by Tyler Durden
January 26, 2013
While little has been said in the mainstream
western press about the ongoing fiasco surrounding
Siena's Banca Monte dei Paschi, Italy's
third largest bank and the world's oldest which may get its
third bailout in three years
- or even be nationalized - as soon as today, for fears that it may
break the thin veneer of "recovery" in the European financial system, the
situation on the ground in Italy is getting more serious by the minute, and
will have implications on both next month's general election,
...and reach as far up as the head of the ECB
- Mario Draghi.
Several hours ago, on Saturday morning, the
four-member board of the Bank of Italy - this time without its prior
president Mario Draghi - met to consider the position of scandal-hit bank
Monte dei Paschi di Siena and decide whether to authorize its request for
3.9 billion Euros ($5.3 billion) of state loans.
As we reported previously, it has emerged over
the past week that due to previously undisclosed derivative contracts first
exposed by Bloomberg, the Siena bank has hid as much as $1 billion in
However as was explained in "Will
The Super Goldman Mario Brothers Succeed In Covering Up The Latest Italian
Bailout Scandal", this discovery has far greater implications for both
the bank's future viability, as well as the implied credibility of both the
Bank of Italy, and especially the man who headed it for five years before
becoming head of the ECB (where he now demands the same supervisory
authority over all European banks that he had in Italy, only to supposedly
let countless derivative fiascos slip through his fingers).
As Zero Hedge
first connected the dots, it is not so much a question of why BMPS
engaged in a variety of derivative deals, of which only three have emerged
so far and likely has many more on the books, but how or rather why, the
then-Draghi led Bank of Italy allowed this to happen not once, not twice,
but at least three times.
What the ultimate purpose of these deals was
is still unclear and will likely become apparent eventually, however it
will likely require the former Chairman of the bank, Giuseppe Mussari,
who served as Chair from 2006 until April 2012, and who
officially quit his post as Italy's top banking lobbyist after today's
revelations, to testify.
One person whom he may testify against
is none other than current ECB head Mario Draghi, who
just happened to be the head of the Bank of Italy from 2006 to
2011, or the entire period when Monte Paschi was engaging
in what increasingly appears to have been fraudulent activity.
The next day, Retuers released "Draghi
under fire over Monte Paschi derivatives scandal" continuing where we
European Central Bank President Mario Draghi
is facing criticism over a scandal involving loss-making derivatives
trades made by troubled Italian lender Monte dei Paschi di Siena while
he was Italy's central bank governor.
Former Economy Minister Giulio Tremonti said
in a tweet that it was "stupefying" that in his role as supervisor of
Italy's banking system Draghi had failed to discover or prevent the
trades, which took place between 2006 and 2009.
An ECB spokeswoman declined to comment on
the matter, saying that it was "the responsibility of national
Current Economy Minister Vittorio Grilli
avoided mentioning Draghi directly but stressed that it was not the
government but the central bank that was responsible for bank
"It wasn't us that did the controlling," he
told reporters. "On the checks, all I will say is that it is the
responsibility of the Bank of Italy."
Draghi saw no evil, smelled no evil, and
certainly heard no evil:
On Wednesday the central bank tried to
deflect any criticism, saying the nature of the trades had been "kept
hidden" and were only recently divulged by new management appointed last
year to turn the bank around.
Draghi, who has won wide plaudits as ECB
president, left the Bank of Italy in late 2011 after a five-year stint
During this time he was also president of
the Financial Stability Board, an international body charged with
improving financial supervision and regulation.
The deals under scrutiny are the so-called
"Alexandria" trade with Japanese bank Nomura, the "Santorini" trade with
Deutsche Bank and a derivative called "Nota Italia", with an unspecified
One of the roots of
its problems - the 2007 acquisition of smaller rival Antonveneta for a
whopping 9 billion Euros in cash just months before the beginning of the
financial crisis - was also done under Draghi's watch.
"One has to wonder what the Bank of Italy
was doing given all the visits they've paid to Monte dei Paschi in
recent months," said a source close to the situation.
"If what they came here to look at was only
the information publicly available in the bank's financial statements,
they could have done that from Rome."
If only Mario Draghi could threaten to print
countless lira, as he has effectively done as head of the ECB, to contain,
for now, the European banking implosion, all would be well, however he
can't, and for now at least the problem is contained to Italy.
Of course, the Bank of Italy could punt, and
effectively push the problem to the ECB's plate, but the second that happens
the fragile alliance between surreality and outright idiocy that has gripped
European pundits and "analysts", who claim Europe is fixed, when in reality
nobody knows what the banks have on their balance
sheets, or how many more trillions in liquidity they collectively need
before their capitalization is fixed (that is a trick statement, of course,
because excess liquidity will never, ever help with capitalization
issues, as much as the ECB pretends otherwise) will crash and burn.
The problem for the ECB in coming to an indirect
cash bailout of BMPS would be its own historical record from as recently as
a month ago, when the second bailout of Monte Paschi was being finalized.
The terms of a state bailout scheme
for Banca Monte dei Paschi di Siena, Italy's third biggest lender, could
pose more challenges to the bank's performance, the European Central
The ECB, which will supervise euro zone's lenders from March
2014, also said on Thursday it was told by
the Italian government too late into the process about the details of
Monte dei Paschi was forced to request state
aid after failing to meet tougher capital requirements set by the
European Banking Authority.
the ECB said issuing more bonds to pay for
the coupon would add to the bank's debt burden in an already difficult
"This could pose further challenges to the
bank's performance in the near term and impair its capacity to redeem
(the bonds) in a timely manner," the ECB said in an opinion posted on
It said it would be preferable for the bank to issue new
shares to the treasury to help pay interest - an option that is possible
under the scheme but is not favored by the treasury or by the bank.
