CDC

Even in France, many people haven't heard of Caisse des Depots & Consignations. Yet they regularly cross paths with the 192-year-old state-owned institution, whose assets reach into every part of the economy.

Parisians can munch on pigs' feet at Au Pied de Cochon, a CDC-owned brasserie that draws celebrity diners such as Henry Kissinger and actor Jean-Paul Belmondo. Vacationers can play baccarat at the seaside casino in Deauville, which is 10 percent owned by the Paris-based bank; take their children to the Gaul- themed Parc Asterix, 20 miles from Paris; or ski on the slopes of Chamonix, Meribel or Val d'Isere in the Alps. All are owned by the bank. Millions of low-income workers live in state- subsidized housing that CDC finances in the suburbs of large cities.

With assets of 405.5 billion euros ($599.2 billion), CDC is also France's largest institutional investor. It has stakes in half of the companies in the benchmark CAC 40 Index. The stakes include 2.0 percent of Societe Generale SA, which said yesterday that bets on stock-index futures by a 31-year-old employee caused it 4.9 billion euros in trading losses, the largest in banking history.

``The Caisse des Depots is a bizarre but typically French monster that mixes public and private sector activities,'' says Philippe Francois, a researcher at Ifrap, the French Research Institute on Public Services, a Paris-based study group advocating free market economics. ``It's a caricature of how the French government operates.''

President Nicolas Sarkozy, elected last year on promises to shake up the economy, indicated he may tighten his grip on the bank. Though the National Assembly oversees CDC, its chief executive officer is named by the president.

Defending the Nation

Sarkozy says he plans to use CDC to help protect French enterprises from speculative investors and foreign sovereign funds. ``The Caisse des Depots is an instrument of this policy of defending and promoting the nation's primordial economic interests,'' Sarkozy said at a news conference on Jan. 8, during which many questions dealt with his romance with former model Carla Bruni.

Those interests include helping to fund the country's troubled university system and build more public housing, according to plans unveiled in December by CEO Augustin de Romanet and endorsed by Christine Lagarde, France's finance minister. In the past, governments have used CDC to help bail out state companies.

CDC may find it tougher to carry out the government's orders in the future. Until now, CDC has used proceeds from its management of the country's 205.1 billion euros of tax-exempt savings accounts to finance public housing.

Funds May Shrink

Now that the European Union has told France it must allow all banks to sell the accounts starting this year, those funds may dwindle because the banks may steer savers toward their own investment products, de Romanet says. Sarkozy supported the EU order, overruling de Romanet's objections.

De Romanet, who took over the bank in March 2007, inherited other challenges. CDC has lost about 295 million euros by buying shares in European Aeronautic, Defence & Space Co., Europe's largest defense firm.

The EADS investment has also entangled CDC in an insider trading investigation. A plan to create an investment bank hatched by de Romanet's predecessor, Francis Mayer, who died of cancer in 2006, also foundered.

A former civil servant and investment banker who was appointed to a five-year term by former French President Jacques Chirac, de Romanet, 47, is making sure he has this government's backing for any new projects. Sarkozy can fire de Romanet at the end of the CDC chief's term, or he can renew it.

Meetings With Sarkozy

De Romanet says he meets frequently with Prime Minister Francois Fillon, Lagarde and Sarkozy. By law, the bank pays a third of its annual profit into the government's general budget. In 2006, that contribution amounted to 1.5 billion euros.

Lagarde attended a meeting of 400 of CDC's top executives in Deauville in December at which de Romanet presented the bank's goals for the next decade. They include: increasing loans for subsidized housing; financing universities; boosting investment in small and medium-sized companies; and supporting carbon trading and the development of environmentally friendly technologies.

``We must show we are worthy of the expectations the country has of us,'' de Romanet told the managers.

Lagarde outlined some of the expectations in her address at the meeting. She urged CDC to abandon Mayer's policy of making the bank an activist investor.

Saving Club Med

In 2004, Mayer brokered a deal to bail out money-losing Paris-based resort company Club Mediterranee SA. Accor SA, the French hotel group then 4.5 percent owned by CDC, bought 29 percent of Club Med -- including CDC's 7.7 percent stake -- for $303 million. ``While it may occasionally be necessary and even profitable for the bank to influence a company's management, this shouldn't be the norm,'' Lagarde said.

Lagarde also criticized the bank's corporate governance in light of Mayer's purchase of EADS shares. Currently, her ministry appoints only one of the 12 members of the bank's supervisory board, which includes four members of Parliament and representatives of government agencies and the Bank of France.

Lagarde, who was representing Sarkozy at the meeting, backed de Romanet's plan to set up an investment committee to advise on future large equity stakes -- something de Romanet says he'll do soon. Lagarde also said the board and Parliament should consider creating an additional, external body to monitor the bank.

That plan represents little change from CDC's past role, Ifrap's Francois says.

`Plum Jobs'

``No matter who is in power, and no matter what their views, politicians find it useful to have a large financial institution that can make investments left and right, and where civil servants can find plum jobs,'' he says.

