Mediobanca, Enrico Cuccia and a virtuous investment banking culture

First of all I should like to thank Professor Giovanni Farese and all those who worked with him to produce the book Mediobanca and Italy’s International Economic Relations, which has been published by the Mediobanca “Vincenzo Maranghi” Historical Archive. The book represents a very considerable contribution to the debate, not only because of the breadth of the source material consulted in its preparation, but also, and in particular, because of the way it so accurately describes the professional and cultural milieu which came about as a result of the path taken by Mediobanca from its inception. It would, I think, be fair to say that it is above all the story of some very remarkable people.
In this brief talk I would like to offer you a reading of Professor Farese’s book through the eyes of someone who, like me, has worked in the banking industry for many years and has had the great fortune to do so for Mediobanca. My aim here is to offer a rereading of that period in the Bank’s history, in the light of how the profession has changed over the years, and what it is like now. My intention is to illustrate how much of the same management approach and the intuitions that drove it at that time can still be a successful strategy even today.

A proper understanding of Mediobanca’s development, the first bank in Italy to pursue the mission of an investment bank with a clear international dimension, has to begin with the formative experiences of Enrico Cuccia in the early years of his career. These include the short stint in Paris in the 1930s working for Sudameris, a company owned by Banca Commerciale Italiana and Paribas, plus a longer period working for the Bank of Italy in London. It was here that Cuccia started to become more familiar with the most sophisticated financial markets, and to understand the weight and role of the investment banks even at a time when, because of the Great Depression, their contribution to growth was necessarily more limited.

A second period of four years working for the Institute for Industrial Reconstruction IRI under the leadership of Alberto Beneduce (as chairman) and Donato Menichella (as General Manager), was even more significant. This is because IRI – set up in 1933, following the Great Depression in 1929 – took control of the majority of Italian banks after the failure of the “mixed” banking system, as a result of which it also came to own a majority of the nation’s industrial companies. But the importance of this period in Cuccia’s formation is to be found more and indeed primarily in the management approach which IRI pursued at the time: professionalism and competence, combined with total independence from public sector’s influence, regardless of who actually owned the capital (public or private).
There was a strong conviction within IRI at the time – whose chairman, Beneduce, was the only non-central bank member to sit on the Board of the Bank of International Settlements (BIS) set up in Basel in 1930 – that Italy needed to look further afield and open itself up to international markets, such as the United States in particular, which was seen as the new dominant world economy.

At IRI Cuccia met Raffaele Mattioli, the Managing Director of Banca Commerciale Italiana (“Comit”), who recruited him to work for the bank in 1938, in Foreign Affairs, where he was to remain for eight years. In this position he bolstered his knowledge of international banks and their bankers, having a chance to analyse the way they worked and to initiate professional relations with some of them. All this laid the foundation for Cuccia to become a banker with an international outlook, whose understanding of the profession was aligned with that of the finest European and US interlocutors of the period.

On this foundation, and with the strong encouragement of Mattioli, the idea that would subsequently become Mediobanca began to take shape in the early 1940s. Owned by Comit, Credito Italiano and Banco di Roma (which in turn were controlled by IRI), the Bank was incorporated on 10 April 1946, seventy-five years ago. The thing that strikes one now about that idea of a bank is how modern and how relevant in many ways it still is. Mattioli and Cuccia were thinking about something quite unlike anything that existed in Italy at the time. As is well known, after the failure of the “mixed” banks, the ordinary retail banks were unable to raise funding or lend money in the medium and long term, or take stakes in industrial companies. Nonetheless, there was clearly a need to kick-start the reconstruction effort following the war, to emerge from isolation, and promote the development of the Italian industrial system by linking it to international markets. Investment banking, in the sense of advisory and capital markets business, was far from widespread in Italy, a country which did not have the tradition of the European investment banks in the second half of the nineteenth century. Having been destroyed by the war, Italy was a country that desperately needed a bank with a different vocation and a different banking licence.

Mattioli’s and Cuccia’s preparation, credibility and vision were fundamental in this respect. The idea from the start was an institution that could function as a modern corporate and investment bank, that is, a bank specializing in the corporate segment, which understood the various industrial sectors’ drivers and so was able to finance their growth by means of medium- and long-term loans; that could help the companies tap financial markets to raise capital, and give them advice to promote mergers and acquisitions. Allied to this was the notion of Mediobanca taking and holding investments in the equity of these companies. It was clear from the start that Mediobanca was without parallel on the domestic market, and that if comparisons were to be made, it was with some of the European and US investment banks (the French banques d’affaires and the British merchant banks in particular, in the case of the former), which themselves, far from coincidentally, would at various points come to hold stakes in Mediobanca as well.

The other point worth emphasizing in this respect is the continual search, right from the start, for international partnerships. Mattioli and Cuccia were well aware that Italy could not do without international markets to finance and develop its own economy. However, in those days it was impossible for banks to establish branch offices outside Italy, especially banks that had only recently been set up. This is why, from the time when its memorandum of incorporation was drawn up, Mediobanca actively sought out co-operations with prestigious international institutions, Swiss, French and American in particular. This was primarily for two reasons: firstly, partner banks were needed in those markets, to be able to help Italian clients raise capital and take new business opportunities. The second reason involved Mediobanca’s ownership structure: the Bank needed prestigious private international shareholders in order to balance the risk of interference from IRI, which by the 1950s had lost much of the management approach that had typified the Beneduce years. As is well known, the search was to go on for almost ten years; but these were far from wasted, because they gave Enrico Cuccia an opportunity to build up an extensive network of relations and to familiarize himself with some of the leading operators that could serve as a model.

