Italy's Monte Paschi Got A Sovereign Bailout To Avoid Being Corzined

Tyler Durden's picture

Those who think back to November 2011 will recall that it wasn't Jon Corzine's wrong way bet on Italian bonds that ultimately led to the bankruptcy of MF Global, well it did in part, but the real Chapter 11 cause was the sudden liquidity shortage due to the way the trades were structured as a Repo To Maturity, where the bank had hoped to collect the carry from the bond coupons, thereby offsetting the nominal repo cost of funding. The kind of deal which is the very definition of collecting pennies in front of a steamroller, as while the funding cost may be tiny and the capital allocated negligible (due to the nearly infinite implied leverage involved when using repo), when the underlying instrument crashes, and the originating counterparty has to fund a massive variation margin shortfall, that is when the shadow transformation cascade triggers an immediate liquidity crisis, which can result in liquidation cascade in a few brief hours. It happened with MF Global, it happened with Lehman too.

And, we now learn, it also happened with Italy's most troubled and oldest bank, Monte Paschi (BMPS), whose endless bailouts, political intrigue, depoit runs, and cooked books have all been covered extensively here previously.

Only unlike MF Global and Lehman, the Italian government came to the rescue of BMPS for one simple reason: a failure of one bank would have set off a chain of depositor-running dominoes that would have destroyed the Italian banking system, and likely led to a Europe-wide panic, leading to the collapse of the Eurozone.

As it turns out, it was precisely a repo (term repo to be precisely) that is what led to the most recent Monte Paschi bailout. Reuters reports:

Monte dei Paschi had to put up more than 2.8 billion euros ($3.65 billion) by way of collateral for two loss-making derivatives trades at the center of an investigation of alleged fraud at Italy's third-biggest lender.


The Tuscan bank said in a statement on Wednesday that it had provided collateral of 1.871 billion euros at the end of March for the derivative deal known as "Alexandria" with Japanese bank Nomura.


The bank also said it had put up a collateral of 939.1 million euros linked to the "Santorini" deal signed in 2008 with Deutsche Bank.

In other words virtually the entire (most recent) $4 billion Italian bailout of Monte Paschi was merely to satisfy the bank's margin calls with Nomura and Deutsche Bank. Net result: taxpayers end up funding obligations that BMPS had made long ago, yet which cash immediately left Italy and was promptly wired to offshore accounts of the German and Japanese banks. Yes, it may come back one day when the variation margin swings back the other way, but most likely it won't.

So what exactly did Monte Paschi purchase using the repo funding? Why the very same instrument that took down MF Global - Italian bonds.

Under the risky deals at the heart of the probe, Monte dei Paschi funded its investment in long-term Italian government bonds through long-term repurchase agreements with Nomura and Deutsche Bank.


In a repurchase, or repo, agreement, a company uses assets as collateral to raise funds and pledges to buy the assets back for a pre-agreed price at a later date.


But as the value of the bonds guaranteeing the loans fell because of the euro zone crisis, the bets backfired and Monte dei Paschi was forced to put up more collateral with both banks.

What is, however, hilarious, and what proves just how clueless almost everyone is about the true nature of the virtually unlimited in their leverage transactions (and needing zero initial capital, and in the case of government bonds - zero initial margin as well) taking place in the shadow economy such as repo, is that Siena prosecutors were so confused about who owned the underlying assets, they ordered the seizure of €1.95 billion in assets from Nomura, which were in fact assets belonging to the Japanese bank in lieu of the unsatisfied variation margin.

In other words, the Italian prosecutors nearly confiscated assets belonging to another bank just to distract from the epic financial crimes going on at the very much insolvent bank founded and operating in their city. Of course, in retrospect they were merely completely clueless and did whatever Monte Paschi' lawyers told them to do. After all, the number of people who truly understand the accounting of repo in the entire world can be counted on one or two hands.

