Where does this saga – mired in high finance, allegations of corruption and political interference – put them in the pecking order of Italy’s corporate scandals? Is this more serious than the demise of Parmalat, the dairy company that collapsed in 2003, in Europe’s biggest bankruptcy?
As judicial investigations develop and the political fallout from the affair widens, ascribing MPS its rightful place in Italy’s hall of shame still needs time. But what is becoming clear is the extent to which, in the darkest days of the eurozone sovereign crisis, MPS joined another list: one of the too-big-to-fail banks.
But at its heart, MPS raises persistent questions about transparency in Italian business and why Italy’s third-largest bank by assets was allowed to rack up risk for so long so that it became a systemic threat in the heat of the sovereign crisis.
“Monte Paschi was important to the entire Italian system. It had to be defended,” says one senior banker with direct knowledge of the affair.
An expensive acquisition
The roots of MPS’s downfall lie in its costly €9bn acquisition of Banca Antonveneta in the last days of the economic boom in November 2007. The buyout, done without due diligence, gave MPS the largest corporate loan book relative to its size in Italy, which today remains the jewel at the centre of the bank.
But at nearly 20 times earnings, almost double the average for Italian banks at the time, it drastically weakened its capital strength just as the financial crisis was about to hit. It was a deal from which chairman Giuseppe Mussari – a Calabrian dubbed Belli Capelli
for his wavy, near shoulder-length hair – and his softly spoken chief executive Antonio Vigni, were never to recover.
The bank’s share price dropped 11 per cent to €3.72 on the day following the announcement of the takeover, valuing the entire group at less than the value of its acquisition target. Santander, which had sold Antonveneta to MPS in one of the most audacious “flips” in banking history, had valued Antonveneta, minus a subsidiary which it kept, at €5.6bn.
The high cost of the takeover sparked immediate controversy not least because the sale came out of the fated break-up of ABN Amro that later engulfed Royal Bank of Scotland and Fortis. An analyst on the conference call with MPS management the day after bluntly asked: “Did you negotiate?” Within months, magistrates were probing the transaction and those investigations are now part of allegations of possible corruption.
Whatever the reasons for the price – and supervisors and those close to the deal say it was just a reflection of the euphoria of the boom – the transaction propelled the bank into a flurry of activity to rebuild capital. This ultimately led to a series of disastrous derivatives trades and the taking of huge debt by its main shareholder. This has deepened speculation about whether MPS can survive in its present form.
The Antonveneta deal was to be funded by a €5bn rights issue and €1bn issue of hybrid capital securities. But by the time of the rights issue, the stock price had fallen sharply to €2.03 and the shares in the rights issue were offered at €1.50. Moreover, it would turn out to be just the first in a series of requests for capital that pushed the bank’s ownership structure, dominated by a local banking foundation, to the brink.
By March 2009, MPS had to ask the government for its first slug of state aid as its plans to sell assets to pay for Antonveneta floundered in the financial crisis. The bank took €1.9bn in the form of “Tremonti Bonds”, named after Giulio Tremonti, economy minister in Silvio Berlusconi’s centre-right government. The bank’s net profit plunged to €220m in 2009, from €953m in 2008.Priming the time bomb
While MPS’s receipt of state aid was played out in public, in private the bank was creating a time bomb in its castellated Renaissance headquarters. From the end of 2008 and through 2009, MPS restructured as many as eight derivatives deals apparently to keep losses worth hundreds of millions of euros off its balance sheet, according to people with knowledge of the matter.The leading playersGiuseppe Mussari
Resigned as chairman of MPS in April under pressure from the Bank of Italy. Quit as head of Italy’s banking lobby amid allegations of market abuse, which he denies.Mario Draghi
Made a robust defence of regulation of MPS while head of the Bank of Italy, detailing interventions by the central bank and calling for extra supervisory powers.Giulio Tremonti
Former economy “superminister” was responsible for supervising the MPS foundation as it ran up €1.1bn in debts. Has said the Treasury shares no blame.Alessandro Profumo
Arrived at MPS last year to oversee a clean-up. That process unearthed €730m of “hidden” derivatives losses, which are now the subject of judicial inquiries.
Significantly in 2008, MPS did a deal with Deutsche Bank to restructure a lossmaking 2002 swap called “Santorini” which at today’s prices books a loss of €429m.
A few months later, MPS applied similar treatment to another lossmaking derivatives trade called “Alexandria”, this time with Nomura as a counterparty. Again at today’s prices, the losses are worth €308m, according to the bank’s new management. But at the time the hit was spread over three decades by repurchase agreements based on Italian sovereign debt.