The much-sought after international partnership finally arrived in 1955, when Lazard New York and Lehman each took a five percent stake in the share capital of Mediobanca. This agreement was memorable, not least because it provided for a right of first refusal in the partners’ respective markets, and represented the first attempt by an Italian bank since the end of World War II to engage in co-operation at an international level. It also made provision for co-operation agreements with Development and Resources Corporation (Desources) and Sofina. This allows us to make another observation which again is still extremely relevant: in order to maintain its best clients, Mediobanca had to extend its network of international connections the whole time, and also expand the scope of its activities, including through relations with companies like Desources that were able to contribute additional professional expertise.

These international investors would subsequently be joined by other Italian shareholders (in 1956 the insurance companies, Edison, IFI, Pirelli all took stakes in Mediobanca), followed by still more international investors in 1958 (Frankfurt-based Berliner Handels-Gesellschaft, Lazard London, and Sofina itself). The right of first refusal agreement included Lazard Paris. In this way a transatlantic and European network of relations began to be mapped out, just one year after the Treaty of Rome was signed (1957) which gave rise to the European Economic Community.

A further important point is that Mediobanca, prompted in part by the NYSE, was the first Italian bank to be listed since the end of World War II. Such rapid growth reminds us that “quality attracts quality”, as the saying goes. The concept of Mediobanca as a group of prestigious shareholders and directors facilitated the Bank’s development, and attracted other potential shareholders of a similar standing; which in turn increased business itself as a result of the reputation thus acquired.

Cuccia, who was in business relations with Siegmund Warburg, one of the most important investment bankers of the twentieth century, shared the latter’s belief that an investment bank needs five characteristics in order to be successful: moral standing, reputation for efficiency and high-quality brain work, connections, capital funds, and personnel and organization.

The latter consideration brings to mind another, equally important observation. An investment bank can enjoy remarkable success for certain periods, then decline, to the point of crisis and even disappearance. There are many such cases, starting with Warburg itself, which grew quickly after Siegmund left the bank, before finding itself in a position, at a critical phase of the market, where eventually it had to be bought by SBC; or Bear Stearns, or even Lehman Brothers, which were swallowed up because they were no longer solvent. Clearly an important role was played in these crises by the expectations of individual bankers which led them to take excessive risks. We can also think of many other banks that have pursued aggressive lending policies, often as a result of political pressure. It is far harder to recall investment banks which have grown carefully and sustainably over the long term.

Several passages from Professor Farese’s book come to mind in this connection: passages which have to do with Enrico Cuccia’s characteristics as a professional, and his idea of what a bank ought to look like; a concept we often find in letters about him or in his own correspondence.

For example, the words of David Lilienthal. Lilienthal, who in the 1930s had been one of the leading exponents of Roosevelt’s New Deal, and who in the1950s worked as a consultant for Lazard, wrote that Cuccia was a banker who “has a curiosity and appetite for ideas in a far broader spectrum than how much collateral is there back of this loan”.

Or the conviction he shared with André Meyer, the head of Lazard New York who was friends with Cuccia and held him in the highest esteem, that “you don’t learn anything in plants”: which is to say that, while a banker obviously needs a solid base in terms of technical skills, primarily an ability to read corporate financial statements, they also require a much broader culture, to be able to relate the bank’s interest to the more general interest of the country in which it operates, in which the financial institution’s individual profit should never be pursued to the detriment of the collective advantage. A private banker should act as a civil servant who makes rigour a key part of their vocation.

Here are some examples of what I mean. In the late 1970s, writing to Lilienthal again – who in the mid-1950s had been invited by Mediobanca to visit Southern Italy – Cuccia stated that more than twenty years after that journey, Southern Italy still had the same problems, “kept alive and in many cases magnified to huge proportions by the country’s general inability to impose the self-discipline that is a prerequisite to solving them”. Or again, when he responds to a request from Giuseppe Cenzato, Chairman of SME, that Mediobanca would be delighted to grant loans in order to finance public works in Southern Italy, provided the projects were serious and addressed actual needs in the interests of production. It is quite plain how these considerations can easily be extended to the so many bizarre projects that still emerge now and again in Italy (and not just).

Thus it is, then, that the features which characterized Mediobanca in that period remain valid even today after so many years. Because even though it is true that much of the banking profession has changed as a result of the globalization of the economy and markets, and even though, for example, an investment bank no longer grows by taking minority interests in competitors or industrial companies, it remains the case that if its corporate culture is based on the same principles of competence and rigour in assessing transactions, if it continues to fuel its growth with people and investments of the highest calibre, and if it is able to combine the perfectly justifiable needs of the individual to make a profit with the concrete contribution that a bank has to make to the economy in balanced fashion, it will have solid prospects for survival”.

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