How It Went Sour

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But if the fraud at Parmalat was so blatant, the question now is how did it go undetected for so long? After all, some of the world's largest banks and respected auditors were up to their milk mustaches in Parmalat business. Were they victims of Parmalat's deceptions? Or, as the company's bankruptcy administrator, Enrico Bondi, alleges, were they more like well-paid enablers, looking the other way while helping Parmalat hobble toward ruin?

They certainly helped the company take its warped finances global. Bank of America alone arranged $1.7 billion in financing through bonds and private placements for U.S. investors. Citibank packaged and resold the firm's receivables, even installing its own software at Parmalat headquarters to help track them. The Italian affiliates of international accounting firms Grant Thornton and Deloitte Touche Tohmatsu signed off on Parmalat's increasingly surreal accounts. Deutsche Bank helped it work with Standard & Poor's, which kept its "investment grade" rating on the firm until 10 days before the collapse.

At the very least, it seems clear that the international institutions working with Parmalat missed some key clues that all was not well. The question of why is at the center of a legal — and increasingly political — storm. The Milan magistrate last month added Deloitte Touche and Grant Thornton to his investigation, as well as a slew of banks, including Bank of America, Citigroup, Switzerland's UBS, and Deutsche Bank. Bankruptcy administrator Bondi has filed civil suits in Italy and the U.S. against many of the same firms, alleging that they knew about Parmalat's shaky financial situation and contributed to its collapse by helping to camouflage it. Using the same argument, Bondi has rejected many of the foreign banks' creditor claims in his proposed bankruptcy settlement. A judge in Parma overseeing the case is expected to rule shortly.

The international auditors and banks that were working for Parmalat vehemently reject the allegations, saying they were tricked by Parmalat's management. (U.S. ambassador to Rome Mel Sembler has been lobbying on behalf of the U.S. banks, alleging that they are being discriminated against in the bankruptcy proceedings and warning of damage to bilateral relations.) Bank of America notes that it has been a victim in the case, already writing off $425 million. Citibank puts its total Parmalat exposure at $540 million. Where did the rest of the lost billions go? According to Bondi, $8.5 billion went to pay interest, dividends and fees — with $3.6 billion of that going to the banks. Magistrates allege that about $1.7 billion was siphoned out of the company by Tanzi and his family, and much of the rest was used to cover operating losses that management was desperate to hide.

To understand how the foreign financial institutions got so deeply involved with Parmalat, it's important to appreciate the hype surrounding the company a decade ago. During the 1990s, it was one of the hottest firms in Italy. Tanzi, 66, was a legendary figure, revered for building a world-class company from scratch through hard work and innovation. Soon after founding Parmalat as a dairy company in 1961, he embraced a new pasteurization technology that allowed milk to stay fresh for months without refrigeration. He discovered the power of sports marketing and plastered the Parmalat name on events ranging from World Cup skiing to Formula One racing.