How A Previously Secret Collateral Transformation With The Bank Of Italy Prevented Monte Paschi's Nationalization

Tyler Durden's picture

The endless Italian bailout story that keeps on giving, has just given some more. It turns out Italy's insolvent Banca dei Monte Paschi, which has been in the headlines for the past month due to its role as political leverage against the frontrunning Bersani bloc, and which has been bailed out openly so many times in the past 4 years we have lost track, and whose cesspool of a balance sheet disclose one after another previously secret derivative deal on an almost daily basis, can now add a previously unannounced bailout by the Bank of Italy to its list of recent historical escapades.

WSJ reports that in the summer of 2011, when Europe was as it tends to do in recent years, imploding and head of the ECB was still Jean-Claude Trichet, and before Goldman was set to control the troika of key world central banks (via NY Fed's Dudley, ECB's Draghi and BOE's Carney), and more importantly when the ECB was being accused of not being a credible lender of last resort, it was the Bank of Italy that secretly bailed out Italy's third largest lender with a €2 billion loan. From WSJ:

The €2 billion ($2.7 billion) emergency liquidity loan the Bank of Italy extended to troubled lender Monte dei Paschi di Siena in 2011 was a "classic" central-bank move, although it didn't appear on the European Central Bank's balance sheet and no other Italian bank entered a similar deal, a senior Bank of Italy official said Saturday.


"The Bank of Italy acted on its own" said Fabrizio Saccomanni, the deputy governor of Italy's central bank, when asked about the at-the-time undisclosed securities lending transaction with MPS.

The Bank of Italy, having found itself in the middle of the BMPS derivatives scandal and particularly its lack of oversight and disclosure under former head Mario Draghi, is in full damage control scramble.

Italy's central bank arranged the loan in October 2011 because MPS was running short of liquidity and had largely exhausted its ability to keep borrowing from the ECB. The loan was aimed at staving off a liquidity crisis at a key Italian bank at a delicate moment in the country's economic history.


The loan wasn't disclosed at the time by either the Italian central bank of MPS. In a conference call shortly after receiving the emergency loan, MPS executives described the bank's liquidity position as sound.


Mr. Saccomanni said that, with its loan to MPS, the Bank of Italy—which was led at the time of the loan by current ECB President Mario Draghi—didn't violate any rules. The loan was "utterly normal central bank behavior," he said. He added, however, that no other Italian bank was party to such an arrangement.

Then again, the Bank of Italy said there would be no more secret derivative losses to emerge at BMPS a few weeks ago when the firs two of BMPS' previously unknown balance sheet Easter eggs were reported (while also lying at the time it had no idea of BMPS' balance sheet horrors). This was followed promptly by revelations of two more (for now) such arrangements, one of which with US Bank of New York which "allowed the Italian bank to mislead authorities and smoothed through its acquisition of rival Antonveneta, according to a report by the financial police in Italy."

Therefore one can be excused for believing absolutely nothing that any European banker, whether they have worked at Goldman previously or not, has said.

What is troubling about the Bank of Italy loan, which only took place because the ECB had in fact been a perfectly qualified lender of last resort, only Monte Paschi had no more eligible collateral against which to receive cash from Europe's central bank, is that it was forced to seek a domestic bailout from the BoI as a true lender of last resort against the most worthless collateral the Siena bank could find. "Under the deal, MPS swapped loans and mortgages for some €2 billion of mainly Italian government bonds."

BMP then proceeded to use the Italian bonds with the ECB and to get Euros in exchange, in effect engaging in precisely the kind of collateral transformation alchemy we described previously in painful detail in "Modern Market Alchemy Explained: Converting Junk Debt Into Supersafe Treasurys Out Of Thin Air", only instead of converting Junk into "money good" Treasurys, Monte Paschi used the Bank of Italy as an collateral transformation intermediary converting just as worthless impaired loans and mortgages in the first step, and then using the repo proceeds, Italian bonds, as collateral with the ECB, and thus once again evading nationalization.

What the above episode highlights is the fundamental distinction in collateral transformation processes between the US and Europe: while the US has the $35-40 trillion shadow banking system as a conduit for preliminary junk-to-hunk "alchemy", in Europe it is the regional central banks that serve the role of a decentralized shadow bank (which Europe does not have). The only problem is that while the US shadow banking system is largely a private sector construct, in Europe it is the taxpayers who will be fully impaired when the real value of the worthless rehypothecated collateral is exposed.

