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To Get Back on Its Feet, Italian Bank Gives Up Five Centuries of Control

July 17, 2013 by Leave a Comment

SIENA, Italy — The long, tortured saga of Monte dei Paschi di Siena, the scandal-plagued Italian lender that is the world’s oldest bank, may be coming to an end, but Italy’s broader banking troubles are far from over.

Shareholders of Monte dei Paschi di Siena are expected to agree on Thursday — under duress — to lift ownership restrictions on the bank, ending five centuries of cozy local control and political patronage. That might attract new capital, some from overseas, to help Italy’s third-largest bank work its way through financial problems. Earlier this year the bank received a 4.1 billion euro ($5.4 billion) bailout.

But the same insular ownership structure that shielded Monte dei Paschi, even while it fell ever deeper into debt, still persists at dozens of other lenders in Italy. Economists say this tradition may be prolonging the recession that has made Italy a threat to euro zone stability, by insulating the financial institutions from the rigorous restructuring they need if they are to resume the main role of banks: lending to businesses.

At a special shareholder meeting on Thursday, Monte dei Paschi, under new management since last year, is expected to abolish a rule that has limited the voting rights of outside investors.

Eventually, that and other changes could wrench control away from the bank’s largest shareholder, the Monte dei Paschi Foundation, which has long dominated the bank and used its profits to act as Siena’s shadow government, helping to finance everything from ambulance service to the local professional soccer team. Profits from the bank even helped finance the Palio, the bareback horse race in the town square that is the city’s trademark event and main tourist draw.

As long as Monte dei Paschi was profitable, the system served almost everyone. Politicians used it to dispense patronage and jobs and sometimes landed lucrative management posts themselves. The foundation used bank profits to help finance hospitals, church restorations, low-cost housing and local museums.

“Monte dei Paschi is extreme,” said Lucrezia Reichlin, a professor of economics at the London Business School who is on the board of directors of UniCredit, Italy’s largest bank. “In Siena there is no one who did not benefit from this crazy bubble.”

Monte dei Paschi is just one example of the pervasive influence that Italy’s powerful foundations, or fondazioni, exert over the banking system as dominant shareholders in publicly traded companies like the country’s two biggest banks, UniCredit and Intesa Sanpaolo. The foundations’ influence may have made it more difficult for Italian banks to raise new capital, analysts said. Not many investors, particularly wealthy foreign ones, are willing to buy shares in a company in which they have no influence.

“All the banks need capital,” said Stefano Micossi, an economist who is director general of Assonime, an association of publicly traded Italian companies in Rome. “This structure makes it difficult to raise capital.”

One reason Italy has been stuck in recession since the end of 2011 is that small Italian businesses have not been able to get credit they need to invest in modernization and expansion and to create new jobs. The credit squeeze has grown worse this year. Lending has fallen more than 5 percent during the first quarter of 2013 compared with a year earlier, according to the country’s central bank, the Bank of Italy.

The problems at Monte dei Paschi have led to a wider debate about fondazioni influence in the Italian banking system. In a speech to a bankers’ group last week, Ignazio Visco, the governor of the Bank of Italy, said that the foundations had in some cases become too involved in bank decision-making. He called on them to let in new investors.

Approval of governance changes at Monte dei Paschi is virtually certain after the foundation said on Monday it would vote in favor of lifting a rule that prevented any one investor except the foundation itself from exercising votes worth more than 4 percent of the total.

The foundation’s stake in Monte dei Paschi has already sunk to 33.5 percent, from more than 50 percent two years ago, and it is likely to sell more shares to cover its own debts, pushing its stake as low as 10 percent.

The changes in Monte dei Paschi governance are designed to make shares in the bank more attractive to investors, and pave the way for the bank to sell 1 billion euros in new shares by the end of 2014. The bank is also responding to pressure from the Bank of Italy and the European Commission, whose approval is needed for the bank to receive state aid.

