recent demise of Italian food group Parmalat, one of the country’s largest businesses employing more than 35,000 people. The firm, due to problems centering around its debt and some allegedly dodgy investment decisions, is on the brink of falling down a deep black hole.
Now, there are certain specific features of the story that pertain only to Italy and Italians. But more broadly, this saga also reminds us of how, in the higher reaches of the corporate world, accounting standards are falling short. In fact, there appear to be no standards at all.
I am sure readers will recall how the American model of capitalism was mocked for its supposedly laissez-faire nature at the time of the Enron, WoldCom and other collapses. A certain smug tone was detected in the pages of European newspapers. Well, now we have a prime example of Enronitis in Europe. Of course, European business shenanigans have been legion – witness the Byzantine affairs of French banking group Credit Lyonnais, for example. And the accounting practises of the European Commission are also a wonder to behold.
Maybe Parmalat will, however, instill a little humility among editors of European business news channels. There’s always hope.
…Maybe Parmalat will, however, instill a little humility among editors of European business news channels. There’s always hope. …
Surely you jest, Sir !!
Did I detect a whiff of schadenfreude ? Impossible !
They’ll switch from “tsk, those bad capitalists in the USA” to “yikes, those bad capitalists in our midst!!!” and never miss a step. It was never America bashing. Just class war as usual.
Well I blame the destruction of our educational system by the trendy lefties myself.Decades ago they decreed that creativity is better than accuracy.So, instead of the situation pertaining when I was a lad when 2+2=4 and double entry book-keeping could tell you your profit and loss at a glance, you now have CREATIVE accounting, which basically means the books look great!(just dont look too close).
I suspect the reason it’s not getting traction in the US is that most people here have never heard of or bought Parmalat. I have a couple of quarts in the cubbard, just in case we run out of milk and need it *now* – but it’s almost impossible to find in the stores here, and never advertised.
As long as we’re talking about European business train wrecks, how can you leave out the runs they’ve made at American movie companies – Vivendi buying MCA, Giancarlo Parrett/Credit Lyonnais buying MGM, Golan/Globus and Cannon.
Hmmm…
I seem to remember at least one major European accounting scandal that predated any of the major US breakdowns (Enron, Worldcom, etc.). Does anyone here remember Learnout & Hauspie? The major difference is that that scandal, at least, got swept under the rug.
Does anyone here remember Learnout & Hauspie?
I do, Bill. Losing a couple thousand dollars will do that to you.
You say Parmalat had problem with its debts, not really, it had problems with its assets, they simply did not exist! From what the WSJ says today, it sounds like large scale fraud from day one, even before the company went public. Moreover, the CEO “took” half a billion euros over the years. Just a bunch of thiefs. Amazing!
Part of it, I suppose, is that Parmalat actually does something. (They do, don’t they? I also have an ancient box in case of emergency.) It’s not a complete shell game like Enron was.
Anyway, the important thing is that Barilla stays solvent. I couldn’t survive without the Green and Black Olive sauce
I’ve lived in Italy for 20 years and know the business climate well. I had to submit to my European colleagues gloating over the “failures” of U.S. capitalism during the Enron/Worldcom crises, but they are suddenly very subdued. I would guess that while Parmalat was an extreme example of crony capitalism in Italy, it is by no means the only one. If the Parmalat meltdown spurs italian investors to demand more transparency from companies, the Italian economy is in deep trouble. The fundamental problem here is that there is rarely a principal/agent relationship that compels managers to open their books. Most industry leaders in Italy are owned by few private shareholders, often within the same family, and rarely are enough shares floated to diversify ownership. Thus, most of the people who will be screwed by the Parmalat crisis will be Italian bondholders (the primary form of fundraising for Italian companies). One can only hope that this is the beginning of a major reform of Italian capital markets, but after 20+ years in this country, my hopes have been dashed too often to hold my breath.