Yet one major similarity is that just like in the US, where as we explained collateral transformation takes place entirely off the books, in Europe this step too was completely secret.  "The loan wasn't disclosed at the time by either the Italian central bank of MPS." At least in the US whenever the Fed provides direct bailout funding via the Discount Window or through excess reserves, it keeps a track of how much (if not who the beneficiary is of course) and discloses this publicly every week. Not so in Europe, and where it gets even worse is that in a conference call shortly after receiving the emergency loan, "MPS executives described the bank's liquidity position as sound." What they didn't describe is why their liquidity position was sound: because the bank had just engaged in a collateral transformation with the Italian people, who were handed off risk that not even the ECB wanted to touch!

Of course, had the conference call participants known the truth, it is very likely that BMPS would have been long since nationalized.

Yet the worst part of this whole story, is the Bank of Italy's painfully sad attempt at justification of its actions: First - the bold faced lie that only BMPS was engaging in such "shadow" transformations, which will be true until some other bank is revealed to have engaged in an identical junks-for-hunks repo with the Bank of Italy. And second, the BoI's childish explanation that because others in Europe do it, it's fine:

"Anyone can do it," Mr. Saccomanni said, adding that similar transactions have been carried out by other national central banks in the euro area. Some central banks, such as those of Greece and Ireland, have used their own balance sheets for such lending to domestic banks, under the Emergency Liquidity Assistance, a special dispensation from ECB protocols.

Yes, of course others can do it: the point is that all of them disclose it. The weekly updated balance of Greek and Irish ELA loans has been widely used as an indicator of liquidity and funding pressures in Europe.

What Italy did is engage in an identical operation with an insolvent bank, but undisclosed. That the head of the Italian central bank is so naive, gullible or plain stupid, to not realize the difference, is precisely why, as we reported a few hours ago, the Fed has now injected a record amount of dollars into foreign, i.e., European, banks in the last month.

Because if "other national banks in the euro area" do it, the implication of course is that they do so undisclosed. Which also means that nobody has any clue just how insolvent Europe truly is, but one does know that the situation now is as dire as it has always been. Otherwise Monte Paschi would not be set to receive yet another bailout in the form of a €3.9 billion state bond to raise it capital for "regulatory requirement" purposes. And the Fed would not have to use all the reserve proceeds created from QEternity to fund European banks.

Our advice to all depositors, who we can only hope can be counted on one hand, in Monte Paschi - take your money to a safe bank, and since in Italy that is an oxymoron, it is probably wisest to just park what money one may have in the local Banca dei Materassi.

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mikla's picture


markmotive's picture

Was there ever any doubt?

Nigel Farage: 'The most dangerous people we've seen in Europe for 70 years'

smlbizman's picture

with the cyber attacks going on...what is our back up plan for the hedge....?????brother john is down, sgt the other day kwn know the fucking granddaddy has the most can the hedge not be the most prized jewel...and what if it goes unharmed?.....

blindman's picture

how many people are in this photograph? he looks like he might be crossing his
legs, or crossing his stomach/s? or is there a chick in there? maybe he
ate a chick? it is like an m.c. esher anatomy thing?
Of Course, J.P. Morgan is Right at the Center of the Latest Italian Bank Scandal
Posted on February 7, 2013
"This should come as no surprise to anyone paying even the slightest bit of attention to the ongoing theft and fraud being perpetrated by the “too big to jail” financial oligarchs. J.P. Morgan in particular these days seems to have its grubby, crony paws in almost every degree of theft one can imagine. From Vatican money laundering, to running the food stamp program, to ripping off U.S. veterans, these guys have all their bases covered. The latest? Well it seems they were right there in the center of the latest scandal at the oldest bank in the world; Italy’s Monte dei Paschi. From Reuters:

Feb 6 (Reuters) – Monte dei Paschi lied to the Bank of Italy about the terms of the so-called FRESH 2008 hybrid instrument, worth around 1 billion euros, which it used to partly fund its acquisition of Antonveneta, prosecutors alleged in a document obtained by Reuters on Wednesday.
...." m.k.

blindman's picture

continued ..
"In the document, prosecutors alleged that Monte dei Paschi’s then chief financial officer Marco Morelli had signed an indemnity document in favour of J.P. Morgan which was hidden from the regulator. J.P. Morgan in 2008 underwrote a 1 billion euro capital increase in Monte dei Paschi, and then structured the Fresh 2008 hybrid instrument, convertible in Monte dei Paschi’s shares, and sold it to a number of investors.

