Sarkozy Pledges to Use French Bank for Protectionism (Update1)
By Richard Tomlinson and Gregory Viscusi
Jan. 25 (Bloomberg) — Even in France, many people havent
heard of Caisse des Depots %26amp; Consignations. Yet they regularly
cross paths with the 192-year-old state-owned institution, whose
assets reach into every part of the economy.
Parisians can munch on pigs feet at Au Pied de Cochon, a
CDC-owned brasserie that draws celebrity diners such as Henry
Kissinger and actor Jean-Paul Belmondo. Vacationers can play
baccarat at the seaside casino in Deauville, which is 10 percent
owned by the Paris-based bank; take their children to the Gaul-
themed Parc Asterix, 20 miles from Paris; or ski on the slopes
of Chamonix, Meribel or Val dIsere in the Alps. All are owned
by the bank. Millions of low-income workers live in state-
subsidized housing that CDC finances in the suburbs of large
cities.
With assets of 405.5 billion euros ($599.2 billion), CDC is
also Frances largest institutional investor. It has stakes in
half of the companies in the benchmark CAC 40 Index. The stakes
include 2.0 percent of Societe Generale SA, which said yesterday
that bets on stock-index futures by a 31-year-old employee
caused it 4.9 billion euros in trading losses, the largest in
banking history.
“The Caisse des Depots is a bizarre but typically French
monster that mixes public and private sector activities, says
Philippe Francois, a researcher at Ifrap, the French Research
Institute on Public Services, a Paris-based study group
advocating free market economics. “Its a caricature of how the
French government operates.
President Nicolas Sarkozy, elected last year on promises to
shake up the economy, indicated he may tighten his grip on the
bank. Though the National Assembly oversees CDC, its chief
executive officer is named by the president.
Defending the Nation
Sarkozy says he plans to use CDC to help protect French
enterprises from speculative investors and foreign sovereign
funds. “The Caisse des Depots is an instrument of this policy
of defending and promoting the nations primordial economic
interests, Sarkozy said at a news conference on Jan. 8, during
which many questions dealt with his romance with former model
Carla Bruni.
Those interests include helping to fund the countrys
troubled university system and build more public housing,
according to plans unveiled in December by CEO Augustin de
Romanet and endorsed by Christine Lagarde, Frances finance
minister. In the past, governments have used CDC to help bail
out state companies.
CDC may find it tougher to carry out the governments
orders in the future. Until now, CDC has used proceeds from its
management of the countrys 205.1 billion euros of tax-exempt
savings accounts to finance public housing.
Funds May Shrink
Now that the European Union has told France it must allow
all banks to sell the accounts starting this year, those funds
may dwindle because the banks may steer savers toward their own
investment products, de Romanet says. Sarkozy supported the EU
order, overruling de Romanets objections.
De Romanet, who took over the bank in March 2007, inherited
other challenges. CDC has lost about 295 million euros by buying
shares in European Aeronautic, Defence %26amp; Space Co., Europes
largest defense firm.
The EADS investment has also entangled CDC in an insider
trading investigation. A plan to create an investment bank
hatched by de Romanets predecessor, Francis Mayer, who died of
cancer in 2006, also foundered.
A former civil servant and investment banker who was
appointed to a five-year term by former French President Jacques
Chirac, de Romanet, 47, is making sure he has this governments
backing for any new projects. Sarkozy can fire de Romanet at the
end of the CDC chiefs term, or he can renew it.
Meetings With Sarkozy
De Romanet says he meets frequently with Prime Minister
Francois Fillon, Lagarde and Sarkozy. By law, the bank pays a
third of its annual profit into the governments general budget.
In 2006, that contribution amounted to 1.5 billion euros.
Lagarde attended a meeting of 400 of CDCs top executives
in Deauville in December at which de Romanet presented the
banks goals for the next decade. They include: increasing loans
for subsidized housing; financing universities; boosting
investment in small and medium-sized companies; and supporting
carbon trading and the development of environmentally friendly
technologies.