The shareholder meeting on Thursday will also make other changes, like term limits for directors, that are likely to weaken the foundation’s influence on the bank’s board.

Even if the changes are a done deal, Thursday’s shareholder meeting is likely to be loud. Past meetings have drawn hundreds of angry citizens, political leaders and former bank employees whose severance pay has been partly converted into devalued bank shares.

“We are breaking a century-old bond here,” said Eugenio Neri, a heart surgeon and leader of a civic movement that placed a close second in Siena’s mayoral elections a month ago. “The function of the bank and of the foundation is crucial for this region. We need to restore the bank ourselves and kick politics out of it. That is what we need.”

Gaia Pianigiani reported from Siena, Italy, and Jack Ewing from Frankfurt.

Article source: http://www.nytimes.com/2013/07/18/business/global/to-get-back-on-its-feet-italian-bank-gives-up-five-centuries-of-control.html?partner=rss&emc=rss

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Official From Monte dei Paschi di Siena Bank is Found Dead

March 7, 2013 by Leave a Comment

The head of communications for the troubled Italian bank Monte dei Paschi di Siena died late Wednesday in what the police are investigating as an apparent suicide.

His death adds an element of tragedy to a scandal that has already had a devastating effect on the community of Siena, reverberated throughout European banking and played a role in Italy’s recent political shake-up.

David Rossi, 51, was found dead on a street Wednesday evening under his office window at the bank’s headquarters in Siena, a local police official said Thursday. An employee of the bank found Mr. Rossi’s office window open and called an ambulance, but Mr. Rossi was already dead when emergency service workers arrived.

Police found several notes crushed in Mr. Rossi’s trash basket that magistrates seized to analyze, but they said there was not yet an explanation for his death.

The bank’s chairman, Alessandro Profumo, and its director general, Fabrizio Viola, issued a joint statement Thursday praising Mr. Rossi’s “human qualities, his sensitivity, professionalism and his bond to the bank.”

“For all these reasons, we confirmed and renewed our trust in him as head of communications, a role he has fulfilled with utmost competence and dedication, even in this particularly delicate phase,” the statement said.

“This event, albeit tragic, renews and strengthens the intensity of our determination to move on in the journey that we undertook.”

Mr. Rossi, who was married and had a stepdaughter from his wife’s first marriage, had been under severe stress because of official investigations into the circumstances that forced the bank, the world’s oldest, to accept a €4.1 billion or $5.3 billion bailout from the Italian government.

Executives at the bank were once among Siena’s most respected citizens, but have suffered from shame and even scorn since the bank’s problems came to light last year.

Mr. Rossi had been spokesman for Giuseppe Mussari, the former chief executive of Monte dei Paschi who is blamed for the bank’s problems and is a target of the investigation. Although Mr. Rossi was not accused of wrongdoing, police had searched his office and home last month.

Under Mr. Mussari, Monte dei Paschi in 2008 acquired another Italian bank, Antonveneta, for €9 billion, a price that was considered wildly inflated and left the bank financially weakened. Later, Monte dei Paschi sought to conceal growing losses by way of complex transactions with Deutsche Bank and Nomura that were not disclosed to regulators.

Last week Monte dei Paschi sued Nomura and Deutsche Bank for damages in connection with transactions. The Italian bank said it was also suing Mr. Mussari and Antonio Vigni, the bank’s former chief executive, because of their role in the deals.

The bank is seeking compensation for “damages sustained and to be sustained by the bank as a result of the challenged transactions,” Monte dei Paschi said in a statement last week.

The scandal has been exploited as an issue by the right and left in Italian politics. At a meeting of the bank’s shareholders in January, Beppe Grillo, a comedian turned populist political leader whose strong showing in recent elections has scrambled prospects for forming a new government, delivered a tirade about the bank’s longtime connections to the Democratic Party, which for decades was the dominant political force in the city.