J.P. Morgan in Milan declined to comment.

Of course they did. J.P. Morgan only likes to comment when Jaime Dimon is running his big mouth about how important his crony ass is.

Yep, clearly civilization would cease to exist without the too big to jail bankers.
"... m.k.

ACP's picture

Alchemy, yes! How to turn lead into gold!

Hell, if the powers that be push the price of gold low enough, we'll be using alchemy to turn gold into lead!

bobthehorse's picture

Italy's toast.

When Europe collapses, the dollar is gonna get real real strong.

We're talking massive deflation.

Ben's gonna have to print a lot of money.

Parrotile's picture

Italy; famous for its very fast cars, very fast motorbikes, pretty fast women, and now covertly fast (as in "fast on the teat") private banking sector . . . .

tankster's picture

Journalism at its very finest. " Banca dei Materassi", now that gave me my first belly laugh in quite a while. I'm off to the donate link in the hope that some day they'll break down and hire a copy editor!

Terminus C's picture

you didn't get the joke?

copy editor... you need reading comprehension.

tankster's picture

Let me break it down for you.

first sentance: compliment.

second sentance: compliment

third sentance: vow + ribbing

Comprehende Senor?

Boozer's picture

"Banca deiMaterassi" may be the only solvent bank worldwide. 

flyingpigg's picture

Be carefull, Banca dei Materassi is still holding fiat deposits....

ziggy59's picture

Anyone else wondering when the hell this clusterphuck will even appear to end? The same corrupt producers, directors and actors in this financial N rated ( for Nutz!) film, keeps replaying way worse than a crappy remake of Groundhogs Day.

Spigot's picture

exogenous event is about all I can figure, its certainly not about mechanics. Consolation? It will be far, far worse outcome due to their meddling. Pyriic Victory for sure, but the big boys nutz will get totally fried, 'struth

ekm's picture



Banca dei Materassi = Bank of Matresses (english)

Dewey Cheatum Howe's picture

Everytime these people open their mouths all I can think of Henry Rollins laughing and screaming suckers suckers.

This song should be the anthem for the new normal.

Atomizer's picture

Tisk, tisk..

We slipped through the mind bend. See below

holdbuysell's picture

"Banca dei Materassi"

Well said.

Yen Cross's picture

 Since we are on the topic of European banking corruption and insolvency, I thought this article would be a good read. The headline alone is worthy of a laugh.  eFXnews : ECB: 4.993 Bln In Three-Year LTRO Funds To Be Repaid Feb 13

Dewey Cheatum Howe's picture

I'm rooting for the Italian justices to actually stick it to Draghi with criminal charges. The dominoes need to starting falling somewhere.

Atomizer's picture

Draghi was disposable. Just another celebrity hired to reel in large pools of support. When things go south fast, a new disposable spokesperson appears.

Water Is Wet's picture

See, the banks can no longer fail.  The governments will just do secret deals and lie about it.  Problem 100% fixed.

Squid Vicious's picture

Fungul! Berlesconi pronto!

slackrabbit's picture

Yep nothing like living on the Ring of Fire on two continental plates.

We are btw over due for a big one - Christchurch's quake wouldn't have raised eyebrows in Wellington.

Joebloinvestor's picture

Ben's fingerprints are gonna be found on this shit, just wait and see.

americanspirit's picture

Mama Mia - atsa spicy meatball!

TNTARG's picture

Let's not forget governments all over Europe (and the USA, of course) have been taken by the bankster's oligarchy so there's nothing to underline about when THEY USE THE BANKS for plaundering people. Let's say they own Central Banks all over de Developed World so they just have to do an electronic transaction to create a new incident to justify a new and more brutal attack to your goods and savings. Those are not political governments but an association to commit crime.

There we have Greece, with Athens under such a smog that you can't breed because people is burning even shoes to stay warm. Amazing the Developed World's degree of development.

q99x2's picture

Yep. Once the banks found out they could keep getting reimbursed for bad debt they kept the discoveries coming. Was anything else expected. It doesn't work and won't work. It is near to being over now.

Feb 2013.

slackrabbit's picture

No wonder they want a idiots want a 100 trillion bailout for the Fed - thats what required to secretly bailout Europe

Peter Pan's picture

Despite Hitler and Mussolini being monsters, I still believe they would have done the decent thing and hung a few bankers rather than bail them out.

In the meantime the momentum of life along with the printing and lying of central bankers, is still keeping the ship afloat despite the passengers on the lower decks drowning one level at a time.

