Will Scandal at Crédit Lyonnais Topple Chairman Jean Peyrelevade?

His iron grip may be weakening

Jean Peyrelevade is a cunning politician who fights fiercely to protect his turf. He needs all his survival skills now. As chairman of Crédit Lyonnais (CLYNY ), France's third-largest listed bank, Peyrelevade is in the tightest spot of his 40-year career. His once-iron grip on the board of the $162 billion-in-assets bank, which he has run since 1993, has weakened. Brought in to clean up a huge financial scandal at the then-state-owned bank, he now faces allegations that he covered up violations of U.S. banking laws by senior Lyonnais executives in the early 1990s. The accused managers' objective was control of Executive Life Insurance Co., a failed California insurance company that had what proved to be a lucrative junk-bond portfolio. The U.S. Justice Dept. is now considering legal action against the bank's U.S. branch. "[Peyrelevade's] under real pressure," says a Paris-based investment banker who knows him well. "I wonder whether he can survive."

If he can't survive, his bank may not either as an independent entity. The scandal has burst to the surface just before a pact among Lyonnais' six biggest shareholders begins to run out in July. And several--including the mutual bank Crédit Agricole and giant German insurer Allianz (AZ )--are eyeing the bank. A bare-knuckle hostile bid is unlikely, but the horse-trading among major shareholders over control of the bank could start soon. Speculation that Peyrelevade's days are numbered has increased since May 23, when Lyonnais announced he would focus on strategy, handing day-to-day direction of the company to Managing Director Dominique Ferrero. Peyrelevade couldn't be reached for comment.

Officials at Lyonnais' ornate belle époque headquarters in Paris insist that the management change is unrelated to the Executive Life case. They say it formalizes the existing division of responsibilities and follows common practice at many French companies. Nevertheless, the timing surprised many on Paris' cocktail-and-canapé circuit. There are rumors of conflict at the bank's highest levels over Peyrelevade's belligerent response to its woes.

The pushy way Peyrelevade has handled the bank's core shareholders--bluntly saying he doesn't want any of them to take it over--has drawn criticism. And Lyonnais is suing the British magazine The Economist for claiming the chairman knew as early as 1995 that the bank illegally won control of Executive Life by setting up an insurance company, Aurora National Life Assurance Co., to buy it. Aurora's shareholders were fronting for Lyonnais. That violated U.S. law, which at the time didn't let banks own other financial institutions. Other executives think that the Executive Life affair may have permanently hurt the boardroom clout of this son of a Marseille secondary-school teacher.

FRIENDLY? If so, the bank may be in play after July 8, the expiration date for most elements of a two-year-old pact that prevents the bank's six strategic shareholders--who together own 33% of the stock--from changing their holdings. Lyonnais will need a firm hand at its tiller, especially because Finance Minister Laurent Fabius wants to shed the state's remaining 10%. Peyrelevade is lobbying the government, which he calls "a friendly shareholder," to sell those shares to Lyonnais employees who would likely oppose a change of ownership.

But France's Socialist government is keeping its distance--though Peyrelevade was once an adviser to former Socialist Prime Minister Pierre Mauroy. The weight of Lyonnais' history may be a factor. It was under the late Socialist President Francois Mitterrand that Lyonnais went on a politically tinged acquisition and lending binge that nearly destroyed the bank and cost taxpayers billions of francs.

The word in Paris is that Fabius may be preparing to sell the state's stake to Agricole, which already owns 10%. Meanwhile, Agricole is preparing to list one of its major subsidiaries to raise money for expansion. Insiders say Agricole's board hasn't yet decided to bid for Lyonnais, but if it does, that could spur Allianz into action. The Munich insurer, whose Lyonnais stake will be nearly 10% after its acquisition of Dresdner Bank, wants more distribution power in France. Société Générale isn't a core shareholder, but has bought 3.9% of Lyonnais. It could support Allianz, and might trade the stake for some Lyonnais assets if Allianz were to dismember the bank.

It's largely out of fear that Allianz would try to get its foreign hands on Lyonnais that the government is considering selling its stake to Agricole. Either prospect horrifies Peyrelevade, whose mission was to prepare the bank--Europe's biggest until it started hemorrhaging money--for privatization. He sold off poor-performing assets, revitalized management, and slashed the balance sheet. Today, Lyonnais boasts vibrant retail and asset-management divisions and a solid investment-banking operation.

Its market capitalization, though, is a mere $9.2 billion, small by European standards. So the bank could easily be snapped up, especially if the U.S. suits weaken it further. If found guilty, the bank could lose its U.S. banking license, though lawyers think that's unlikely--in part because Congress has repealed the law Lyonnais allegedly violated.

Analysts say an outright hostile bid by a foreign bank is the least likely scenario because it would arouse so much popular and political opposition in France. And it would be extremely difficult anyway before 2003, when the shareholders' pact's final clauses--which call for core shareholders to give each other first refusal if they sell their shares--expire.

Peyrelevade may get a hand from the unions. Force Ouvrière, one of France's three big unions, is urging Fabius to keep the state's stake until at least 2003. The recent departure of two senior officials from Agricole--Lucien Douroux and Yves Barsalou--could also be a boon. Insiders say they had represented the bank in secret talks with the Finance Ministry over the fate of the state's stake. SocGen Chairman Daniel Bouton, meanwhile, has attacked the government for even contemplating the sale of its stake to Agricole. He says such a move would harm taxpayers and other shareholders because it wouldn't guarantee a fair price. But Bouton's intervention may be a ploy to weaken Agricole's position before it makes a move.

Peyrelevade could weather the storm. But whatever happens in the U.S., Crédit Lyonnais' prospects look decidedly unstable. The odds are someone will try to engineer a change of owners. And that will send Jean Peyrelevade into early retirement.

By David Fairlamb in Paris

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