Furthermore, not helping matters is that the guidelines for repo accounting in FAS 140 actually contradict themselves! Recall, from Matt King's "Are The Brokers Broken" when explaining the mechanics of "borrowed versus pledged" transactions:

Quite apart from the fact that FAS 140 contradicts itself (with paragraph 15 (d) making borrowed versus pledged transactions off balance sheet, and paragraph 94 making them on balance sheet, a topic complained about by many broker-dealers immediately  after its issue), there seems to be little consensus as to who is the borrower and who is the lender. As far as we can tell, terms like ‘borrower’ and ‘lender’ are used in exactly the opposite sense in the accounting regulations relative to standard market practice. The description above follows common market practice. The accounting documents seem to refer to this the other way around, a source of confusion commented upon in some of the accounting literature.

What makes things very scary is that the main reason to use repo is to avoid putting down cash or pledging assets in the form of a conventional loan. And since all of Europe is now asset strapped, virtually every insolvent banking system, be it Italy's or Spain's is now entirely reliant on repo: in short every single European bank is one massive MF Global-type blow up just waiting to happen.

And with peripheral European banks using repo to buy up as much sovereign bonds as they can, one thing is assured: once sovereign bond yields start blowing out, the liquidating cascade will commence, as margin call after margin call saps the collateral counterparty chain of any excess liquidity, forcing the ECB to finally not only use the OMT, but since the OMT is one big mirage which doesn't exist from a legal standpoint, to directly inject cash into countless banks: a move which Germany will just love.

However, for now why worry?

After all the BOJ's massive QE came just at the right time to find the next big marginal buyer of peripheral debt alongside domestic PIIGS banks (most likely just as the capacity for repo was about to be maxed out). The immediate result has been the epic and near record in many instances, tightening of peripheral spreads. Alas, they can only go to zero, before someone sells. And then someone else sells, and the carry trade unwinds.

Sadly, the last in this unwind chain will be the suddenly once again very much insolvent Italian and Spanish banks who will then have to once more get full taxpayer defaults while waving the Mutual Assured Destruction card.

The only question is when. However, if Abenomics does indeed suffer an early death due to program failure or whatever other reason, that will be the time to bolt the hatches and lower the periscope as the marginal buyer of European toxic hazard will be gone, and the European banks will have no choice but to dump it all, finally setting off the endspiel of the European crisis.

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zorba THE GREEK's picture

The fact that CORZINE IS NOT IN JAIL just about says it all about our government

Bunga Bunga's picture

sorry, all agents are busy fighting terrorism

toys for tits's picture

I heard he was in Italy as a shadow adviser for the shadow banking.

Abraxas's picture

He is from Mordor, where the shadow lies, that's why.

ebworthen's picture

And no doubt the bailout for the gambling banks and banksters will appear in the form of more taxes and austerity for the regular working folk who have no control over their bought politicians, the justice system, or the troika.

DormRoom's picture

If there is a new normal, it it this: heads they win. tails you lose.


Someone should just call the market for what it is: irrational exuberance.  If the Feds ever exit, the house of cards will all come down.  And if the Feds don't exit, the US government will borrow more because of the low rates until its debt:gdp is unsustainable, and the house of cards all come down.


heads they win. tails you lose.


Roandavid's picture

I like to think that I have developed some semblance of sophistication when it comes to trading over these many years, but i gotta admit it, i don't have clue one about what the Hell you're talking about here.

toys for tits's picture


Now it's clear as mud.

knukles's picture

Oh, it's just the oldest trick in the book of "prudence" a la the US S&L crisis.

Borrow Short to Lend Long and when the long drops too much you gotta post additional "stuff" to support the guys loaning you the short term money.

Think of it as Vinne the Vig.  You owe him money and he has your car whenever he wants it.  So he lets you float.  But you crash the car, so it's no good as "collateral" to Vinne anymore.  So he says "come up wid dah cash."  And can't come up with the cash.
He breaks your knees.

FoeHammer's picture

haha. +1


Almost spilled jungle juice on keyboard

lolmao500's picture

Hell yeah...

