When Fausto Tonna, the former CFO of scandal-ridden Parmalat, wished reporters “a slow and painful death” as he entered the prosecutors’ office in Parma, Italy, in 2004, the magnitude of Europe’s biggest bankruptcy was just emerging. Bankers, auditors and Parmalat executives, including Tonna, had been conspiring for years to hide debt worth billions of euros through a web of shell companies and cross-shareholdings.
But the Italian dairy group is different from other disgraced companies of recent years. Though Enron, WorldCom and several others have been relegated to the history books, Parmalat lives on, says Pier Luigi De Angelis, its current CFO, who chronicles the company’s long and painful road to recovery in this month’s cover story, “The Spill-Over Effect.”
While Parmalat and the like put into sharp focus the troubles that result when controls fall apart, the current subprime crisis shows that many companies — notably some of the world’s biggest banks — failed to learn this lesson, as we report in “Missing Pieces,” which begins our banking and finance special section. Now that the gaping holes in banks’ previous risk management have been revealed, are their new risk structures capable of addressing the problem?
Another article in our special section — “Pedalling As Fast As They Can” — looks at how companies are sweating to find capital, and paying more for it. As CFOs are now learning, this is a credit-market contraction like no other. In the contraction of 2001, for example, high corporate default rates and fraud spurred retrenchment. This time, the problems have arisen within the financial sector itself, making it critical for CFOs to take a cold, hard look at the financial conditions of their banks. It’s worth remembering that a few bad judgement calls when it comes to credit risk could leave a company picking up the pieces for years to come.