“There was a clear intention to spread losses over a 30-year period,” according to a person with direct knowledge of the term sheets. The Bank of Italy says the scope of the transactions, which are now the subject of regulatory and judicial scrutiny, were not fully discovered until October 2012.
At the same time the bank’s top managers were building a huge portfolio of €25bn of Italian BTP sovereign bonds, storing up another problem just as the eurozone sovereign crisis was about to strike. In July 2010, even though the bank’s share price continued to fall, MPS surprised analysts by passing the first round of European Banking Authority stress tests.
However, the bank’s board was being given a different message privately by the central bank. According to the central bank, MPS’s board and its auditors in the autumn of 2010 requested that the bank again increase its capital levels. Nonetheless, on October 25 2010, with its share price down to €1.05, MPS dismissed media reports about the need for a capital raising as “groundless”.
Three months later with still no word about capital raising, there was a rare public expression of the high tension between the central bank and MPS. Mr Draghi, speaking at an annual banking congress, broke away from a scripted speech to “make a suggestion”. “It would be wise for you either to raise capital or make clear any plans to raise capital before the stress tests,” he said. Mr Mussari, sitting in the front row, directly in Mr Draghi’s view, left the conference abruptly at the end of the speech, visibly angered.
When the €2.5bn capital raising finally took place in April 2011, it pushed the foundation that owned more than half of MPS shares to the brink, putting the bank’s ownership in play as Italy roared into the crisis.Extra funds
To maintain its control of the bank, the MPS foundation decided in 2011 it needed to come up with an additional €1bn. The foundation, which is controlled by the traditionally centre-left Sienese political community and the heads of local guilds, owned more than half of MPS shares. Mr Mussari, now head of Italy’s banking lobby, had been chairman of the foundation before becoming chairman of MPS.
Having run down its finances subscribing to previous capital raisings, particularly the 2008 rights issue to fund the acquisition of Antonveneta, the foundation called Goldman Sachs and JPMorgan. The latter bank lined up a consortium to lend the foundation €600m. It raised a further €400m by transferring nearly 10 per cent of its shares in MPS to Goldman to sell.
That sale by Goldman, which reduced the foundation’s stake in the bank to about 51 per cent, put downward pressure on the MPS stock price, according to people familiar with the matter. In the first half of June 2011, the shares fell 20 per cent, which caused the collateral to lose value.
By late October 2011, as dividends from the bank dried up as its profits fell, the foundation was forced to ask for a standstill from its creditors on its total €1.1bn of debt, say people with direct knowledge of the event. With more than 95 per cent of the foundation’s assets tied up in the bank, and the MPS share price falling rapidly, the loan to value ratio had soared to levels that put it in breach of covenants.
Over the next two months, the bank teetered as creditors came close to seizing the shares that they held as collateral on the foundation’s loan and selling them in the open market. However, they were discouraged from doing so by Italy’s most senior financial authorities, according to several people familiar with the matter.
In parallel, the Bank of Italy was staging its own covert intervention at the bank. That October, the central bank has said it was “obliged” to conduct emergency securities lending operations in order to enable MPS to increase its recourse to refinancing from the ECB. As lender of last resort, it allowed MPS to swap loans and mortgages that were not ECB eligible with some €2bn of Italian Treasury bonds. Regulators told the Financial Times that the bank was the most at risk in Europe of full or partial nationalisation. MPS denied this and said it was being victimised.A lurid unravelling
Now five years after the acquisition of Antonveneta, accusations of a systemic cover-up have exploded before the national elections on February 25, as campaigning politicians have sought to make capital out of the bank’s request for its second bailout in four years. This time the rescue is worth €3.9bn. This is partly to account for attempts by new management, led by Alessandro Profumo, to mark to market €730m of losses from the derivatives deals.
Mr Mussari and Mr Vigni, who quietly left the bank in early 2012 amid moral suasion from the Bank of Italy, are now facing noisy recriminations and allegations of market abuse.
On one side, senior bankers say, given that the eurozone crisis has eased, Italy’s supervisors succeeded in averting a banking crisis and today is a better time for a clearer view of MPS’s weakness to emerge.
Nevertheless, the longer-term impact may reverberate far beyond the walls of Siena.
Lurid tales of the bank’s unravelling tarnish Italy’s reputation and raise questions about how the country is run when, for the sake its long-term competitiveness, it needs to instil confidence in foreign investors.
For those in Siena mulling their place in Italy’s scandals, in this respect at least, the scandal in their city takes its place alongside Tangentopoli
The Financial Times Limited 2013. You may share using our article tools.