Missouri House of Reps Passes Powerful Nullification of Federal Gun Grab

The bill, in very plain terms...informs Washington that Missouri will not surrender her sovereign right to reject unconstitutional federal acts and will guard her citizens' right to keep and bear arms as protected by the Second Amendment. Quoting the fathers of nullification — Thomas Jefferson (Kentucky Resolution) and James Madison (The Federalist, No. 45) — Section 2 of the bill ably and accurately lays out the legal and constitutional case supporting Missouri’s position:

The next section of the bill adds impenetrable bricks to Missouri’s wall of resistance, enumerating specific acts of the federal government that will be disregarded within the state borders. Section 3 of HB 436 declares:

(1) All federal acts, laws, orders, rules, and regulations, whether past, present, or future, which infringe on the people's right to keep and bear arms as guaranteed by the Second Amendment to the United States Constitution and Article I, Section 23 of the Missouri Constitution shall be invalid in this state, shall not be recognized by this state, shall be specifically rejected by this state, and shall be considered null and void and of no effect in this state.

(2) Such federal acts, laws, orders, rules, and regulations include, but are not limited to:

(a) The provisions of the federal Gun Control Act of 1934;

(b) The provisions of the federal Gun Control Act of 1968;

(c) Any tax, levy, fee, or stamp imposed on firearms, firearm accessories, or ammunition not common to all other goods and services which could have a chilling effect on the purchase or ownership of those items by law-abiding citizens;

Missouri for the win!

lolmao500's picture

Not gun grab but certainly war on guns...

If GE wasn't already on your BOYCOTT list... put it on...

Dr. Engali's picture

It's been on mine since 08. I used to buy GE products whenever possible, but no more.

knukles's picture

GE and whatzizname are pets of the Administration since Ge Capital got bailed out with TARP
Or you guys forget that linkage
Not to mention lots and lots, oodles and oodles, gobs and gobs of Defense Contracts to be maintained during Sequester.


Dr. Engali's picture

No I didn't forget any of that. That's why I said they should be on the dustbin of history.

knukles's picture

I'd meant that as to the "youse guys" general audience, Doc.
I'd never, ever dispute the good Doctor :)

FoeHammer's picture

Aren't they also heavily applying past losses to current and future earnings in order to reduce tax liability? Keeping lots of cash abroad as well. Gee, isn't apple doing the same thing? lol

True American Companies!    /barf

knukles's picture

Last year they filed something like a 1,400 page return and were getting money back.


FoeHammer's picture

1400....Holy smokes.


Lobbying and Accounting-based human capital must have a stellar ROI.

Dr. Engali's picture

GE is another piece of shit company that should be lying in the dustbin of history. All of these bailed out mega-corps are a thorn in America's side.

fonzannoon's picture

They won't allow another Lehman. They will keep doing backdoor bailouts. They will print money all day long and we will eat chained cpi shit sandwiches.

FoeHammer's picture

I hope they fucking print more. Past the point of no return anyways. Increase the size and scope of purchases and let's get this shit over with!


nmewn's picture

"The kind of deal which is the very definition of collecting pennies in front of a steamroller, as while the funding cost may be tiny and the capital allocated negligible (due to the nearly infinite implied leverage involved when using repo), when the underlying instrument crashes, and the originating counterparty has to fund a massive variation margin shortfall, that is when the shadow transformation cascade triggers an immediate liquidity crisis, which can result in liquidation cascade in a few brief hours."

Why, its almost like fiat sycophants, exclaiming that all is well! The market is back up to where it was and I have all my money back despite its devaluation in what it could buy five years ago!

(Rolls eyes)

jonjon831983's picture



April 17, 2013

"Italy prosecutors pursue Nomura assets in Europe"

"The seizure order was aimed at preventing Monte dei Paschi from sending more cash to Nomura as collateral for the "Alexandria" trade, a huge bet on Italian government debt made more costly by an interest rate swap that forces the Italian bank to take losses when rates are lower than expected."

"The funds are held in accounts outside Italy, which means the Siena-based prosecutors are trying to seize the money through "Target 2", the interbank payment system that links European banks through the central banks of individual countries that use the euro, a judicial source told Reuters on Wednesday."

"The source said the Bank of Italy had contacted the Bundesbank to block a Nomura account held with Citigroup in Frankfurt, but had not yet heard back from the German central bank."



April 19, 2013

"Bundesbank Said to Rebuff Italian Bid to Freeze Nomura Funds"

disabledvet's picture

Under the Tuscan Sun it is then... gotta love Diane Lane...what a hotty. she does seem it nice? this flik. in any case..."go ahead, freeze those assets."