De Romanet says CDC is protected by checks and balances since Parliament has responsibility for overseeing the bank and its CEO is appointed by the president for a fixed term.

There is a lot to manage at CDC, whose holdings sprawl across France and abroad. CDC owns 40 percent of Paris-based CNP Assurances SA, France's largest life insurance company, with 32 billion euros of premium income in 2006. CDC also has an international transport company; an engineering subsidiary that builds ports and highways; and 40 percent of publicly traded Cie. des Alpes, which owns ski slopes and amusement parks.

In addition, the bank owns stakes in large French companies equal to 2-3 percent of the CAC 40 Index's market value. The bank says it got a 12.5 percent return on its investments in equities and bonds in 2006. It also has two private equity divisions, including one that owns the Freres Blanc restaurant group and the jewelry retailer Marc Orian SA. Overall, the bank's 2006 profit totaled 4.47 billion euros.

Public Housing

Not everything CDC does aims at making a profit for the bank. The 205.1 billion euros in tax-exempt savings, which are held separately from the rest of CDC's assets, earned 678 million euros in 2006. Those funds are used to help finance CDC's long-term loans for subsidized public housing.

For instance, CDC is helping to finance Les Carreaux, a 154 million euro housing renovation project in the north Paris suburb of Villiers-le-Bel. The suburb is where gun-wielding youths rioted last November after two teenagers died when their motorcycle collided with a police car.

Last year, the bank provided 80 percent of all funds for French public housing, much of it in poor urban neighborhoods such as Villiers-le-Bel. De Romanet and Lagarde want the bank to finance the construction of 90,000 housing units in 2010 compared with 64,000 in '07.

Carbon Trading

The government is also using CDC to invest in green projects. CDC teamed up with NYSE Euronext, owners of the New York Stock Exchange, in December to buy the carbon-trading unit of Paris-based Powernext SA, an energy-trading exchange. BlueNext, the new name for the unit, will start trading emission permits this year, the companies say.

The World Bank estimates that in 2007 worldwide carbon trading tripled in value to $30 billion -- and de Romanet, and Lagarde, want CDC to have a share of this market.

Starting this year, CDC will also invest up to 150 million euros annually to help universities improve research facilities. CDC also plans to increase its support for startup companies in France. From 2008 to '11, CDC aims to invest 1 billion euros in small and medium-sized companies with more than 50 employees, one third more than its current expenditure.

``The Caisse des Depots is the French government's private bank,'' says David Lascelles, senior fellow at the London-based Centre for the Study of Financial Innovation, which researches Europe's banking industry. ``The government can use the Caisse to do whatever it likes.''

Paying for War

CDC has been used for generations as a way for the government to invest in French companies. The bank was created by King Louis XVIII in 1816 to help restore confidence in France's public finances after Napoleon's costly wars by managing and paying out civil servants' pensions.

CDC still manages 52 pension funds for French public sector employees. In 2006, these funds paid 16.2 billion euros in benefits to about 3 million pensioners, a fifth of France's retirees. CDC is also the national custody bank for legal fees, with 30.4 billion euros on deposit at the end of 2006. Every weekday, lawyers' clerks from around Paris deliver fees to a special CDC counter in the atrium of the bank's head office.

``The government has been tempted to take control of the Caisse des Depots ever since the bank was established, simply because the French state is always short of money,'' says Alain Lambert, a senator from Sarkozy's UMP party.

Bailing Out Alstom

In the past decade, CDC has stood at the government's flank in some high-profile bailouts. Mayer in 2003 joined the government's rescue of Alstom SA, the Paris-based maker of power stations, high-speed trains and cruise ships. CDC contributed about 1.2 billion euros in financing to a 4.2 billion euro rescue package.

Sarkozy, who became France's finance minister in April 2004, persuaded Mario Monti, then EU competition commissioner, to approve the bailout in July 2004. ``I remember being criticized for rescuing the company, but today it's one of France's greatest industrial success stories,'' Sarkozy said at the news conference in January.

CDC had a direct interest in Alstom's survival. It owned 3.3 percent of the company in 2003; it now owns about 1.5 percent. Alstom's shares closed at 135.5 euros on Thursday, more than double their value when the rescue was announced.

`Good Investment'

``Alstom turned out to be a very good investment for the bank, and you can't really criticize them for making money,'' says Colette Neuville, founder and president of ADAM, the association for the defense of minority shareholders, a lobbying group based in Chartres, France. ``That's their mission.''

CDC can influence French companies even with a small stake, says Fabrice Remon, who manages the French office of Deminor International SCRL, a Brussels-based consulting firm for minority shareholders. ``In France, the quorum for a shareholders meeting is often very low, at about 25 or 30 percent,'' Remon says. ``Even if you only own 3 or 4 percent of a company, you are a really important player.''

To be sure, CDC hasn't always done the government's bidding. ``The relationship can be rather uncertain, depending on the chief executive's personality and his ability to resist the government,'' says Philippe Marini, a French senator who's a member of CDC's supervisory board.