Before the bank’s problems came to light last year, profits from Monte dei Paschi financed an enormous array of city projects, including ambulance services and child day care. The sudden end to the largesse, distributed by a foundation that is the bank’s largest shareholder, has already led to cuts in services, and more are likely as civic organizations use up money they had received in the past.

Mr. Rossi’s death is at the very least a psychological blow to the bank as it seeks to recover under its new chairman, Alessandro Profumo. Mr. Profumo, former chief executive of UniCredito, Italy’s largest bank, has negotiated job cuts with bank staff and has not ruled out selling the bank, something many Sienese consider unthinkable.

It is unlikely that the bank, founded in 1472, will ever be able to provide as much financial support or jobs to the city of Siena as it once did.

Article source: http://www.nytimes.com/2013/03/08/business/global/official-from-monte-dei-paschi-di-siena-bank-is-found-dead.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Italian Lender Sues Deutsche Bank and Nomura

March 1, 2013 by Leave a Comment

The Italian bank filed two separate lawsuits at the civil court in Florence a day after receiving €4.1 billion, or $5.3 billion, in government funds as part of a bailout. Monte dei Paschi said it was also suing Antonio Vigni, the bank’s former chief executive, and Giuseppe Mussari, its former chairman, because of their involvement in the deals.

The bank is seeking compensation for “damages sustained and to be sustained by the bank as a result of the challenged transactions,” Monte dei Paschi said in a statement on its Web site.

Rob Davies, a spokesman for Nomura in London, and Kathryn Hanes, a spokeswoman for Deutsche Bank, declined to comment on the lawsuits.

Monte dei Paschi revealed last month that it had lost €730 million on three transactions that were used to conceal the size of the bank’s difficulties. The bank said Friday that the lawsuits concerned two of the three transactions that were responsible for most of the losses.

Monte dei Paschi said one lawsuit related to Mr. Mussari, Nomura and a financial transaction in 2009 called Alexandria. The other lawsuit refers to Mr. Vigni, Deutsche Bank and a trade called Santorini, which took place in December 2008.

Lawyers for Mr. Mussari and Mr. Vigni could not be reached for comment.

The two transactions have been in the spotlight since January, when news spread that Fabrizio Viola, the bank’s new chief executive, had found an exchange of letters from Nomura to M.P.S. hidden in a safe. The bank consequently started a review of its financial portfolio in October, which led to a revision of its 2012 final results.

The Alexandria transaction caused a €273.5 million loss, Santorini resulted in a loss of €305.2 million, and the third transaction, called Nota Italia, lost €151.7 million, M.P.S. said.

Italian prosecutors have started an investigation into why this 541-year old bank ran into trouble. The local authorities have long asked for those responsible for the bank’s demise to be held accountable.

The bank’s problems began in 2008, when it acquired the regional lender Antonveneta for €9 billion, a sum regarded by analysts as far too large. Short of cash, Monte dei Paschi then tried to raise money without compromising its capital base and concealed certain features of the transaction, according to the Bank of Italy, the country’s central bank. The Siena magistrates are now looking into allegations of bribery related to the Antonveneta deal.

Alessandro Profumo, Monte dei Paschi’s chairman, and Mr. Viola, who took over as chief executive last year, are now working to repair the bank’s finances and reputation. They replaced executives, closed branches and announced the elimination of thousands of jobs.

The bank had to ask for a government bailout because its troubles had left it short of the minimum capital requirement set by regulators.

Gaia Pianigiani reported from Rome. Jack Ewing contributed reporting from Frankfurt.

Article source: http://www.nytimes.com/2013/03/02/business/global/italian-lender-sues-deutsche-bank-and-nomura.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Political Economy: Bank Deals Failed to Raise Alarms

February 10, 2013 by Leave a Comment

Should an investment bank worry about a client’s motives when it engages in a complex and potentially suspicious transaction?

Banca Monte dei Paschi di Siena of Italy has been just such a client. The Italian bank, which has just been rescued by the state, engaged in a series of complex deals with Deutsche Bank, JPMorgan Chase and Nomura that had the effect of giving a misleading picture of its finances.

