"And the hits just keep on coming."
It was about a week ago when Bloomberg reported that the world's oldest bank, Sienna's Banca Monte dei Paschi (BMPS) had masked a massive (for its size) loss courtesy of a Deutsche Bank-facilitated derivative transaction dubbed "Project Santoini." The trade, which led to a $2 billion loan from Deutsche Bank in December 2008, helped Monte Paschi mitigate a €367 loss from an older derivative contract with Deutsche Bank. As part of the arrangement, the Italian lender made a losing bet on the value of the country’s government bonds: one wonders if DB made BMPS buy some of its Italian holdings because, as is well-known, it was about this time that the German bank was getting uber bearish on all the periphery (for more on the details of the derivative read here).
This was the first time anyone in the general public had head about "Project Santorini."
Not surprisingly "Santorini" did not help the firm and in a few months later, the firm sought a €1.9 billion bailout from the Italian government - the first of many. Then in 2012, the bank requested more bailout funds after it became the only bank to fail the minimum capital requirement set by European regulators. CEO Fabrizio Viola, 55, requested an additional 500 million euros, bringing the total cost of the bailout to 3.9 billion euros, after the lender said in November that structured financings linked to government securities had soured. It is likely that yet another bailout of BMPS is imminent.
Then yesterday, as we reported, that BMPS had engaged in yet another previously undisclosed derivative trade named "Alexandria", this time with Nomura whose impact we immediately unclear but one which would result in an earnings hit of €220 million. However, while previously BMPS tried to get off the hook and put the blame on Deutsche, in this case Nomura said the bank's Chairman, Giuseppe Mussari, had "fully reviews and approved" the trade.
This was the first time anyone in the general public had head about "Project Alexandria."
And the market finally took notice, maybe because of the news of two previously unknown and losing derivative deals with two separate banks, both of which had supposedly gotten the blessing of the regulator - the Bank of Italy - coming to light in under one week, or maybe because the abovementioned Mussari promptly quit his post as Italy's top banking lobbyist in the aftermath of the disclosures: in all ways analogous to the departure of the US assistant attorney general yesterday in the aftermath of the "Untouchables" Frontline episode. Because if there is a departure, there is fire.
The result: the stock plunged.
Today it's deja vu again, as the news keeps on coming, this time from Reuters, which reported that BMPS could face total losses as much as $1 billion on prior derivatives trades which have only recently been discovered. The shares promptly plunged, and BMPS was halted for trading minutes before the Italian market closed:
the world's oldest bank has now said it is reviewing three loss-making structured trades related to its Italian sovereign bond holdings which only recently came to light and were negotiated by its previous management.
"Yes. The actualized shortfall is around that amount," the bank's chief executive Fabrizio Viola was quoted by daily newspaper Il Messaggero as saying when asked if 720 million euros was a certain loss rather than simply a maximum risk.
UBS said in a research note on Thursday it was including in its estimates a loss of 720 million euros on the derivative trades, pending more clarity, pushing the full-year expected loss to over 2 billion euros.
"Since the bank's statement spoke of an analysis exclusively of three products, the worry is there could be more and that's spooking the market," one analyst said, asking not to be named.
Viola, who has said the three products were never submitted to the bank's board, told Il Messaggero the management would now open every drawer in the bank for caution's sake. "But I think we're very close to completing the (clean-up) job," he said.
A spokesman for main shareholder Fondazione Monte dei Paschi di Siena told Reuters it did not exclude taking legal action depending on the outcome of analyses under way.
The bank said on Wednesday that 500 million euros requested in extra state aid in November would be enough to absorb a hit on its capital from the structured trades, which were linked to its massive 24 billion-euro Italian government bond portfolio.
Naturally, the implication is that after 4 years of endless bailouts and "recovery", nobody has any clue still just what is on Europe's bank balance sheets. And the further implication is that if BMPS was doing it, everyone else was, of course, doing it, and much more dirty laundry is soon set to be uncovered, especially since the Italian banking business puts simple incest to shame:
The central bank also said the new management, headed by Chairman Alessandro Profumo, had produced documents that had previously been hidden.
Profumo, former CEO at Italy's biggest bank UniCredit, took up his new role at Monte Paschi last April in place of Giuseppe Mussari while Viola took over as CEO in February from Antonio Vigni.
