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Abstract:
In late 1993 and early 1994, the wholly-owned U.S. subsidiary of a German
conglomerate experienced substantial losses in connection with the
implementation of a petroleum marketing strategy, triggering an emergency
recapitalization of the German parent company. The rescue was overseen by the
firm's supervisory board, which was chaired by a member of the senior management
of the largest German bank. This paper draws on a special auditor's report
that examined the near-bankruptcy of the firm, as well as other sources. We
develop a case study which finds that the German bank was not well informed as
to the formulation and execution of the client firm's risk management strategy
that was to be implemented through the large-scale use of financial
derivatives. The analysis in the paper raises questions as to whether private
information is transmitted efficiently within the bank-based German system of
corporate governance.
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