The merchant bank Mediobanca is just such an institution, bestriding the Italian economy in a manner unrivalled in any other developed country. Yet one looks in vain for the trappings of such power. A short walk under the colonnades on the left-hand side of La Scala theatre in Milan leads one to an unremarkable, ochre 17th-century building. There is no nameplate. As with an exclusive English gentlemen's club, only those that need to be are aware of the significance of 12 Via Filodrammatici.
Inside, similar discretion reigns in the atmosphere of an old cloister. Hushed voices, soft lighting, the restrained tones broken only occasionally by the orchestra practising in La Scala next door. But this unworldly charm deceives. In 48 years Mediobanca has assembled a network of influence that enables it to exercise a vice-like grip on one of the world's leading economies. Achieving this position has been the life's work of Enrico Cuccia, 86 years old but still deploying his blend of Sicilian guile and high-finance wizardry with extraordinary efficiency.
Shunning publicity, Cuccia was virtually unknown outside Milan banking circles until a few years ago. For nearly three decades, however, he has been the undisputed padre padrone of Italian finance.
Written off countless times as an anachronism of Italian capitalism, Mediobanca and Cuccia are now at the apex of their power. This bastion of the First Republic has until now shrugged off the collapse of much of the old system around it. Cuccia has outwitted his enemies by turning Italy's recently launched privatisation programme to his advantage, seizing control of two of the country's most important commercial banks.
But he is suddenly having to cope with an unexpected and potentially devastating shift in the balance of forces. In May, Mediobanca finally became entangled in the vast web of anti-corruption investigations. Shaken by this news, the merchant bank was forced the following month to pull the plug on a big rights issue, an unprecedented humiliation for a house of such repute. These setbacks occurred against the tense background of an unseen struggle with the new government of Silvio Berlusconi, which harbours forces keen to break Mediobanca's power.
The Prime Minister, who personifies Italy's brash new business elite, and the traditionalist Cuccia are no particular friends. They have been circling one another, waiting for points of weakness to be exposed. Last week, the stakes shifted dramatically again. The arrest on corruption charges of Paolo Berlusconi, the Prime Minister's younger brother and key member of the family Fininvest holding company, has engulfed the government in crisis. The struggle for power between the elected head of the country and the shadowy financial potentate, once a finely calculated waiting game, has exploded into a race against the clock of continuing anti-corruption investigations.
Giovanni Agnelli, the head of Fiat, Italy's foremost industrial conglomerate, described Cuccia as the 'neck of the bottle through which flow all important transactions in the Italian economy'. Whether corporate advice, stock underwriting or mergers and acquisitions, nothing important happens in Italy without the say-so of Mediobanca.
It was founded by the big state banks immediately after the Second World War, the young Cuccia at its helm, to help the reconstruction of the Italian economy by providing long-term lending to medium-size firms. The Sicilian financier, who had married the daughter of Alberto Beneduce, chief economic adviser to Mussolini and the father of Italian state capitalism, had other ideas, however. Cuccia believed Italy's economic prowess would be shaped by the strength of its big companies.
To this end, he systematically pulled Mediobanca away from its designated task towards forging alliances with the emerging powerhouses of Italy's economic miracle. Cuccia became the banker of the leading industrial families - Agnelli, Pirelli, de Benedetti, Orlando, Marzotto - and grew with them. He developed a reputation for piecing together novel financial solutions. But this sophistication was rooted in a basic instinct inherited from his Sicilian forefathers. 'Cuccia divides the world into friend and foe. Friends are looked after at any cost. And foes are destroyed with all possible means,' says Marco Vitale, one of Italy's foremost economic academics and advisers.
There is a Sicilian proverb: 'To command is better than making love.' Enrico Cuccia is interested in controlling those who exercise power. His is an unrelievedly cynical world of divide and rule, of balancing relationships against one another, of weaving intricate patterns of interest to achieve maximum influence with minimum risk. On the strength of his contacts with Italy's corporate dynasties, Cuccia developed in the 1960s and 1970s what became known as the salotto buono. This notion of the fine drawing- room defined the Establishment, distinguishing those who are part of Mediobanca's entourage from the rest. Agnelli and Pirelli epitomised the salotto buono; Berlusconi and Benetton, another exponent of thrusting modern Italian entrepreneurship, have never been members.
