French Bank Chief Goes on Trial

Jean-Claude Trichet, head of the Bank of France and heir apparent to current European Central Banker Wim Duisenberg, goes in front of a French magistrate today to answer allegations that he published misleading information in the early 1990’s to cover up billions of francs of losses at Crédit Lyonnais, once Europe’s largest bank.

It was once of the biggest scandals in post-war France and has come back to haunt the man who headed the Treasury at the time, and who was in charge of watching over the activities of state-owned enterprises, such as Crédit Lyonnais, in which the French government had a 54% stake at the time.

While the alleged cover-up has been in the hands of the French justice system since 1996, the beginning of the trail today comes at a bad time for Trichet, 60, who is set to take over the helm of the Frankfurt-based European Central Bank (ECB) in July. A guilty verdict on the charge of complicity, especially coming to close to Duisenberg’s departure, could threaten Trichet’s credibility. The succession could also be thrown into question if the trial, which is expected to last six weeks, runs into delays.

Brilliant Banker

By most accounts, Jean-Claude Trichet is well suited for the top job at the ECB. He is considered one of the world’s brightest central bankers and enjoys a level respect among the financial community than Wim Duisenberg can only envy.

Many believe Trichet should be the one in Frankfurt anyway. He was a hair’s breadth away from clinching the ECB job in 1998 when the German government expressed reservations about having a Frenchman at the European economic helm. A controversial compromise put the more neutral Duisenberg in the top spot and stipulated that Trichet would take over in 2003.

But in 2000, a formal investigation began regarding in Trichet’s role in the scandal at Crédit Lyonnais, the one-time state-owned bank whose troubles in the early 1990’s. A series of government bailouts in the years following cost French taxpayers more than 100 billion francs. The bank was privatised in 1999.

In 1992, the bank reported losses of 1.8 billion francs ( euro). But prosecutors say the banks accounts, which were approved at the time by Trichet, failed to reflect the billion of provisions against bad investments, hiding a loss in reality of nearly 7 billion francs.

Misleading Accounting

Investigating magistrate Phillip Courroye argues that the accounts were deliberately understated so that Crédit Lyonnais would not break European rules on minimum solvency requirements for financial institutions.

Trichet’s lawyers counter that the charges of complicity against him are groundless. They say he had no precise information over the actual state of the bank’s financial affairs nor the power to dictate what the bank reported in its statements.

Still, magistrates have unearthed a noted Trichet wrote to the then finance minister in 1993 stating that “publication of a bigger loss would have meant not respecting EU solvency laws and prompted questions about the solidity of Europe’s leading financial institution.”

Trichet stands accused with eight other leading French financial figures, including former Crédit Lyonnais president Jean-Yves Haberer, Jacques de Larosière, one-time government of the Bank of France, and Jean-Pascal Beaufret, a treasury officials who is now CFO at the Alcatel technology group.

A verdict on the case has been promised before July.