“We must show we are worthy of the expectations the
country has of us, de Romanet told the managers.
Lagarde outlined some of the expectations in her address at
the meeting. She urged CDC to abandon Mayers policy of making
the bank an activist investor.
Saving Club Med
In 2004, Mayer brokered a deal to bail out money-losing
Paris-based resort company Club Mediterranee SA. Accor SA, the
French hotel group then 4.5 percent owned by CDC, bought 29
percent of Club Med — including CDCs 7.7 percent stake — for
$303 million. “While it may occasionally be necessary and even
profitable for the bank to influence a companys management,
this shouldnt be the norm, Lagarde said.
Lagarde also criticized the banks corporate governance in
light of Mayers purchase of EADS shares. Currently, her
ministry appoints only one of the 12 members of the banks
supervisory board, which includes four members of Parliament and
representatives of government agencies and the Bank of France.
Lagarde, who was representing Sarkozy at the meeting,
backed de Romanets plan to set up an investment committee to
advise on future large equity stakes — something de Romanet
says hell do soon. Lagarde also said the board and Parliament
should consider creating an additional, external body to monitor
the bank.
That plan represents little change from CDCs past role,
Ifraps Francois says.
`Plum Jobs
“No matter who is in power, and no matter what their
views, politicians find it useful to have a large financial
institution that can make investments left and right, and where
civil servants can find plum jobs, he says.
De Romanet says CDC is protected by checks and balances
since Parliament has responsibility for overseeing the bank and
its CEO is appointed by the president for a fixed term.
There is a lot to manage at CDC, whose holdings sprawl
across France and abroad. CDC owns 40 percent of Paris-based CNP
Assurances SA, Frances largest life insurance company, with 32
billion euros of premium income in 2006. CDC also has an
international transport company; an engineering subsidiary that
builds ports and highways; and 40 percent of publicly traded
Cie. des Alpes, which owns ski slopes and amusement parks.
In addition, the bank owns stakes in large French companies
equal to 2-3 percent of the CAC 40 Indexs market value. The
bank says it got a 12.5 percent return on its investments in
equities and bonds in 2006. It also has two private equity
divisions, including one that owns the Freres Blanc restaurant
group and the jewelry retailer Marc Orian SA. Overall, the
banks 2006 profit totaled 4.47 billion euros.
Public Housing
Not everything CDC does aims at making a profit for the
bank. The 205.1 billion euros in tax-exempt savings, which are
held separately from the rest of CDCs assets, earned 678
million euros in 2006. Those funds are used to help finance
CDCs long-term loans for subsidized public housing.
For instance, CDC is helping to finance Les Carreaux, a 154
million euro housing renovation project in the north Paris
suburb of Villiers-le-Bel. The suburb is where gun-wielding
youths rioted last November after two teenagers died when their
motorcycle collided with a police car.
Last year, the bank provided 80 percent of all funds for
French public housing, much of it in poor urban neighborhoods
such as Villiers-le-Bel. De Romanet and Lagarde want the bank to
finance the construction of 90,000 housing units in 2010
compared with 64,000 in 07.
Carbon Trading
The government is also using CDC to invest in green
projects. CDC teamed up with NYSE Euronext, owners of the New
York Stock Exchange, in December to buy the carbon-trading unit
of Paris-based Powernext SA, an energy-trading exchange.
BlueNext, the new name for the unit, will start trading emission
permits this year, the companies say.
The World Bank estimates that in 2007 worldwide carbon
trading tripled in value to $30 billion — and de Romanet, and
Lagarde, want CDC to have a share of this market.
Starting this year, CDC will also invest up to 150 million
euros annually to help universities improve research facilities.
CDC also plans to increase its support for startup companies in
France. From 2008 to 11, CDC aims to invest 1 billion euros in
small and medium-sized companies with more than 50 employees,
one third more than its current expenditure.