Inside the salotto buono, stakes were swapped in each other's businesses, and reciprocal interests nurtured. Underpinning Mediobanca's moves is Cuccia's guiding principle: 'Shares are weighed, not counted.' A small strategic stake often suffices to call the shots in a business, by playing off seemingly dominant shareholders against one another. Guided by this reasoning, Cuccia used the salotto buono to evolve his system of controlling syndicates. These are hard cores of shareholders, none of whom holds individual stakes of any size - it is rare for anyone to go above a 3 per cent stake in a Mediobanca syndicate - who band together to achieve a commanding position in a company.
Cuccia's strategy of dealing with friends and the friends of friends is also an evolving one. Although Mediobanca is focused on the Italian market, displaying no foreign ambitions, it has sought in its own way to keep pace with the globalisation of the markets. The deal it put together to cover Fiat's rights issue last autumn was significant in this respect. Because the capital-raising exercise was going to dilute markedly the Agnelli family's influence, Cuccia brought together a controlling syndicate to protect his friend's interests. But this time he went beyond the salotto buono, bringing in names from the European business establishment, such as Deutsche Bank of Germany and Alcatel of France.
Pursuing this strategy of interlocking holdings, Mediobanca has amassed an unrivalled blue-chip portfolio, the centrepiece of which is a holding of nearly 13 per cent in Generali, Italy's biggest insurer, but also ranging across most of the main companies in the salotto buono as well as some important foreign stakes. This wealth is backed up by a reputation for professionalism and efficiency unrivalled in Italy. Mediobanca 'must rank as one of the highest-quality and most profitable banking operations in the world'. Fulsome praise, indeed, especially when one considers its provenance: S G Warburg. In a recent analysis, the leading British merchant bank valued Mediobanca at around 12 trillion lire ( pounds 5bn). The Italian powerhouse manages this with just 87 executives and 307 staff. 'An investment bank anywhere in the world would be proud of such cost control,' said Warburg.
Just as Mediobanca used its relationships to grow, so it exploited them, ruthlessly when necessary, to block attempts at creating a significant rival. There were enough attempts, notably in the 1980s. Although most are still operating, none has succeeded in acquiring any stature in Mediobanca's shadow. Cuccia's hold on the companies that count was too strong; his access to funds too privileged. Given such a fierce defence of Mediobanca's pre- dominant position as the financier of big business, it is no coincidence that in the world's fifth biggest economy, Italy's stock exchange is barely bigger than Malaysia's.
Enrico Cuccia's title of honorary chairman is deceptive. Each working day, including Saturdays, the frail, stooped figure is seen entering Via Filodrammatici. He does not care for holidays. 'The person who is absent is always wrong,' he likes to say. Hard of hearing since his youth, Cuccia turns 87 in November. But no important decision is taken without his approval. His discipline is renowned; his obsession with discretion has shaped the entire work ethos of Mediobanca, where no public life is tolerated. Telephone conversations tend to be conducted in low voices; faxes are sent in the evening to avoid their being seen by unwanted eyes. A frequent visitor recounts how in 10 years he has only once come across an open office door and inadvertently met a client.
The privatisation programme begun towards the end of last year formed the decisive battleground for the master strategist of Italian finance to display his survival skills. For the government sell-off provoked a clash of cultures: between Cuccia's feudal system of reciprocal favours and mutual guarantees, and those wanting to create a more transparent, Anglo-Saxon type of market of diffuse public ownership. 'The privatisation is a once-and-for- all opportunity to encourage economic pluralism in an economy dominated by four or five groups in the state and private sector,' declared Romano Prodi, the former head of IRI, the biggest state holding company, and the Sicilian financier's declared opponent.
The stakes for Mediobanca were extremely high, for the first privatisations involved two commercial banks, Credito Italiano and Banca Commerciale Italiana (Comit), both important shareholders in Mediobanca, and through which the Milanese merchant bank raises much of its funds, by selling certificates of deposit under a special arrangement. If Credito and Comit had fallen outside Cuccia's control, it would have been the beginning of the end of Mediobanca's ascendancy. With precisely this aim in mind, Romano Prodi persuaded the government to place a 3 per cent shareholding limit on the bank privatisations.
But this underestimated the versatility of Cuccia, who, against the odds, outwitted his opponents by artfully spun controlling syndicates: no single shareholder held much more than 2 per cent, but together they pulled the banks firmly into Mediobanca's orbit. Enrico Cuccia again made use not just of the salotto buono, but of his foreign connections: Lazard Freres, Commerzbank, Credit-Anstalt and Banque Paribas.
