Siena banks at the heart of Italian corruption

[TonyGosling]

The old Siena is starting to filter into the international press, their not really that well informed but anyway the story is starting to fatten up. The international connections are also starting to stack up, with JP Morgan at the fore. Certain people in Siena have been warning that this was coming. A guy wrote a book a few years back called "The Cast of Siena" which basically revealed who and how things were being run. It sold a good few copies but was ignored by the mainstream media. The writer is on on a Roll !!


Patron of Siena Stumbles
Stefano Rellandini/Reuters

The headquarters of Monte dei Paschi in Siena, Italy. At 541 years old, it is the world's oldest operating bank.

http://www.nytimes.com/2013/02/23/business/global/the-patron-of-siena- monte-dei-paschi-stumbles.html?pagewanted=all&_r=0
By JACK EWING and GAIA PIANIGIANI

Published: February 22, 2013

SIENA, Italy — Cut into the stonework of the imposing Palazzo Salimbeni is a name that has been entwined with the fortunes of this Tuscan city for five centuries: Monte dei Paschi, or Mount of the Pastures.

Massimo Berruti for The International Herald Tribune

Alessandro Profumo, chairman of Monte dei Paschi, said he wanted it to be "a good bank," not "the lender of last resort."

Since the days of the Medici family in Florence, 40 miles to the north, the banking house of Monte dei Paschi has rained wealth on the people of Siena. For 541 years, it has endured war, plague and panic, and it stands today as the world’s oldest operating bank.

But beyond the arched entrance of the Salimbeni palace, inside the stately offices of Monte dei Paschi di Siena, a thoroughly modern fiasco has done what the centuries could not. Monte dei Paschi, founded in 1472, has been brought to its knees by 21st-century finance.

To howls across Italy, the government hastily arranged a bailout worth $5.1 billion. Now, the widening troubles, which began at a time of growing economic distress in Italy, have boiled over into an issue in nationwide elections to be held on Sunday and Monday.

Nowhere is the shock greater than in Siena. For many here, Monte dei Paschi is more than a bank. It is “Babbo Monte,” or Daddy Monte, the city’s largest employer and greatest patron. For as long as anyone can remember, its money has helped pay for charities and civic works, including Siena’s signature annual event, the colorful Palio horse races around the Piazza del Campo each summer. Indeed, the bank’s largest shareholder, the charitable Monte dei Paschi Foundation, has long operated as a sort of shadow government here.

Now, everyone wonders what will happen without Babbo Monte’s money.

“Nothing falls from the sky anymore,” said Mario Marzucchi, president of Misericordia di Siena, which provides health care to the city’s poor and operates a fleet of ambulances. The charity is struggling to maintain its services and to renovate its clinic, located in a former Benedictine monastery.

Caterina Barbetti, president of a cooperative that operates nursery schools, said she had been forced to reduce free child care for the city’s poor. She used to depend on Babbo Monte, too. “Now,” she said, “he has left.”

Monte dei Paschi has occupied its palace in Siena’s old town since the bank was founded, although it has added modern trappings like bulletproof glass doors. The bank’s archives are in a vaulted room once used to store weapons. In the piazza out front stands a statue of Sallustio Bandini, an 18th-century Tuscan economist who was an early advocate of free trade.

Where Monte dei Paschi goes from here will be determined largely by its chairman, Alessandro Profumo, a prominent banking executive brought in from Milan. Mr. Profumo, 56, is no stranger to controversy. In 2010, he was ousted as chief executive of another Italian bank, UniCredit, after the Libyan government acquired a large stake in that bank.

Seated in an office decorated with a fresco, begun in the 1400s, of the Virgin Mary protecting the citizens of Siena, Mr. Profumo said Monte dei Paschi had been undone in part by its dealings with several large international banks. JPMorgan Chase and others helped arrange transactions that ultimately hurt the Italian bank. The foreign banks have not been accused of wrongdoing, but Mr. Profumo suggested they profited at Monte dei Paschi’s expense.

“Clearly, many investment banks made a lot of money on Monte dei Paschi,” he said. “I would say too much money.”

The picturesque setting aside, the outlines of what went wrong here are all too familiar. In Siena, as in much of Europe, banks controlled by politicians provided loans and jobs in return for votes, and sponsored charities and civic organizations to buy good will. Vincenzo Loi, chief financial officer of A.C. Siena, the city’s soccer team and another longtime beneficiary of Monte dei Paschi’s largess, likened the system to the way the Roman emperors kept their citizens happy with bread and circuses.

Monte dei Paschi’s troubles have been exploited by both the right and the left in Italian politics. At a meeting of the bank’s shareholders in January, Beppe Grillo, a comedian turned populist political leader, delivered a tirade about Monte dei Paschi’s longtime connections to the Democratic Party, which for decades was the dominant political force in the city.

The bank’s real problems began in 2008, when it acquired Antonveneta, a small regional bank, from Santander of Spain. Analysts regarded the price of 9 billion euros ($11.9 billion) as wildly inflated even then, and to compound the problem, Monte dei Paschi paid cash. Stretched, it turned to a series of transactions to raise money without compromising its capital base, a development that would run afoul of banking regulations.

Enter JPMorgan. The American bank helped Monte dei Paschi raise about 1 billion euros with securities that had features of both ordinary shares and bonds. As long as Monte dei Paschi remained profitable, the notes would pay a fixed dividend, much like a bond payment, of about 5 percent. But if it got into trouble, the dividends would stop and the notes would be treated as shares.

