Death of a bank

January 11 was the night of Bank Austria's annual ball in the Rathaus, Vienna. The bank's chairman, Gerhard Randa, was in good form and showing as much excitement as this reputedly cold, calculating man can.

He knew that only 400 metres away in a smoke-filled room at the federal chancellery, Austria's coalition politicians were hammering out a deal. If it went his way it would make him undisputed number one banker in Austria.

In the 19th district of Vienna another bank chairman, Guido Schmidt-Chiari, waited nervously at home. After his six-year often single-handed battle to keep the 140-year-old Creditanstalt-Bankverein independent, those politicians were about to decide its fate. Would it survive as a partner in a complex consortium of financial and industrial companies, or would it be bought and ultimately swallowed by Randa's Bank Austria? He expected a summons for last-minute discussions or at least to be told how they had decided.

The meeting had started at 3pm. Chancellor Franz Vranitzky and his finance minister, Viktor Klima, both of the socialist party (SPÖ), and Vienna finance chief Robert Edlinger, were head-to-head with their coalition partners, deputy chancellor Walter Schüssel, economics minister Johann Farnleitner and conservative People's Party (ÖVP) chief whip Andreas Khol. Creditanstalt, traditionally a conservative bank, seemed destined to pass into the hands of Bank Austria, popularly regarded as a stronghold of the socialist left. Bank Austria had put in the highest bid, outclassing an offer by a consortium led by top savings bank First Austrian and insurance company Erste Allgemeine- (EA-) Generali. On price alone it was logical to accept Bank Austria's bid, but it would be a merger fraught with political difficulty and hostility since it would upset the balance of power between right and left in Vienna. Nevertheless both sides knew they couldn't leave the room without a deal. The so-called privatization of Creditanstalt, initiated in 1991, had dragged on long enough ­ possibly the longest privatization saga in history.

Scribbled agreement

Shortly before 2am they had something. Elisabeth Hagen, a finance ministry official, and Walter Schuster, head of JP Morgan's advisory team, were summoned into the meeting. So were Bank Austria's two negotiators, board members Fritz Kadrnoska and Franz Zwickl. Before them was a hastily scribbled agreement.

It appeared to award Creditanstalt to Bank Austria, but under terms so hedged about with hands-off clauses and no-lay-off stipulations that Bank Austria would be unable to get its hands on the prize for five years, let alone merge the two into a fighting unit.

Could Bank Austria possibly agree to such terms? Randa was called from the Bank Austria ball. As he read the agreement he could see that it was long on political expediency, to save the face of the ÖVP, but short on legal constraints. Once Creditanstalt was his there was plenty of scope to interpret the terms any way he liked. The politicians signed, and Randa, standing out in his smart tuxedo, added his signature at the bottom.

In his modest Jugendstil house Schmidt-Chiari waited for the call that never came. His alleged allies, the ÖVP politicians, were perhaps too ashamed to invite him to a meeting which had concluded in a death sentence for his bank. Only six days before, at the ÖVP's traditional Twelfth Night rally in Salzburg, oaths had been sworn not to let Creditanstalt die. "One day we'll know what happened to the ÖVP on the 9th and 10th of January," says a Creditanstalt board member, "because on the 6th they were in a fighting mood."

One possibility is that the ÖVP were scared of breaking Austria's fragile coalition and precipitating new elections. The Creditanstalt deal was so important that the senior coalition partners had staked everything. Its conclusion allowed a long-planned change in the Austrian leadership: chancellor Vranitzky stepped down, making way for a triumphant Klima with Creditanstalt under his belt.

The deal gives impetus to a much-needed consolidation of the Austrian banking sector. Randa has been waiting for the competition commission in Brussels to give the go-ahead, possibly as soon as March 10, before outlining how the combination will work. It may be five years before the integration is anywhere near complete ­ Bank Austria itself is the product of a merger of two big banks in 1991, and they are still running separate customer account systems.

But however long the integration takes, it spells the death of a once great institution. In its heyday, before World War 1, the Credit-Anstalt für Handel und Gewerbe was the financial hub of a resplendent Habsburg empire with dealings all over the world. But as war, republicanism, hyperinflation and industrial decline hit Austria, the bank's fortunes declined too and its sphere of influence shrank. It suffered a near-fatal blow in 1931 when its insolvency triggered a five-year Austrian banking crisis with global repercussions. As Dieter Stiefel wrote in his history of the episode: "Out of the rubble of a large international bank based in Vienna, directed at purely private commercial business, arose a partly nationalized bank which was an integral component of the Austrian banking system." [Die Krise der Credit-Anstalt für Handel und Gewerbe 1931, by Dieter Stiefel, Frankfurt 1989]

Although it fought hard, particularly in the last six years under Schmidt-Chiari, Creditanstalt was never able to escape the clutches of state ownership. Ironically even now it has passed into the ownership of another state-controlled bank, although the government's intention is to reduce the state's share below 25%. Critics complain that the Bank Austria option was not a privatization at all and that politics continue to dominate the banking sector.

That game of politics began after the 1934 civil war, as an extension of warfare by other, slightly more civilized means. The socialists and the conservatives over the years have carved up the country's economic units into areas of influence. Socialists dominate the savings bank sector, conservatives the cooperative and rural Raiffeisenkassen. Creditanstalt, though 70% state-owned, is traditionally the bank of conservative big business. Bank Austria is owned 45% by Anteilsverwaltung Zentralsparkasse (AVZ), 18.9% by the Republic of Austria and 6.3% by Wiener Städtische insurance, and so is reputedly under the influence of the City of Vienna whose socialist officials dominate the AVZ's governing council, the Sparkassenrat.