Were it not for some shady derivatives trades carried out by the world’s oldest bank, Banca Monte dei Paschi di Siena SpA, Italy’s most recent parliamentary elections might have produced a government.
When Bloomberg News on Jan. 17 broke the first details of derivatives transactions that the bailed-out Monte dei Paschi made to hide losses, the election campaign was in full flight. Many Italians were planning to vote for Pier Luigi Bersani’s center-left Democratic Party, tired of the endless conflicts of interest and political corruption that former Prime Minister Silvio Berlusconi had come to represent.
Yet the Democratic Party ran the philanthropic foundation that, in turn, controlled Monte dei Paschi. The foundation for years had chosen the bank’s top executives, meddled in investment decisions and determined how the bank’s largess, via dividends, should be distributed in Siena. As more revelations followed, the Monte dei Paschi affair seemed for many Italians proof that their entire political system was rotten. Bersani’s sizable lead began to evaporate, and by election day no party had enough support to form a government.
The story of Italy’s 88 bank foundations that Elisa Martinuzzi lays out in the May issue of Bloomberg Markets magazine is one of good intentions gone awry. The foundations were in many ways virtuous. They were meant to help move the country’s banking system from state to private control. Foundation ownership meant that bank dividends went to philanthropic causes.
The banking system that resulted did a decent job as far as the wider society was concerned. Italy spent slightly less than 0.3 percent of annual gross domestic product recapitalizing its banking sector from 2008 to 2011, compared with 2.5 percent of GDP in Germany and 40 percent of GDP in Ireland, according to data from the European Commission.
Still, the foundation system proved susceptible to the weaknesses that hobble Italy’s political economy, namely patronage and corruption. Some foundations, such as Fondazione Monte dei Paschi di Siena, held onto their bank shares, partly because they offered too useful and lucrative a political tool. No wonder former Treasury Minister Giuliano Amato, who drew up the 1990 law that set up the foundations, recently called his creations Frankensteins.
Italians voted against their political system in February. Beppe Grillo’s Five Star Movement, which calls for erasing the entire political structure, won a quarter of the vote. Grillo then ruled out supporting any of the traditional parties in government, forcing a period of gridlock. Italy’s economy is too fragile for such uncertainty, which is helping to choke off desperately needed flows of bank credit.
More than a month after the elections, negotiations to form a government continue. Time is running out for Bersani. Grillo should play a positive role by pledging Bersani enough votes in the Senate to control it (the Democratic Party already has a majority in the House), in exchange for commitments to a handful of Five Star Movement demands such reforms to the electoral system. Achieving that alone would earn Grillo a place in Italy’s history books.
There are alternatives, but they’re less attractive. Fresh elections might produce more votes for Grillo, but quite possibly no clear majority again, meaning an extended period of uncertainty. A grand coalition between Bersani’s left and Berlusconi’s right would involve the kind of horse-trading within the old political elite that Grillo and many Italians want to end.
Whatever shape the next government takes, it can go a small way toward restoring confidence in the system by ensuring that local governments and party officials can no longer appoint foundation directors, and by forcing foundations that still have large bank stakes to sell them. Italy needs to complete the transition to private ownership that its financial sector began more than 20 years ago.
Monte Paschi Fails Siena Race as Oldest Bank Loses Trust
The Fondazione Monte dei Paschi di Siena has its headquarters in the baroque Palazzo Sansedoni overlooking the Italian city’s main square. It was there, one day in November, that Chairman Gabriello Mancini delivered the bad news: The foundation, which for 15 years had supported the districts that compete in the renowned Palio horse races, could no longer pay for the spectacle’s colorful medieval costumes.
Mancini and his aides told representatives of Siena’s 17 districts, or contrade, that the cutbacks were the result of Italy’s economic crisis and the misfortunes of the foundation’s largest holding, Banca Monte dei Paschi di Siena SpA, according to an account published in the foundation’s newsletter.
The money it had given to support the contrade and their twice-yearly races around the Piazza del Campo — 11 million euros ($14.1 million) from 1996 through 2010 — was no longer available, Bloomberg Markets will report in its May issue.