One issue relates to how Monte dei Paschi di Siena, or M.P.S., paid for its acquisition of Antonveneta, another Italian bank, in 2008. JPMorgan helped finance part of the deal by selling €1 billion, or about $1.34 billion at current exchange rates, worth of so-called Fresh notes, a type of bond that could be converted into M.P.S. equity. But the Bank of Italy objected that they were not sufficiently loss-absorbing and insisted that M.P.S. not pay money to JPMorgan to forward onto the investors unless it made a profit.

The snag was that by the time the central bank objected the notes had already been sold and some of the investors were not happy with a change in the terms. M.P.S. then gave indemnities to JPMorgan and Bank of New York Mellon, which was an intermediary between JPMorgan and the Fresh investors.

It is not clear what these indemnities were. But the Siena prosecutors say that M.P.S. concealed the JPMorgan indemnity from the Bank of Italy and did not communicate the Bank of New York’s indemnity to the central bank either, according to a document reviewed by Reuters.

The question for JPMorgan and the Bank of New York is whether they knew that the Italian central bank had not been in the picture at the outset. If so, they should not have touched the deal. JPMorgan and the Bank of New York declined to comment.

Now look at the Deutsche Bank transaction. What happened here was that in 2002, M.P.S. had invested in yet another Italian bank, Sanpaolo Imi. The investment was stuck in a special-purpose vehicle called Santorini, which the German bank had helped establish. The value of this vehicle plummeted after Lehman Brothers went bust in 2008.

M.P.S. then engaged in two more transactions with Deutsche Bank, which mitigated its Santorini losses. Each deal involved M.P.S. pledging €2 billion worth of Italian bonds to Deutsche Bank in return for a same-sized loan. One of these transactions was with Santorini; the other with M.P.S. itself. But there was a curious quirk: The interest rate on the Santorini leg was less than the market rate, while that on the M.P.S. leg was more expensive.

M.P.S. rapidly unwound the first transaction, creating a gain that helped it counter the loss on the original Santorini deal. But it hung on to the second investment and did not report any immediate loss from it.

Last week, M.P.S.’s new management said that the value of the investment had been incorrectly listed on its balance sheet. It should have incurred a loss of €429 million.

Deutsche Bank’s defense for being involved in the transaction is that it asked for and received representations from M.P.S.’s senior management that its auditors and regulators had been informed of the transaction’s details. But the Bank of Italy said that when it examined the transaction in 2010, it was worried that the operation did not show fair value on M.P.S.’s balance sheet.

What is more, it would be revealing of the German bank’s culture at the time if it did not ask what possible motive M.P.S. could have had for doing these deals. Deutsche says its standards have evolved since 2008 and continue to do so in light of its own experience and the market’s. That, at least, suggests it is learning some lessons.

The same does not seem to be so for Nomura. In this case, M.P.S.’s original bet — nicknamed Alexandria — was on risky credit derivatives called “C.D.O. squareds,” a type of collateralized debt obligations, which, by 2009, were threatened with big losses. That is when M.P.S. embarked on two new deals. One involved the Japanese investment bank buying the C.D.O. squareds from M.P.S. at above their market price, with the result that the Italian bank avoided booking a loss.

The other involved M.P.S.’s pledging Italian government bonds with its Japanese counterpart in return for a loan. The oddity was that, although Nomura kept the fixed coupon on the bonds, it paid back to M.P.S. an unusually low floating interest rate. At the time, M.P.S. did not recognize any loss on this part of the transaction. But last week its new management said it should have booked a €309 million liability.

There was also a side-letter between Nomura and M.P.S. linking the two new deals. But this was not revealed to the Bank of Italy until October, after the new management found it. The central bank says that letter clarified the real purpose of the operation.

Nomura said the deal was approved by the Italian bank’s board and its auditors, KPMG — although M.P.S. said its board had not approved the deal, and KPMG said it had never received the Alexandria documentation.

