Political Economy: Monte Dei Paschi’s Revelations Put Spotlight on Italian Politicians

The Monte dei Paschi di Siena saga is not just an Italian affair. Revelations that complex financial transactions used by the bank, the country’s third-largest, had the effect of hiding losses are causing a political storm in Italy.

With a general election only weeks away, Silvio Berlusconi, the former prime minister, looks as if he will be the main winner from the political spat. Mr. Berlusconi’s camp has attacked Pier Luigi Bersani’s Democratic Party, which is leading in the opinion polls, for being close to Monte dei Paschi, or M.P.S. It has also criticized Mario Monti, the current prime minister, who agreed to increase the M.P.S.’s bailout to €3.9 billion, or $5.25 billion.

The scandal won’t be enough to get Mr. Berlusconi back as prime minister. But it could prevent a Bersani-Monti coalition from running the country with a solid majority in both houses of Parliament. If so, fears about Italian political risk could return to haunt the markets.

The still-murky saga has also put the spotlight on Mario Draghi, the European Central Bank president, because he ran the Bank of Italy when M.P.S. was getting into such a mess. Giulio Tremonti, who was finance minister in Mr. Berlusconi’s last government, tweeted that it was “stupefying” that Mr. Draghi had failed to discover or prevent the complex transactions.

The Italian central bank’s defense is that, while some of its supervisors knew about the transactions, it did not know that they were linked to other money-losing operations because key documents were hidden from it. What’s more, even though it was worried about M.P.S.’s weak risk management, it didn’t have the power to fire bank directors, although Mr. Draghi had asked the last Berlusconi government for such authority. Its moral suasion did, though, eventually help lead to the removal of M.P.S.’s old management last year.

The Sienese bank’s troubles began in November 2007 when it bought Antonveneta, another Italian bank, from Santander of Spain for €9 billion. This was a crazy price. The subprime mortgage crisis had already burst into the open and the price tag was 60 percent more than Santander had itself paid only a few months earlier when it helped carve up ABN Amro, the Dutch banking group that had acquired Antonveneta in 2005. Italian prosecutors are now investigating why M.P.S. paid so much.

Some people think the Bank of Italy should have stopped M.P.S. from buying Antonveneta. The central bank’s defense is that it didn’t have the power to say a deal was overpriced. All it could do was insist that M.P.S. raise more capital, which it did.

Even so, the Antonveneta deal left M.P.S. with a weak balance sheet just as the financial crisis was about to go into overdrive. That’s when two other investments — which have triggered the current turmoil — went bad: one nicknamed Santorini and the other called Alexandria.

The original Santorini deal was done with Deutsche Bank in 2002 to warehouse M.P.S.’s shares in yet another Italian bank, San Paolo di Torino. That transaction allowed M.P.S. not to report losses on the stake provided its value didn’t fall below a certain level. However, in 2008, the value of the stake plummeted, meaning that M.P.S. was staring at a loss of about €360 million. That was unfortunate, given that the bank’s balance sheet was already stretched after the Antonveneta deal.

M.P.S. engaged in two more transactions with Deutsche Bank that had the effect of mitigating its Santorini loss. One was structured so that it was likely to generate a profit for M.P.S.; the other so it was likely to generate a profit for the German bank. M.P.S. rapidly unwound the first transaction, helping it counter the loss on the original Santorini deal. But it hung on to the second investment and didn’t report any immediate loss from that.

Deutsche Bank’s defense for being involved in the transaction is that it asked for and received assurances from M.P.S. senior management that its auditors and regulators had been informed of the transaction’s details.

The Alexandria transaction was somewhat similar. In this case, M.P.S.’s original bet was on risky credit derivatives called C.D.O. squareds that, by 2009, were threatening it with a loss of about €220 million.

That is when M.P.S. embarked on another series of side deals — this time with Nomura. One transaction involved Nomura, a Japanese investment bank, buying the C.D.O. squareds from M.P.S. at above their market price, helping the Italian bank to avoid booking a loss. The other was structured so Nomura would make a profit, but M.P.S. didn’t acknowledge the countervailing loss up front.

Nomura says the deal was approved by M.P.S.’s board and its chairman at the time, Giuseppe Mussari, and was also reviewed by M.P.S.’s auditors, KPMG. M.P.S. denies that its board approved the deal, and KPMG says it never received the Alexandria documentation. Mr. Mussari denies any wrongdoing.

These complex transactions only came to light when an exchange of letters from Nomura to M.P.S. was found in a hidden safe by the Italian bank’s new management last October. It immediately told the Bank of Italy and the judicial authorities. Snippets of what happened have started to seep out into the press in the last two weeks, forcing M.P.S. to acknowledge that it was sitting on megalosses and triggering the political storm.

But the full facts have not come out. Until they do, it will be impossible to know for sure whether the Bank of Italy, Deutsche Bank and Nomura could have been more vigorous in pursuing hints that things weren’t quite right or if they were truly hoodwinked by M.P.S.

Hugo Dixon is editor at large of Reuters News.

Article source: http://www.nytimes.com/2013/01/28/business/global/28iht-dixon28.html?partner=rss&emc=rss