The bank, the world’s oldest, dating to 1472, was unable to raise more money from shareholders, including the foundation, which owned a 34 percent stake. It had scrapped dividends, once a key source of funds for the foundation’s philanthropy, and was seeking a second taxpayer bailout in four years to meet regulators’ capital requirements.
Two days before the Nov. 30 meeting, the bank had increased the amount it was seeking from the government by 500 million euros to 3.9 billion euros after its management had reviewed the impact of earlier transactions.
The foundation’s inability to outfit Palio contestants is just one piece of collateral damage in a scandal that has ensnared former Monte Paschi executives in a criminal probe of false bookkeeping, market manipulation and regulatory obstruction. It has cast light on the role of the foundations that still wield control over Italian banks, even following efforts by officials to diminish their influence. And it became an issue in Italy’s February election, swaying voters in favor of anti-establishment parties.
“The goal of the foundations is to keep jobs locally, lend money locally and sponsor events to buy consensus,” says Davide Serra, a managing partner at London-based Algebris Investments LLP, which oversees about $1.3 billion in bank shares, including Italy’s largest lenders, UniCredit SpA (UCG) and Intesa Sanpaolo SpA. “Most, like Siena, kept control of their banks because this allowed the foundations to disburse dividends locally and in this way buy votes for the politicians. It’s another sad example of the Italian political class of the last 20 years.”
Serra last year backed an unsuccessful candidate for leader of Italy’s Democratic Party, which controls Monte Paschi through the foundation.
Monte Paschi’s woes were brought into focus when Bloomberg News revealed in January derivatives deals that masked earlier losses. In one 2008 trade, dubbed Project Santorini, Deutsche Bank AG (DBK) loaned Monte Paschi about 1.5 billion euros in a transaction that wasn’t disclosed to shareholders, Bloomberg News reported.
Although no criminal charges have been filed and there is no evidence other Italian lenders engaged in similar practices, Monte Paschi’s investment decisions are rooted in the political influence of the charitable foundations that still hold sway over banks decades after they were separated from the state.
Prosecutors are exposing a complex web of covert interests at Monte Paschi that hurt shareholders and the reputation of the Democratic Party.
The party lost voters as the scandal dominated newspaper front pages and came up short of a majority in the Senate. Anti- establishment candidate Beppe Grillo and former Prime Minister Silvio Berlusconi won a blocking majority, creating an impasse that has left the country without clear leadership.
Established by a 1990 law named after former Prime Minister Giuliano Amato, nonprofit foundations were entrusted with Italy’s state-owned lenders as the banks were removed from direct government ownership.
Over time, regulators and lawmakers encouraged the 88 foundations to dilute their bank stakes by selling shares to the public. The objective was to diversify their portfolios and ensure stable endowments that could support local economies.
The foundations, with total assets of about 43 billion euros at the end of 2011, have cut their bank holdings: A quarter no longer own shares in the lenders they once controlled, according to Associazione di Fondazioni e di Casse di Risparmio SpA, or Acri, the industry group that represents foundations and savings banks.
The divestments probably didn’t go far enough, says Andrea Resti, a finance professor at Bocconi University in Milan. While Monte Paschi has the highest foundation ownership among the country’s biggest banks, as much as 27 percent of Intesa Sanpaolo (ISP), Italy’s second-biggest lender by assets, is controlled by 16 foundations led by Compagnia di San Paolo, according to Acri. About 14 percent of UniCredit, Italy’s biggest bank, is owned by 14 foundations.
“If the objective was to take the banks public and distance them from politics, a first step has been taken,” Resti says. “Foundations have operated to retain banks’ control, and reforms have been implemented with an eyedropper.”
The International Monetary Fund, which conducted a review of Italy’s lenders this year and published its assessment yesterday, said the current legal framework of banking foundations should be revised “to require greater transparency, corporate governance, and sound financial management, and encourage further diversification.” The IMF in a statement also said foundations’ “systemic presence and peculiar governance structure warrant closer oversight.”
