(The authors are Reuters Breakingviews columnists. The opinions
expressed are their own)
By Neil Unmack and Dominic Elliott
LONDON, Jan 23 (Reuters Breakingviews) - Banca Monte dei
Paschi di Siena (BMPS.MI) is on the spot. The Italian bank – the
world's oldest - is probing how bizarre derivatives trades
racked up hundreds of millions of euros of losses. It is
promising to come clean about how it got into the mess. Here are
the four questions that investors and taxpayers need answered.
Why was a commercial bank gorging on structured derivatives?
The derivatives trades date back to at least 2002, when MPS
and Deutsche Bank (DBKGn.DE) set up an off balance sheet vehicle
called Santorini whose assets mainly comprised shares, or
derivatives linked to shares, in another lender, San Paolo IMI.
The precise structure and purpose of this vehicle isn't clear.
One possible explanation is that MPS wanted to cash in its
Intesa shares but retain some upside exposure. MPS needs to say
what Santorini's real function was. Another trade relates to a
so-called "CDO squared" - a highly leveraged structured product
- that MPS originally bought from Dresdner.
Why did MPS restructure the trades?
By 2008, the Santorini vehicle was making losses, Bloomberg
reported. In response, MPS restructured it, again with help from
Deutsche. The CDO squared was restructured in 2009 in a
transaction with Nomura (8604.T). Though the deals are complex,
what is clear is that they both involved MPS taking on different
kinds of risk, this time linked to Italian government credit and
interest rates. The restructurings may have allowed the bank to
avoid recognising losses in the immediate aftermath of the
financial meltdown, but left it exposed when the euro crisis
struck. Last year, the bank took an additional 500 million euros
of state bailout money as a direct result of structured trades
linked to government debt. Il Fatto Quotidiano, an Italian
website, reported on Jan. 22 that losses on the Nomura deal
alone could be 220 million euros or higher. MPS says it is
reviewing the accounting treatment of the transactions. It also
needs to say why it made such a potentially reckless move.
Why weren’t the deals disclosed more clearly?
Given the potential losses facing MPS and Italian taxpayers
that funded the bank's bailout, it’s equally surprising that the
2008/2009 trades weren’t explained in the bank's annual results.
True, MPS was probably keen to avoid making itself appear
vulnerable by giving away too much information to other market
participants. But it ought to have made investors aware in
general terms about what was going on. Even the bank’s auditor,
KPMG, says it did not know about the Nomura trade.
So who knew about the trades, and who approved them?
Deutsche Bank says the restructuring of Santorini was given
the necessary approvals by MPS, and that the Italian bank also
received independent advice. Nomura says the MPS board and
Giuseppe Mussari, who stepped down as executive chairman last
summer, approved the 2009 transaction. However, MPS says the
board did not rubber-stamp the deal. Mussari resigned from his
position as head of the Italian Banking Association on Jan. 22,
saying he had always respected the rules of the ABI. He made no
comment regarding the MPS derivatives, and could not be reached
directly. The precise chain of approval needs to be made clear
if investors – and taxpayers - are to hold those responsible for
the losses to account.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- The former chairman of Banca Monte dei Paschi di Siena on
Jan. 22 stepped down as head of Italy's ABI banking lobby
following a report by Il Fatto Quotidiano, an Italian website,
that the bank would book a 220 million euro loss on a
derivatives contract in its 2012 results.
- Giuseppe Mussari, who stepped down from MPS in 2012,
announced his resignation from the ABI in a statement that did
not mention the Sienese bank or the derivatives contract. He
said he had always respected the rules of the ABI, but did not
want to harm the ABI in any way, even indirectly.
- Nomura, which designed the 2009 derivatives deal for Monte
dei Paschi, said on Jan. 22 the trade had been reviewed by the
Italian bank's external auditors, KPMG, and approved by the
board and Mussari.
- MPS said its board had not reviewed the trade for
approval. KPMG said on Jan. 22 that it had "never been informed
of any confidential agreement between MPS and Nomura" and "never
approved, and certainly not on a preliminary basis, the
financial transaction structures covered by such confidential
- In 2012, MPS received a 3.9 billion euro bailout from the
Italian state, largely as a result of its holdings of government
debt. The bailout was 500 million euros larger than previously
expected because of what the bank called "structured
transactions" linked to sovereign debt.
- The bank said on Jan. 18 it "is analysing the legal,
financial, accounting and bookkeeping profile of the
transactions and intends to accurately assess any potential,
current and prospective impact from the deals."
- Bloomberg reported on Jan. 17 that MPS used a derivative
transaction with Deutsche Bank, called Project Santorini, to
obscure a 367 million euro loss during the financial crisis in
- Deutsche Bank said on Jan. 23 in an emailed statement that
the deal “was subject to our rigorous internal approval
processes and also received the requisite approvals of the
client who was independently advised.”
- MPS shares fell a further 5 percent to 0.26 euros on the
morning of Jan. 23. They have fallen 12 percent in a week.
- Mussari statement: link.reuters.com/rut45t
- MPS statement: link.reuters.com/sut45t
- Reuters: Monte Paschi shares plunge on derivative loss
(Additional reporting by George Hay)
- For previous columns by the author, Reuters customers can
click on [UNMACK/]
(Editing by Peter Thal Larsen and David Evans)
Keywords: BREAKINGVIEWS MPS/
(C) Reuters 2012. All rights reserved. Republication or redistribution of
Reuters content, including by caching, framing, or similar means, is
expressly prohibited without the prior written consent of Reuters. Reuters
and the Reuters sphere logo are registered trademarks and trademarks of
the Reuters group of companies around the world.