The system is bankrupt and insolvent in all directions...past, present and future.

Indebtedness has become a gun with barrels pointing in both directions. Both the debtor and creditor are screwed because the system has no sustainable means of paying interest, let alone capital.

Ghordius's picture

+1 it's undeniable that all fascist dictators in europe - including in Portugal, Spain, Poland, Austria, Hungary, etc. etc. and also some current proto-dictators like the White Russian always made a point of being perceived as the protectors of national interests (which includes "the people") from the "locust-like attacks of the financial world". A big part of their antisemitism has it's roots in anti-financialism

european fascists actually hate both the private financial intermediary and the "bourgeouis rentier", i.e. the "owner of capital that does not act with it", i.e. someone that lives from the gains of lent money alone, including the trader of debt, the trader of bets and the financial speculator

Ghordius's picture

"in Europe it is the regional central banks that serve the role of a decentralized shadow bank (which Europe does not have)" Well, besides the fact that those are not "regional central banks" but national banks (even the Bank of Italy is way more under tight political control than the FED, as this case shows so well) this is the main difference:

the Shadow Banking System is an AngloAmerican construct fed by Global MegaBanks derivatives and City of London Branches hyperleveraged credit so where is the main souce of this corruption?

or at least where are the financial wizards that make those corruptive instruments, thanks to sympathetic politicians?

Ghordius's picture

"due to its role as political leverage against the frontrunning Bersani bloc" Wait a moment, Italians have a name for this "Bersani Bloc". It's The Left, aka The Socialists or Social Democrats or the Post-Communists The same guys that have a tight political control over Monte dei Paschi di Siena since 60 years (through this MPS foundation which is now the kernel of the MPS bank)

I wonder why they aren't called socialists in the NY media?

Ghordius's picture

"Therefore one can be excused for believing absolutely nothing that any European banker..." strike that "European" and the quote makes way more sense

Ghordius's picture

"the Fed has now injected a record amount of dollars into foreign, i.e., European, banks in the last month"

possible, but still only a "feeling" - only part of those "foreign" are eurozone banks. what about Japanese? Chinese? Arab? British and Swiss? Singapore?

Those injections have nothing to do with the monthly 85bn FED purchases of USTs? Have nothing with Japanese, Chinese and Arab holdings of US debt?

Ghordius's picture

"The only problem is that while the US shadow banking system is largely a private sector construct, in Europe it is the taxpayers who will be fully impaired when the real value of the worthless rehypothecated collateral is exposed."

So the US Shadow Banking System is superior, then it's private and does not get bailed out with taxpayer money. mmmhhhh...

remind me, under which jurisdiction is all this near-endlessly rehypothecated? That of Gog and Magog?

Ghordius's picture

"Our advice to all depositors, who we can only hope can be counted on one hand, in Monte Paschi - take your money to a safe bank, and since in Italy that is an oxymoron, it is probably wisest to just park what money one may have in the local Banca dei Materassi."

more or less eurozone depositors have always heeded that advice way more than other populations - just have a look on how much more tangible cash is around here

safe Italian bank? an oxymoron since 800 years. a tradition, in this and yet this is one reason why Anglo-American style bank runs don't happen here that easily  - the other being our penchant of nationalizing when in doubt


of course, this case being an exception to this rule, buy hey, those were times where "lying was necessary" - /s/LOL

Downtoolong's picture

The other piece of this that is even more difficult to identify is all the profits the so-called healthy banks make by arranging the deals for the weaker ones. No major bank could make half the profits or pay half the bonuses they do were it not for the OTC swaps, derivatives, and other forms of financial malpractice they engage in. They're like a doctor selling morphine to heroin addicts at a 1000% markup.


DutchR's picture

"Collateral Transformation" is like seeing four tits when i'm drunk, right.


Trillion/Billion /Million  hey i'm dislectic just give me back my change, and i'll hope you know what i'm doing...



Wait,   what?

supermaxedout's picture

Great the Fed is saving European banks with newly printed Dollars.

Everyting is fine. Its just paper. Why not hand the green paper when you can save the entire global financial system.  Or better the Dollar system.

Its very simple the US has to save these banks otherwisethe Dollar system would be blown in pieces.  Its the decision of the Fed and they will know what they are doing. So nothing to worry about.

Dont worry about Banco Monte dei Paschi di Siena. This bank is always rising from the ashes of financial catastrophes like a phoenix. Once the worst is over they come up wioth real valuable assets and start all over again.