It would be sad if Nomura did not investigate what possible purpose M.P.S. could have had for all this financial engineering. The Japanese bank said it had acted fairly and reasonably while a spokesman denied it had acted unethically.

This really will not do. An important lesson of the M.P.S. story is that, when banks are presented with a client who wants to do something that seems suspicious, they should check its motives deeply. And if they do not get a satisfactory answer, they should refuse to do business with it.

Hugo Dixon is editor at large of Reuters News.

Article source: http://www.nytimes.com/2013/02/11/business/global/11iht-dixon11.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Monte dei Paschi di Siena Admits $985 Million in Losses From Secret Deals

February 6, 2013 by Leave a Comment

FRANKFURT — Monte dei Paschi di Siena, an ancient Tuscan bank whose troubles have shaken Italian politics and caused jitters around the euro zone, on Wednesday confirmed earlier estimates of losses from a series of secret transactions that were used to conceal the scope of the bank’s problems.

The bank said its losses from three questionable transactions were 730 million euros (about $985 million), only slightly higher than an estimate in October of a loss of 720 million euros. The disclosure Wednesday, after a meeting of the bank’s board that lasted into the evening, could calm financial markets if investors conclude that all of the bank’s skeletons are out of the closet.

The disclosure came as Italian prosecutors said on Wednesday they had ordered the seizure of assets worth about 40 million euros in connection with possible fraud against Monte dei Paschi, Reuters reported. Prosecutors did not give details, but Italian news organizations reported that the money was seized from other banks that did business with Monte dei Paschi.

Problems at Monte dei Paschi, founded in 1472 and commonly known as M.P.S., have rippled far beyond the medieval Tuscan city of Siena, which is also the bank’s largest shareholder.

Former Prime Minister Silvio Berlusconi has seized on the scandal as an issue as he tries to make a political comeback.

The timing of the scandal has been inopportune for Mario Draghi, the president of the European Central Bank, raising questions about his supervision of Italian banks when he was governor of the Bank of Italy, the Italian central bank.

The Bank of Italy has insisted that it subjected M.P.S. to intense scrutiny. Last week the central bank issued a detailed account of the numerous steps it took since 2008 to force Monte dei Paschi to raise capital, install new management and deal with risks stemming from its holdings of Italian bonds, which were declining in value.

Some managers withheld critical information about the questionable trades that came to light only recently, the Bank of Italy said.

But at the least the case of Monte dei Paschi has illustrated the limits of bank supervision, and called into question whether the central bank would be able to do a better job than national supervisors at keeping an eye on banks.

Mr. Draghi is likely to face many questions about Monti dei Paschi when the central bank holds its regular monthly news conference on Thursday.

The problems at M.P.S., which led to a 3.9 billion euro ($5.3 billion) bailout by the Italian government, have also led to criminal investigations.

Prosecutors in Siena on Wednesday heard testimony from Antonio Vigni, former chief executive of Monte dei Paschi and one of several previous managers being investigated on a series of charges including false accounting and fraud. Giuseppe Mussari, the bank’s former president, will also be heard this week.

The bank’s troubles stem in part from the 9 billion euro ($12 billion) purchase of Antonveneta bank in 2008, just months after the Spanish bank Santander had bought it for 6.6 billion euros ($8.1 billion). The Siena magistrates are also looking into allegations of bribery related to that deal.

Investigations have branched out to other Italian cities, including Trani, in Sicily, where prosecutors are looking closely at derivatives operations carried out by Monte dei Paschi and other Italian banks as well as the role of the regulatory bodies entrusted with monitoring those banks.

Jack Ewing reported from Frankfurt and Elisabetta Povoledo from Rome.

Article source: http://www.nytimes.com/2013/02/07/business/global/monte-dei-paschi-di-siena-admits-985-million-in-losses-from-secret-deals.html?partner=rss&emc=rss

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