by Tyler Durden
January 26, 2013

from ZeroHedge Website

 

 

 

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,

  • on Mario Monti

  • on Silvio Berlusconi

  • on frontrunner for the Prime Minister post Pier Luigi Bersani,

...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 losses.

 

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 left off:

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 authorities."

 

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 supervision.

 

"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 as governor.

 

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 bank.

 

...

 

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.

 

From Reuters:

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 Bank said.

 

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 the rescue.

 

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 economic environment.

"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 its website.

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 (hint: equity 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.

 

As Bloomberg reports:

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 brother Paolo.

 

“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.

 

How 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 started:

[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 Bank.

 

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 yesterday.

 

“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 fault."