I am a CPA. I have worked in Public Accounting and currently work for a small, privately owned manufacturer so I’ve not worked for, nor audited, a big corporation. I have no idea how numbers generated under an operation the size of Enron are supposed to make sense. The scope is just too big. I have the belief that investing in a large corporation requires simple faith and not based on critical thinking. Just go out to the Edgar database on the SEC website and tell me how anyone is supposed to make heads or tails of all the information that is filed annually with the SEC. Accounting for a company that has a few million in assets is difficult, accounting for a multifaceted, mutli-billion dollar company is impossible. The only thing one has is a blind faith in management. Regulation is a farce and any annual information an investor or debtor would get, that is absorbable, is too general for real use in determining whether investment is wise. Unfortunately the biggest player of all, the Feds, rig the market and the lions share of surplus of the individual winds its way into big companies, through 401k’s and the mutual funds that make them up, and the insurance coffers (the largest creditor for the big corps). It is all part and parcel of my belief that Big Business owes its existence to Big Government interference in markets, savings, insurance etc.
As far non-existent assets, there may have been fraud from the get go in this case, but both Enron and Worldcom owe their problems, at the root, to massive amounts of debt. Enron, for the most part, was an attempt to hide the saturation of debt on unconsolidated subsidiaries so that creditors would be willing to lend more long term debt so that Enron could make good on current portions of prior long-term debt coming due. The amount of debt that Americans face in total is staggering, at the Fed level, on corporate balance sheets, and individually. The prosperity of the last decade and half has been based on credit. The bills are coming due very soon. The poor saps who have been trying to build equity all this while are going to be in for a rude awakening when the collectors come knocking and reward them for their sensible fiscal approach with the demand to pay the bill. It’s going to be a lovely time to live through.
“…Maybe Parmalat will, however, instill a little humility among editors of European business news channels. There’s always hope. …”
Not a chance. They will simply blame it on the “Americanisation” of the European economy.
Here’s bit of inside info which will sooner or later discovered…
I was working at one of US investment banks in late 90s and Parmalat was what we call Tier 1 customer. The structured “notes” were basically bets to take advantage of certain speads in interest rates (US/Japan was one of their favourites) and financing these bets Parmalat was an active writer of long-dated puts on FX (USDJPY again), Swaps, Credit Derivatives – on anything. The deals made no economic sense – what the hell is Italian dairy company doing 10 year USDJPY linked notes, etc. But hey, they didn’t certainly know the true value of what they were selling/buying so their business equalled to a FREE lunch if there was any. And when they lost their shirts (I believe they have not made any REAL money probably for decades) , they came to our syndicate desk and borrowed more from the eurobond market. Which of course was more fees for us! Yam yam.
Eventually the end came – they tried to float another eurobond issue about 6 months back, I think it was like 20 year GBP denominated one – but the investors balked and didn’t buy it – and the liquidity started trying up. So the banks pulled the plug. From there it was just a question of time before the end came.
Oh yes, and of course the poor accountants were out of it – as always. You simply can hide almost ANYTHING in your financial statements because the US GAAP (or European equivalents) are full of holes like Swiss cheese. The banking lobby and ISDA in Washington is probably the most powerful one in the whole US and NO Republican/Democrat will challange it. For example, the Sarbannes-Oxley act of 2002 was triumphed as victory for the small investor and “cleaning up corporate America”. HA-HA! By the time the act passed Congress it was more watered down than Principal Skinner’s lemonade. You don’t bite the hand that feeds you.
So yes, Parmalat , like MANY major companies use these derivatives routinely to “manage” their earnings. This allows them to beat the earnings (usually by the penny, ie. the penny surprises) just in time, with the unknown risks and liabilities stashed away somewhere into the far future. But hey! by the time s**t or this case yogurt hits the fan, the management has made like bandits and the bill is left for the poor shareholder (or bondholder).
And then you get these leftist intellectuals whinging on TV how the bad bad capitalists have looted the company and now working class yokels will be out of their yooobs. Well I got two words for those ten-a-penny experts : get lost! You losers have no brains to analyse any of this , that’s why you write for the Guardian. So go save some whales or whatever…
Personally I believe on “caveat emperor”. I certainly will not buy any rubbish shares/bonds and tuff if the fool is seperated from their money. It’s just the way nature meant it to be.
Get out.
does anyone have anything to say about enron/parmalat’s similarities? also. does anyone have any think that the US should take note of how Italy’s gov. ia handling their “Enron”? EMAIL ME
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