“The Caisse des Depots is the French governments private
bank, says David Lascelles, senior fellow at the London-based
Centre for the Study of Financial Innovation, which researches
Europes banking industry. “The government can use the Caisse
to do whatever it likes.
Paying for War
CDC has been used for generations as a way for the
government to invest in French companies. The bank was created
by King Louis XVIII in 1816 to help restore confidence in
Frances public finances after Napoleons costly wars by
managing and paying out civil servants pensions.
CDC still manages 52 pension funds for French public sector
employees. In 2006, these funds paid 16.2 billion euros in
benefits to about 3 million pensioners, a fifth of Frances
retirees. CDC is also the national custody bank for legal fees,
with 30.4 billion euros on deposit at the end of 2006. Every
weekday, lawyers clerks from around Paris deliver fees to a
special CDC counter in the atrium of the banks head office.
“The government has been tempted to take control of the
Caisse des Depots ever since the bank was established, simply
because the French state is always short of money, says Alain
Lambert, a senator from Sarkozys UMP party.
Bailing Out Alstom
In the past decade, CDC has stood at the governments flank
in some high-profile bailouts. Mayer in 2003 joined the
governments rescue of Alstom SA, the Paris-based maker of power
stations, high-speed trains and cruise ships. CDC contributed
about 1.2 billion euros in financing to a 4.2 billion euro
rescue package.
Sarkozy, who became Frances finance minister in April
2004, persuaded Mario Monti, then EU competition commissioner,
to approve the bailout in July 2004. “I remember being
criticized for rescuing the company, but today its one of
Frances greatest industrial success stories, Sarkozy said at
the news conference in January.
CDC had a direct interest in Alstoms survival. It owned
3.3 percent of the company in 2003; it now owns about 1.5
percent. Alstoms shares closed at 135.5 euros on Thursday, more
than double their value when the rescue was announced.
`Good Investment
“Alstom turned out to be a very good investment for the
bank, and you cant really criticize them for making money,
says Colette Neuville, founder and president of ADAM, the
association for the defense of minority shareholders, a lobbying
group based in Chartres, France. “Thats their mission.
CDC can influence French companies even with a small stake,
says Fabrice Remon, who manages the French office of Deminor
International SCRL, a Brussels-based consulting firm for
minority shareholders. “In France, the quorum for a
shareholders meeting is often very low, at about 25 or 30
percent, Remon says. “Even if you only own 3 or 4 percent of
a company, you are a really important player.
To be sure, CDC hasnt always done the governments
bidding. “The relationship can be rather uncertain, depending
on the chief executives personality and his ability to resist
the government, says Philippe Marini, a French senator whos a
member of CDCs supervisory board.
Rejecting Adidas Deal
Former CEOs say that they were pressured by government
ministers to make certain investments during their tenures at
CDC –and refused.
Robert Lion, CDCs CEO from 1982 to 92, recalls that in
1990 Finance Minister Pierre Beregovoy asked him to invest in
Adidas AG, the German sportswear company, which was then 80
percent owned by Bernard Tapie, the French investor. Lion says
he refused because he thought Adidas in poor shape.
Beregovoy summoned Lion to his office. “Beregovoy had
already told Tapie I would invest, and he didnt dare tell him I
would not, Lion says. “So I did. It was fun.
Beregovoy was prime minister from 1992 to 93, when Tapie
was briefly his urban affairs minister. Beregovoy committed
suicide in 1993 after Frances ruling Socialist Party lost a
parliamentary election. Tapie didnt respond to calls to his
lawyers office seeking comment.
Daniel Lebegue, CDCs chief executive officer from 1998 to
2002, says he refused the governments request in January 2002
that he help rescue Paris-based Air Lib, Frances second-largest
airline, which was close to bankruptcy. “I said no, because I
didnt consider that it conformed with my mandate, which was to
protect the assets of the Caisse des Depots, he says.
The government made a $27.3 million loan to privately held
Air Lib, which continued to lose money and was liquidated in
February 2003.