Mussari stepped down as head of Italy's banking association late on Tuesday, although he has denied any wrongdoing.
"You'll have to ask them (the old management). I can only make suppositions. And I prefer to keep them to myself," Viola told Il Messaggero when asked why the Bank of Italy had not been informed.
On Thursday, Italy's Treasury minister Vittorio Grilli said there was no sign that other Italian lenders could face problems similar to those at Monte Paschi.
"It's an isolated case and I don't see any reputational risk for other Italian banks which are much more solid than foreign banks as regards their exposure to derivative," said Giovanni Fiori, professor of accounting and business at Rome's LUISS Guido Carli university.
Of course there will be more "cases" - to assume this is isolated is the height of stupidity and naivete, but what else is an Italian minister to do to preserve the precarious stability attained after months of endless bluster from the ECB that Europe is "fine" -why pull a Juncker and lie of course.
But not even that is the biggest issue. Because should the BMPS dirty laundry be truly exposed for all to see, then the stench will go far. Very far. As far as Frankfurt and the ECB headquarters, because as we first explained yesterday, the person who may well be held accountable for BMPS' endless transgressions is none other than ECB head, and former Goldmanite, and prior head of the Bank of Italy: Mario Draghi.
Recall from Yesterday:
Bank Of Italy Throws The Book At Monte Paschi For "Hiding Derivative Documents"
As we reported previously, the stock of the oldest bank in the world, Italy's venerable Banca Monte Dei Paschi of Siena, was halted in early trade after plunging on news that the bank had engaged in not only the previously reported secret derivative transaction with Deustche Bank to hide losses before a prior government bailout, but yet another derivative transaction, this time with Nomura, signed three years ago and whose intention, ironically, was to reduce 2012 earnings by some €220 million.
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.
But don't worry: just like in the US, nobody of signfiicance is about to go down for this "glitch" which is about to be blamed on some poor mid-level shmuck, and which nobody in the senior level management had any idea about, and certainly not the person who ultimately would have had to give the green light: the current head of the ECB. Sure enough from Bloomberg:
- BANK OF ITALY SAYS MONTE PASCHI HID DOCUMENTS ON TRANSACTIONS
It was all Fabrice Tourre's fault. Or better, yet: an algo did it!
- BANK OF ITALY SAYS NEW BMPS MGMT DISCLOSED INFO ON DEALS
- BANK OF ITALY SAYS NEW BMPS MGMT COOPERATING WITH AUTHORITIES
- BANK OF ITALY SAYS ALSO MAGISTRATES REVIEWING TRANSACTIONS
Would it be the same magistrates who are also reviewing Berlusconi for "alleged" sex with minors?
* * *
Sure enough not even 24 hours later, Mario Monti, speaking in Davos, said something that immedately confirmed just what is at issue here:
- ITALY'S MONTI SAYS NO OVERSIGHT FAILURE ON PASCHI
Translation, it was not the Bank of Italy's fault, and that of its then-head, Mario Drahi, that it failed in supervising the iconic Sienna bank. Because, you see, it is all the evil management's fault. The same "management" whose Chairman just happened to be head of the entire Italian banking lobby. Until yesterday.
And another, less politically correct translation: a (super) Goldman brother is helping another (super) Goldman brother out before the reporters figure out just what happened.
Naturally, since justice no longer exists in a Ponzi empire doomed to less than beautiful deleveraging, there will be no heads rolling over this matter besides those that already have, however one wonders: if Mario Draghi allowed such glaring unreported transactions, whose significance nobody grasped or know about at the time, and whose impact is only now being appreciated, to happen under his nose while in Italy, just what has been happening now that he is head of the biggest central bank in the world?
The other question: if and when BMPS fails, and its shareholders sue the Bank of Italy, will they also sue the man who presided over the Bank of Italy from 2006 until 2011?
And if Monte Paschi is the canary in the 2013 Italian bailout coalmine, who will be next: first in Italy, and then all over Europe?
Because once the other cockroaches, to take literary freedom with mixing and matching metaphors, are exposed - what will happen to all those sworn vows that Europe is now, finally, fixed, uttered most recently by none other than the Super Goldman Mario brothers?