Urban Redneck's picture

Tactically, now is the time to going after collateral at DB, while Italy lacks a PM, and they can blame it on the "system"...

Bearwagon's picture

Collateral at the DB? Oh, yes, they do have some bridges to sell, don't they?  ;-)

Urban Redneck's picture

Ownership of a bunch of digital 0's and 1's that really only exist in a handful of Central Bank's hard drives... Insanity/CONfidence, not physics, makes the world go round.  

Ghordius's picture

from the bloomberg article: "...prosecutors are also targeting Nomura accounts at Citigroup Inc. and Bank of America Corp. in the U.K., according to the April 15 asset seizure decree, as well as deposits at other banks that operate through Target2, Europe’s cross-border payment system, the document shows."

it's indeed a bad day when I find myself cheering for the (usually quite leftist) Italian prosecutor caste (the famigerate independent "Magistratura") and the Italian Treasury's paramilitary Finance Police (the "Guardia di Finanza"), then too often I was witness of very heavy-handed "inquisitions" by them

Tyler at this point would be expected to say that's in German national interests to protect Deutsche Bank, and so the block from the BuBa should be seen in this light. Sadly imho it's a bit more complicated than that and I'm quite sure more megabanks will "surface" in this scandal...

Yes, the absence of a fully functional government, as Urban Redneck says, is a good moment to "unleash the dogs", but as I wrote, remember that the prosecution "system" in Italy is really quite independent - Berlusconi's various governents can attest to this

imho the only reason why they did not investigate previously/harder is political: the Bank's controllers were their "friends from the left" elected to their regional political offices - and the regional peculiarities of the whole system

trebuchet's picture

That ties up with the LTRO and opening of FED-ECB-BOE swaps  - i thought there was a bank that had played the MAD card triggering the run for cover................. now we know who it was..................


Cdad's picture

If reincarnation turns out to be the real deal, I want to come back as a bond trader.  You guys have all the fun.

knukles's picture

Tee hee
But gotta tell ya, this political correctness shit's killed the fun on the trading floors from what I hear.  No more midget tosses, blowjobs, strippers, cursing at the females, grabbing ass....
Well, maybe still in the muni houses because if you think bond guys are sick, even the bond guys think the muni-tunes are out of their fucking minds.

disabledvet's picture

can't even do that stuff on television anymore. yet again another reason to migrate to Zero Hedge.

notquantumdum's picture

It's truly amazing how many “professionals” in the financial management industry use what seems to be excessive leverage.  In my personal accounts I won’t even use leverage at all, overnight, but what was Leman at?  30:1?  50:1?  Constantly?  'Just insane.  ‘Huge risk. ‘Tiny relative reward.  I 'Guess they don’t know any other ways to make enough money, and their competition is doing it too so they have to keep up.

Cheyenne's picture

"they ordered the seizure of €1.95 billion in assets from Nomura, which were in fact assets belonging to the Japanese bank"

What the hell? Don't tell me Italy already burned through the $134.5 billion in paper it snatched from those two Japanese dudes in Chiasso four years ago...

Atomizer's picture

Allow me to help you visually understand liquidity flow vs. the creation of surplus/extraction of fiat monies in the current monetary system. Does the word slush fund ring a bell?

ekm's picture

Deutsche B and Nomura called a spare change of 4 billion of collateral, MARGIN CALL, spare change, simply spare change.


A spare change like this almost bankrupted the whole eurozone.

What happens when (not if) hundreds of billions are called back?

ekm's picture

Unreal. Simultaneous!!!



ekm's picture

What is not explained is the question:


Why were DB and Nomura calling for the collateral back?

My answer: They needed it to do payouts for their swap losses.

GoldenTool's picture

I think the line that scares me more then any other is this....  either gentleman's handshakes or blood usually settle these types of problems.

"After all, the number of people who truly understand the accounting of repo in the entire world can be counted on one or two hands."


"Scientia ac labore"

dunce's picture

And none of the wise men are making the decisions, they are just keeping the books. Guys like Corzine do not ask for advice.