So the Italian head of the ECB was told by the
Italian government headed by Monti, both former workers of Goldman Sachs
about the terms of the second Monte Paschi bailout, "too late"?
And upon hearing of said bailout, it was the
ECB's determination that a more feasible bailout structure would be to issue
equity - equity from an entity that one short month later would need
another bailout and possibly nationalization
value = zero)?
One couldn't make this up!
But if it was only a question of implicating
Draghi, we are confident that the BMPS scandal would promptly go away after
the Frankfurt-based central bank slipped a few billion €s under the table to
the current head of the BOI - Ignazio Visco - delaying the eruption of the
problem for another year.
However, what is unique this time is that the
BMPS fallout has far broader political implications due to BMPS' historical
links to the centre-left, and the fact that Bersani's Democratic Party runs
the local government in Siena where Monte Paschi is based, and controls the
banking foundation that is the lender's biggest shareholder.
As a reminder Bersani is the frontrunner to
replace Mario Monti as Italian PM. Which means the immediate involvement of
the entire media empire apparatus of who else but...
Yup - Silvio, who is also running in next
month's election, is now on the case, and where Silvio goes, the public is
sure to follow.
Berlusconi and his allies have slammed Monti
over the bailout by linking the aid to an unpopular real estate levy on
first homes, known as the IMU, which raised from Italian taxpayers an
amount similar to the emergency loans designated for Monte Paschi.
“We paid the IMU to Monti so that he
could save the bank” of the Democratic Party, read yesterday’s
front-page headline in newspaper Il Giornale, owned by Berlusconi’s
“What has been said about interventions and comparisons
between the amount used for aid and the revenue from taxes is a complete
fantasy,” Monti said.
Monti said today in an Italian radio
interview that the election campaign shouldn’t affect the bailout timing
because it’s being carried out under European rules. Still, he
acknowledged that the Monte Paschi case “has a lot to do with the ugly
beast of mixing banks and politics.”
The irony of course, is that the first bailout
that Monte Paschi received was when Berlusconi was still PM:
Monte Paschi, the world’s oldest bank,
received a first bailout from Berlusconi’s government in 2009, and has
now added 500 million Euros to its aid request to cover potential losses
linked to the structured-finance deals, bringing the total cost of the
rescue to 3.9 billion Euros
However, to distract from his involvement,
Silvio will be more than happy to throw none other than Draghi under the bus
for having been the BOI's head at the time, and after all - it was Draghi's
decision to bail out BMPS, not the Prime Minister's.
Ah, the plot thickens:
“We want to know the truth, we’re tired of
being taken advantage of,” said shareholder Gianni Acciughi, 60, who
took early retirement from Monte Paschi in 2009.
is possible that nobody knew anything about this? If that’s the case,
then legal action has to be taken immediately against those responsible.”
Members of the Northern League party, a
partner in Berlusconi’s previous government, demonstrated at today’s
investor meeting. They distributed leaflets criticizing Mussari’s
management and his ties to the Democratic Party.
And for those who still believe this is a
non-issue, Beppe Grillo, the leader of the 5 Star Movement running in the
campaign, and a very popular grass roots candidate among voters disenchanted
by both parties,
"said the bank’s case will turn into a scandal
worse than the collapse of food company Parmalat SpA in 2003."
Needless to say the scramble by everyone to
cover their backsides ahead of what is sure to be an epic media, publicity
and political scandal has
[Bank of Italy head] Visco attended the
World Economic Forum in Davos on Friday where he gave a spate of
interviews to try to deflect accusations that the BOI had not
done its job properly.
"It is wrong to insinuate that there was a
lack of supervision by the Bank of Italy," he told CNBC television,
adding that his institution had nothing to hide and would cooperate with
prosecutors probing the Tuscan lender.
Visco told reporters on Friday that "there
is no question that the bank is stable."
Actually, there is:
Outgoing Prime Minister Mario Monti said
late on Friday he considered it a "remote hypothesis" that the bank
would end up needing to be nationalized.
So... there is "a question"?
It only gets better:
In Davos, Visco sidestepped questions about
whether Draghi knew about the derivatives trades, which were conducted
between 2006 and 2009 and involved Japanese bank Nomura and Deutsche
Internal auditors at Monte
Paschi already detected anomalies at the bank's finance department
responsible for derivative operations three years ago,
daily Il Sole 24 Ore reported on Saturday, quoting parts of the audit
dated November 26, 2009.
However, the outcome of the audit was
"partially favorable" for the Siena-based bank, contrasting with
"partially unfavorable" rating given by Bank of Italy inspectors led by
Vincenzo Cantarella at the end of an inspection from May-August 2010.
Press reports on Saturday suggest the
scandal around Monte Paschi is widening.
Yes it is. And it is "widening" at a time when
former Bundesbank head Weber said in Davos that everyone in Europe has
succeeded in sticking their
heads in the sand:
“Central banks can buy time, but
they cannot fix issues long-term,” former Bundesbank President
Axel Weber, now chairman of UBS AG, said in the Swiss ski resort
“There’s a perception that they are the only game in town.”
This coming from the former head of the one
European central bank which several days ago requested that all of its Paris
gold, and much of its New York-based gold, be repatriated.
And when the next leg of the financial crisis
flares up, which it will as nothing at all has been fixed, unless one
considers stuffing all outstanding issues under the rug "fixing", nobody
will have been able to foresee any of it. As always.
And it will be, naturally, "someone else's