Natixis Formed
In July 2004, Sarkozy — then finance minister — supported
Mayers attempt to form a jointly owned investment bank with
Groupe Caisse dEpargne. Mayer agreed to transfer CDCs
investment banking units to Caisse dEpargne, in return for a 35
percent stake in the bank, with a market value at the time of
3.4 billion euros. Two years later, Caisse dEpargne instead
opted to create a new investment bank, Natixis SA, with Groupe
Banque Populaire.
Mayer protested to the Finance Ministry, then led by
Thierry Breton, in vain.
Both Lion and Lebegue are critical of the incident, which
Lebegue calls a brutal defeat. “When youre a loser, you
shouldnt scream out youre a superloser, Lion says.
De Romanet responds that the episode is finished. Groupe
Caisse dEpargne bought back CDCs 35 percent stake in a deal
completed last year for 7 billion euros.
Natixis is now Frances fourth-largest bank by market value
after selling 26 percent of its shares on the Paris Bourse in
December 2006. Natixis shares closed at 11.66 euros on Jan. 24,
down 40 percent since the sale.
Went to ENA
De Romanet is well qualified to juggle the pressures
involved in managing CDC, says Lambert, a former deputy budget
minister who employed de Romanet as his chief of staff from 2002
to 04. “Hes familiar with how the French state works, but
also understands what it takes to be a private-sector banker,
Lambert says.
A graduate of the Ecole Nationale dAdministration,
Frances elite training college for civil servants, de Romanet
worked from 1986 to 99 in the Finance Ministry and at the EU in
Brussels. He joined Oddo %26amp; Cie., a Paris-based investment bank,
as a partner in 1999. He returned to the civil service in 2002,
and in 2005 became Chiracs deputy chief of staff.
In October 2006, near the end of Chiracs presidency, de
Romanet joined Paris-based Groupe Credit Agricole SA, Frances
No. 2 bank by assets, as deputy director of finance and
strategy.
Two months later, Mayer, 56, died of cancer. Finance
Minister Breton called de Romanet on Chiracs behalf to offer
him Mayers job.
EADS Scandal
One of the first things that de Romanet had to navigate was
an insider trading scandal that involved CDC even though the
bank hasnt been accused of any wrongdoing.
In April 2006, Mayer bought 2.25 percent of EADS for 600
million euros from Lagardere SCA, the Paris-based industrial and
media company. CDC already owned 0.58 percent of the company.
Two months later, EADSs Airbus unit disclosed production delays
on its A380 superjumbo plane, sending EADS shares down 26
percent in a single day. As of Jan. 24, CDC had lost about 295
million euros on the stock it bought from Lagardere.
Arnaud Lagardere, the companys CEO, said on Dec. 9 that he
wasnt aware of production delays at Airbus when his company
sold CDC the stock.
Investigation
Investigating Magistrate Xaviere Simeoni is looking into
allegations of criminal insider trading by EADS shareholders who
havent been identified. Shes expected to report her results in
the first half of 2008.
Lebegue and Lion say Mayer must have had prior government
approval to make such a big investment in a defense company.
“They should have known when they bought the stake that the
company was in poor condition, Lion says. “I do not believe
that the Caisse made this investment without some kind of
coordination with the state, Lebegue says.
De Romanet disagrees. “Nobody in April 2006 could have
imagined that EADSs share price would tumble 30 percent because
of a wiring problem, he says. Mayer made a mistake by not
telling CDCs board hed bought the shares until after they had
plunged, he says.
Breton testified to a parliamentary commission in October
that the government didnt know in advance about CDCs purchase
of EADS shares.
De Romanet says his next task is to figure out which areas
the bank should focus on in the future. In January, he began
reviewing CDCs activities to see what could be trimmed. “We
cant be everywhere, he says. “We must focus our resources.
Whatever de Romanet decides, Sarkozys government may have other
ideas.
To contact the reporters on this story: Richard Tomlinson at
rtomlinson1 @bloomberg.net;
Gregory Viscusi at
