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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