According to the Bank of Italy, the country’s central bank, managers at Monte dei Paschi concealed certain features of the transaction. “M.P.S. did not disclose to the Bank of Italy significant parts of the operation in question,” said Paola Ansuini, a spokeswoman for the central bank, in an e-mail, referring to Monte dei Paschi and the notes designed by JPMorgan.

Prosecutors are examining the transaction as part of a broad inquiry into the events that led to Monte dei Paschi’s problems. There is no evidence that JPMorgan did anything illegal. While critical of JPMorgan and other investment banks, Mr. Profumo, Monte dei Paschi’s chairman, said it was the Italian bank’s responsibility to keep regulators informed. JPMorgan declined to comment.

There is little question, though, that JPMorgan helped enable an acquisition that was regarded as foolish by many people and that severely weakened Monte dei Paschi. Later, Deutsche Bank of Germany and Nomura of Japan undertook transactions with previous management at Monte dei Paschi that helped it conceal losses of 730 million euros, raising further questions about the conduct of investment banks.

Though his office is fit for a Renaissance prince, it is hard to see why Mr. Profumo would want the job. His salary is the equivalent of about $80,000 a year, and he is not likely to make many new friends in Siena.

Along with Fabrizio Viola, Monte dei Paschi’s chief executive since last year, Mr. Profumo is dismantling the patronage system that has prevailed for so long — and cutting costs. He and Mr. Viola have purged politically connected officials from the bank’s management, closed hundreds of branches and negotiated an agreement with unions to eliminate about 4,000 jobs. He said he could not rule out the possibility that Monte dei Paschi would be sold — a prospect many Sienese consider unthinkable.

“The role of Monte dei Paschi will be to be a good bank,” Mr. Profumo said. “We will not be the employer of last resort. We will not be the lender of last resort. We will be a good bank. That’s enough.”

This article has been revised to reflect the following correction:

Correction: February 22, 2013

A caption in an earlier version of this article misspelled the city in which Monte dei Paschi is based. It is Siena, not Sienna.

[TonyGosling]

Banca Monte dei Paschi di Siena

A mountain of risk
http://www.economist.com/blogs/schumpeter/2013/01/banca-monte-dei-pasc hi-di-siena
Jan 26th 2013, 20:30 by D.L | ROME

CONFUSED, shocked and furious. These three words pretty much sum up how shareholders of the Banca Monte dei Paschi di Siena (MPS), Italy's third largest bank and the world's oldest, felt when they gathered on January 25th. The meeting had been called to ask them to put their bank in hock to the state through a convertible bond subscribed by the government of up to €4.5 billion ($6 billion). (When the stock market closed on the day of the meeting, MPS was worth just under €3 billion.) Aimed at bringing the bank's capital ratios up to scratch, the state aid, which was approved by the shareholders, comes at an eye-watering price: MPS will pay 9% interest, and the rate will increase starting next year.

The meeting capped a bad week for Siena, the bank and its shareholders. Two days before they met, the Bank of Italy, the central bank and banking regulator, said that the true nature of some of MPS’s transactions emerged only recently, following the discovery of documents kept hidden from the supervisory authority and brought to light by the bank’s new management. The latter had begun investigating suspect operations in October. (Digging is nearly finished: within two weeks the board, chaired since April by Alessandro Profumo, UniCredit's chief executive between 1997 and 2010, should know the effect of the dodgy operations.)

MPS had always been considered a conservative institution—solid, prudent, unadventurous and tightly linked to the city where it was founded in 1472 and still has its head offices. Hence shareholders' dismay to learn that the previous management, pushed aside a year ago at the behest of the Bank of Italy, had apparently been indulging in finance of the more risky sort—and that its bets had not panned out. At the end of September net losses for the MPS Group amounted to almost €1.7 billion. Shareholders are now wondering whether results for the full year will be worse than those of 2011 when the net loss reached almost €4.7 billion.

Shareholders are also asking why things did go so wrong. At the root of MPS’s troubles are politics, poor management and inadequate supervision. Twenty years ago, when Italy's public-sector banks were transformed into joint stock corporations, politicians in Siena were unwilling to let go. They wanted to maintain the bank's local character and keep its jobs in and around the city. Even today, the 16-member board of the Fondazione Monte dei Paschi di Siena, which owns a stake of almost 35% in the bank, is dominated by political appointees: eight are chosen by the city authorities and five by provincial authorities.

A lawyer by profession and linked to the left, which has long run the city, Giuseppe Mussari was appointed chairman of the foundation in 2001. He became the bank's chairman in 2006 and held that post until last year. In 2007 MPS’s board decided to buy Banca Antonveneta from Santander for a whopping €10 billion—a move that has since bled MPS and crippled the foundation.

Attention now focuses on what the regulator has done or not done over the past five years. Ignazio Visco, the Bank of Italy's governor, has said—rather disingenuously—that the central bank does not police banks or fight crime but is concerned with prudential supervision. He has also said that the regulator steps in when bank management seems imprudent.

The troubles at MPS date back to when Mr Visco’s predecessor, Mario Draghi, now the president of the European Central Bank, was governor of the Bank of Italy. Mr Draghi got that job in December 2005 in the wake of a scandal that also involved Banca Antonveneta. Perhaps Mr Draghi should have instructed his colleagues to dig more deeply into MPS and look more closely at the takeover of Banca Antonveneta.

Politics, poor management and lax supervision already make for a distasteful banking cocktail. Yet another ingredient may make it more unpalatable still. Magistrates and Italy's financial police are investigating the possibility of corruption in connection with the takeover of Banca Antonveneta. Hopefully, all this won’t spell the end of the independence of world’s oldest bank.