Ms Lagarde and The Tribulations of A Corrupt French State Bank

Written by Hilary Barnes

The case in which the president of the IMF, Christine Lagarde, is being investigated in France for “abuse of public funds” and “complicity in wrong-doing” has its origins in 1991 when President Francois Mitterand asked a French businessman and TV personality, Bernard Tapie, to join his government.

What then happened would not have surprised anyone had it happened in, shall we say, Russia, but it was not something one expects to see in a country such as France.

On joining the government (with a ministerial portfolio for doing something about conditions in suburban townships dominated by immigrants from North Africa in the Paris region and in other big cities), Mr Tapie had to sell his all his businesses, which included the Adidas sportswear company.

As a specialist in turning round derelict businesses, he bought Adidas (“the deal of my life“) in a near-bankrupt condition from its German owners and although it was till losing money in 1991 and 1992, it returned to profit in 1993 and then did well.

He put the process of selling his businesses in the hands of the bank which normally handled his business, Credit Agricole (now known as Credit Lyonnais), which had been nationalised by the Mitterand government a few years earlier.

Mr Tapie was astonished when he discovered to whom the bank had sold his businesses; itself, through a complicated series of offshore transactions. It then sold Adidas to a third party for €350m, which the bank pocketed, who sold it a year later for €700m, and by 1996 its market value was put at €1.6bn.

The bank also bankrupted Mr Tapie, which automatically, under French law, rendered him ineligible to own a business for the next 10 years (just imagine if Silicon Valley innovators faced the same fate when a business failed).

Mr Tapie, who had other problems in the meantime that added to his notoriety but were not connected with Credit Agricole and the Adidas rip-off, fought back.

But it took a long time. After being ordered to pay Mr Tapie 600m francs (€90m) in 1996, Credit Lyonnais used a rule that forbids a person who has been declared bankrupt from suing the state.

However, in 2005 Tapie’s bankrupt estate was awarded €145m, which was confirmed on appeal in 2006. But Tapie was now eligible to bring a case to have the sale of Adidas annulled. That would have exposed the state to a loss that could run to €3bn.

It was at this point that the newly appointed finance minister, Christine Lagarde, who as a business lawyer by profession knew all about arbitration procedures, decided to let the case go to arbitration, declaring at the time that this would save the state money and finally bring this long-running saga to a close.

The award in favour of Mr Tapie and his estate this time, in 2008, was €390m, of which €45m damages to Mr Tapie and his wife, €240m damages to the Tapie holding company, plus €90m in back-dated interest, and €13m costs.

The case was considered by an administrative tribunal in 2009, which found no fault with Ms Lagarde.

But members of the French Socialist Party, now back in office under President Francois Hollande, were outraged by the arbitration award, which, they allege, must have been fixed with the complicity of the government of the day by way of rewarding Mr Tapie for supporting the former president, Nicolas Sarkozy.

In 2010 an investigating magistrate decided to open the case in which Ms Lagarde is now involved.

What an investigating magistrate hears in the course of an investigation is supposed to remain a secret between the magistrate and the person concerned, but investigating magistrates cannot be held responsible for anything they do in their function as investigating magistrate.

If they find any meat on the bone they are chewing, they therefore usually leak it with impunity to the media.

In this case nothing of note has leaked. That does not prove that there is no meat on the bone, but if I were a bookmaker my book would show that the case involving Ms Lagarde is not going to run.

It is clear that Ms Lagarde takes the same view and that the IMF accepts her view.