About 29 percent of foundation directors are nominated by local governments, according to Acri. In the case of the Fondazione Monte Paschi, a majority had the backing of politicians and the ability to appoint the bank’s managers.
The foundation said on March 12 that it’s reviewing its statute and has proposed reducing the number of political nominees to fewer than 50 percent.
Giuseppe Mussari, 50, a former Monte Paschi chairman who’s facing allegations of misconduct starting with the bank’s purchase of Banca Antonveneta SpA in 2007, had previously been chairman of the foundation. Mussari’s lawyer didn’t return calls seeking comment.
“The Monte Paschi foundation had a negative development, but it is an exceptional situation,” Acri Chairman Giuseppe Guzzetti says. “Having diversified their holdings, the banking foundation is a model that is sustainable, and foundations’ mission isn’t managing banks. Notwithstanding the economic crisis, 2012 was a better year.”
Amato, who turns 75 on May 13 and is now a senior adviser to Deutsche Bank, expressed a harsher view in financial daily Il Sole 24 Ore on Feb. 3.
The foundations have evolved into “soulless Frankensteins,” he wrote. The financial crisis tightened ties between banks and their foundation owners in an unfavorable way, Amato wrote. Pushed to the brink by writedowns and losses, banks relied on foundations to back capital increases instead of seeking private investors elsewhere.
“Foundations have ended up sharing banks’ destinies, suffering deeply from losses that these were undergoing,” Amato wrote. He declined to be interviewed for this article.
In the five years through 2011, Italy’s foundations injected 6.9 billion euros in their banks. That’s almost as much as the 7.2 billion euros they made in charitable contributions in the same period, according to Acri.
Nowhere was this bank-foundation bind clearer than in the Tuscan city of Siena. The Fondazione Monte Paschi is paying off debt it assumed to participate in the bank’s 2.2 billion-euros rights offering in 2011. Creditor agreements and scarce liquidity prevent the foundation from donating more than 5 million euros this year, its strategic guidelines show. Contributions totaled about 21 million euros last year, down from 233 million euros in 2008. Mancini, the foundation’s chairman, declined to comment.
Last year, the foundation, which then owned 48 percent of the bank’s shares, nominated Alessandro Profumo, 56, as Monte Paschi’s new chairman and approved the appointment of Fabrizio Viola, 55, as chief executive officer.
Brought in to turn around the company, they’re now battling to restore investor confidence. The uncovering of derivatives deals from 2008 and 2009 used to mask earlier losses led to a 730.4 million euros hit to assets. The bank is suing its former top managers as well as Nomura Holdings Inc. (8604) and Deutsche Bank, seeking 1.2 billion euros in damages.
Current and former Monte Paschi executives declined to comment. Deutsche Bank said in a statement that the claims “are entirely without merit” and that the transaction “received the requisite approvals of the client who was independently advised.” Nomura, which has filed a lawsuit against Monte Paschi, declined to comment.
Aside from the alleged wrongdoing, it is Monte Paschi’s core business that may hamper its ability to return to profitability. Bad loans as a proportion of total lending may rise 1 percentage point a quarter, according to estimates by Alberto Gallo, a London-based analyst at Royal Bank of Scotland Group Plc.
Italian corporate and household nonperforming loans rose to a record in January, reaching 126.1 billion euros, according to data from the Italian Banking Association. Banks’ gross nonperforming loans as a proportion of total lending increased to 6.4 percent from 5.4 percent a year earlier.
Monte Paschi tomorrow reports fourth-quarter earnings and may post a loss of about 761 million euros, based on the mean estimate of eight analysts surveyed by Bloomberg.
“We’ve hit a wall, and we’re going to have to confront the failure,” says Bernardo Bortolotti, an economics professor at Turin University who advised the Italian Treasury on asset sales from 2002 through 2005. “Instead of completing the process of privatization and creating multiasset endowment funds, we’ve created philanthropic hedge funds.”
- Spokesman for Italian bank Monte Paschi di Siena found dead (telegraph.co.uk)
- Monte Paschi’s former finance chief returns to jail (Reuters) (newsdaily.com)