Rejecting Adidas Deal

Former CEOs say that they were pressured by government ministers to make certain investments during their tenures at CDC --and refused.

Robert Lion, CDC's CEO from 1982 to '92, recalls that in 1990 Finance Minister Pierre Beregovoy asked him to invest in Adidas AG, the German sportswear company, which was then 80 percent owned by Bernard Tapie, the French investor. Lion says he refused because he thought Adidas in poor shape.

Beregovoy summoned Lion to his office. ``Beregovoy had already told Tapie I would invest, and he didn't dare tell him I would not,'' Lion says. ``So I did. It was fun.''

Beregovoy was prime minister from 1992 to '93, when Tapie was briefly his urban affairs minister. Beregovoy committed suicide in 1993 after France's ruling Socialist Party lost a parliamentary election. Tapie didn't respond to calls to his lawyer's office seeking comment.

Daniel Lebegue, CDC's chief executive officer from 1998 to 2002, says he refused the government's request in January 2002 that he help rescue Paris-based Air Lib, France's second-largest airline, which was close to bankruptcy. ``I said no, because I didn't consider that it conformed with my mandate, which was to protect the assets of the Caisse des Depots,'' he says.

The government made a $27.3 million loan to privately held Air Lib, which continued to lose money and was liquidated in February 2003.

Natixis Formed

In July 2004, Sarkozy -- then finance minister -- supported Mayer's attempt to form a jointly owned investment bank with Groupe Caisse d'Epargne. Mayer agreed to transfer CDC's investment banking units to Caisse d'Epargne, in return for a 35 percent stake in the bank, with a market value at the time of 3.4 billion euros. Two years later, Caisse d'Epargne instead opted to create a new investment bank, Natixis SA, with Groupe Banque Populaire.

Mayer protested to the Finance Ministry, then led by Thierry Breton, in vain.

Both Lion and Lebegue are critical of the incident, which Lebegue calls a brutal defeat. ``When you're a loser, you shouldn't scream out you're a superloser,'' Lion says.

De Romanet responds that the episode is finished. Groupe Caisse d'Epargne bought back CDC's 35 percent stake in a deal completed last year for 7 billion euros.

Natixis is now France's fourth-largest bank by market value after selling 26 percent of its shares on the Paris Bourse in December 2006. Natixis shares closed at 11.66 euros on Jan. 24, down 40 percent since the sale.

Went to ENA

De Romanet is well qualified to juggle the pressures involved in managing CDC, says Lambert, a former deputy budget minister who employed de Romanet as his chief of staff from 2002 to '04. ``He's familiar with how the French state works, but also understands what it takes to be a private-sector banker,'' Lambert says.

A graduate of the Ecole Nationale d'Administration, France's elite training college for civil servants, de Romanet worked from 1986 to '99 in the Finance Ministry and at the EU in Brussels. He joined Oddo & Cie., a Paris-based investment bank, as a partner in 1999. He returned to the civil service in 2002, and in 2005 became Chirac's deputy chief of staff.

In October 2006, near the end of Chirac's presidency, de Romanet joined Paris-based Groupe Credit Agricole SA, France's No. 2 bank by assets, as deputy director of finance and strategy.

Two months later, Mayer, 56, died of cancer. Finance Minister Breton called de Romanet on Chirac's behalf to offer him Mayer's job.

EADS Scandal

One of the first things that de Romanet had to navigate was an insider trading scandal that involved CDC even though the bank hasn't been accused of any wrongdoing.

In April 2006, Mayer bought 2.25 percent of EADS for 600 million euros from Lagardere SCA, the Paris-based industrial and media company. CDC already owned 0.58 percent of the company. Two months later, EADS's Airbus unit disclosed production delays on its A380 superjumbo plane, sending EADS shares down 26 percent in a single day. As of Jan. 24, CDC had lost about 295 million euros on the stock it bought from Lagardere.

Arnaud Lagardere, the company's CEO, said on Dec. 9 that he wasn't aware of production delays at Airbus when his company sold CDC the stock.

Investigation

Investigating Magistrate Xaviere Simeoni is looking into allegations of criminal insider trading by EADS shareholders who haven't been identified. She's expected to report her results in the first half of 2008.

Lebegue and Lion say Mayer must have had prior government approval to make such a big investment in a defense company. ``They should have known when they bought the stake that the company was in poor condition,'' Lion says. ``I do not believe that the Caisse made this investment without some kind of coordination with the state,'' Lebegue says.

De Romanet disagrees. ``Nobody in April 2006 could have imagined that EADS's share price would tumble 30 percent because of a wiring problem,'' he says. Mayer made a mistake by not telling CDC's board he'd bought the shares until after they had plunged, he says.

Breton testified to a parliamentary commission in October that the government didn't know in advance about CDC's purchase of EADS shares.

De Romanet says his next task is to figure out which areas the bank should focus on in the future. In January, he began reviewing CDC's activities to see what could be trimmed. ``We can't be everywhere,'' he says. ``We must focus our resources.'' Whatever de Romanet decides, Sarkozy's government may have other ideas.