At the first shareholder meetings in the spring of the newly privatised banks, the Credito and Comit old guards were replaced by Cuccia appointees, including his nephew, Enrico Beneduce. Mediobanca also renewed its privileged funding arrangement, on an even more favourable basis, until the year 2001. With these masterstrokes, Cuccia had come a big step closer to his goal of forging a north Italian financial powerhouse, linking Mediobanca, the insurer Generali and now Comit, one of the most reputable banks.
Winning control of Credito and Comit brought other important gains. The two banks are among the main creditors of Silvio Berlusconi's heavily indebted Fininvest media empire; Cuccia found himself with a useful lever on a weak point of a man whose political triumph he had not expected, and whose government, strongly backed by medium-size business interests, suddenly posed a serious potential threat.
Mediobanca moved quickly to bolster its links to Berlusconi. Days after the election, the Milan merchant bank, which hitherto had had scant dealings with Fininvest, took charge of floating Berlusconi's publishing arm, Mondadori, under a debt-reduction restructuring.
But just as it looked, once again, as though Cuccia was stacking one ace after another into his closely held hand, things went awry. The announcement of the corruption investigation unsettled the markets. By virtue of its involvement in every deal that counted in Italy, Mediobanca had been investigated on several previous occasions, and nothing ever came of it. But now the salotto buono offers no sanctuary from the crusading 'clean hands' magistrates. Enrico Cuccia and three other leading Mediobanca executives are being investigated for allegedly falsifying a document and withholding information about losses from creditors during a critical period last summer, while putting together Italy's biggest rescue package, for the collapsed Ferruzzi agro-chemical group.
The investigations are at an early stage, but are being taken seriously by Milan's inner financial circle. Mediobanca's share price reflected the nervousness, and in a rapidly weakening market provoked the unthinkable in late June, when Italy's foremost financial institution was forced to halt a rights issue for the first time. Mediobanca had counted on raising the expected 1.5 trillion to 1.9 trillion lire to fill its war chest for the next round of privatisations. Cuccia had already been manoeuvring behind the scenes with his allies, Pirelli and Alcatel, to forge an alliance to pounce on Stet, the telecoms company, which would give access to one of the country's big growth markets of the future.
'The publicity surrounding the investigation and the aborted rights issue have been very bad for a company like Mediobanca, which is appreciated by big business above all for its absolute discretion and professionalism. Now there is a stain,' says a leading Milanese banker who knows Cuccia well.
Despite having won the important early privatisation battle, Cuccia suddenly found his position had weakened considerably. The entree to Silvio Berlusconi, via his Fininvest empire, needed to be built upon if Mediobanca were to succeed in influencing plans of the new government to erect safeguards around coming privatisations that would thwart the use of controlling syndicates. There was also the risk that the government, in a snub to Mediobanca, would encourage the use of the big American institutions, anxious for a foothold in Italy, for the privatisations.
'From a negative relationship with Berlusconi, Cuccia has managed to move quickly to a neutral one, but it is no better than that. The government remains fairly suspicious of Mediobanca's ambitions,' says a banker with links to both men.
Not inclined to repeat the mistake of those who have underestimated Mediobanca's master, Silvio Berlusconi was waiting to see how the investigation against Cuccia progressed. That was, at least, until the dramatic change of fortunes last week. The arrest of the Prime Minister's brother Paolo, who surrendered to face charges of having bribed the financial police, may have brought timely relief from an unexpected quarter for Enrico Cuccia.
The scandal swirling around the Prime Minister's business empire has aggravated the already severe loss of authority in the government, leaving Silvio Berlusconi fighting for his political survival. Never one for emotion, the padre padrone of the Italian economy is unlikely to expend much sympathy on one who was not even the friend of a friend.
------------------------------------------------------------------------ CROSS HOLDINGS ------------------------------------------------------------------------ Who owns how much of Mediobanca (left) and how much it has of them 2.0% Pirelli 10.0% 2.0% Fiat/Agnelli 3.0% 2.0% Olivetti/di Benedetti 3.0% - Gemina/Agnelli 12.4% 2.0% Generali 12.5% - Orlando 3.2% 0.7% Marzotto 1.2% 0.5% Stefanel 1.7% - Paribas 1.7% 0.8% BHF Bank (Germany) 2.0% 2.0% Lazard (France) - ------------------------------------------------------------------------
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