Cassino's Refusal to Disclose Swap Losses With JPMorgan Results in Lawsuit
JPMorgan Swap Deal With Cassino Must Be Disclosed
JB Reed/Bloomberg
JPMorgan Chase & Co. and Cassino agreed in 2009 to terminate the contract, without disclosing financial terms.
JPMorgan Chase & Co. and Cassino agreed in 2009 to terminate the contract, without disclosing financial terms. Photographer: JB Reed/Bloomberg
Cassino, the central Italian city that cost taxpayers 2 million euros ($2.8 million) because of an interest-rate swap with JPMorgan Chase & Co. (JPM), was taken to court earlier this month over its unwillingness to disclose how it lost the money.
The lawsuit, brought by Bloomberg News, asks an administrative court to enforce a ruling by a regional ombudsman that Italian law requires the city to release documents on a swap agreement between Cassino and a unit of Bear Stearns Cos., which JPMorgan bought in 2008. The New York-based bank and Cassino agreed in 2009 to terminate the contract, without disclosing financial terms.
The city of 33,000 people, the site of some of the worst fighting in World War II, withheld the documents because of the potential damages it would incur if it breached a confidentiality clause with JPMorgan, the second-biggest U.S. lender by assets, the city said in a letter to Bloomberg last month. The news service has a “direct, concrete” interest and should be granted access to the swap file, the regional ombudsman of Lazio said in its final ruling on the case in December, citing a 1990 Italian freedom of information law.
“There’s a need for greater transparency and this would create an important precedent for accountability,” said Gustavo Piga, author of “Derivatives and Public Debt Management,” and a professor at Tor Vergata University in Rome. “Knowing the scale of the loss and how it was incurred is helpful to understand how the finances are being managed.”
JPMorgan is named as an interested party in the lawsuit because of the potential impact on the firm. A spokeswoman for the lender in Milan declined to comment on the suit. Cassino city officials didn’t respond to e-mails and telephone calls.
‘Unavoidable Obligation’
Debt isn’t “only a contract with a bank but an unavoidable obligation for future generations,” Bloomberg said in its claim, filed at the administrative court in Latina, near Rome, on March 11.
JPMorgan is separately on trial in Italy in the first European criminal case involving swaps. The bank, together with Deutsche Bank AG (DBK), Depfa Bank Plc and UBS AG, faces charges in Milan for fraud for tricking the municipal government into buying the contracts. Meanwhile, JPMorgan is among banks that are suing Italian municipalities in London to enforce the swaps. The cases are pending.
Deutsche Bank, Germany’s biggest bank, lost a case over interest-rate swaps last week, the first ruling by the country’s highest court on derivative sales. The court said the Frankfurt- based lender didn’t adequately disclose risks and ordered it to pay 541,074 euros in damages to its customer, Ille Papier Service GmbH.
‘Extremely Risky’ Bet
Faced with shrinking income and growing expenses, Italian cities bought swaps that would typically offer lower interest expenses in the near-term, while exposing the buyers to the risk of increased interest costs in later years. Italian cities faced losses of at least 1.2 billion euros from the transactions as of June, data compiled by the central bank show.
Cassino entered a seven-year swap with Bear Stearns in 2003 to adjust payments on about 22 million euros of debt. The swap switched the city’s 4.7 percent fixed interest rate payment for a variable rate, according to a June 2009 report by Italy’s financial police.
The city paid a floating rate based on the U.S.-dollar London interbank offered rate, an “extremely risky” bet given that Libor was at a record low, the police said in testimony to the Italian Senate in 2009.
Three-month U.S. dollar Libor was at a 1 percent in June 2003 and by January 2006 had surpassed 4.7 percent, according to data compiled by the British Bankers’ Association. The measure climbed as high as 5.7 percent in September 2007 as credit markets began to seize up, before declining to a record low of 0.25 percent by December 2009 after policy makers cut rates.
Jefferson County
Municipalities from Cassino to Jefferson County, Alabama, as well as institutions such as Harvard University have lost money on swaps aimed at cutting costs that instead raised them.
Harvard completed agreements in December 2004 that locked in interest rates on $2.3 billion of bonds. The benchmark overnight interest rate set by the U.S. Federal Reserve was then 2.25 percent. The swaps lost value as interest rates fell in 2008 to near zero, and the university paid almost $1 billion to terminate the agreements in 2009.
The U.S. Justice Department is investigating sewer financing by Jefferson County in a nationwide probe of an alleged conspiracy by Wall Street banks to rig bids and fix prices on derivatives sold to municipalities, according to court papers. In Italy, some local governments stopped making payments and others seek to recover fees they say were hidden.
Battle site
The police said Cassino was one of its most significant cases of “irregularities” involving derivative purchases, without elaborating. The city and its mountaintop abbey were almost entirely destroyed during the battle of Monte Cassino in 1944 amid the Allied drive to the Italian capital.
The local government was put under special administration by the prefect, the state’s representative in the city, in July after the assembly failed to approve the town’s budget and the elected mayor stepped down. Off-balance-sheet debt and lower income were placing pressure on the town’s finances, the mayor said in a statement in December 2009.
Bloomberg News sued the European Central Bank in December to make it release documents showing how Greece used derivatives to hide its fiscal deficit and helped trigger the region’s sovereign debt crisis. The case is pending.
To contact the reporters on this story: Elisa Martinuzzi in Milan at emartinuzzi@bloomberg.net; Lorenzo Totaro in Rome at ltotaro@bloomberg.net
To contact the editors responsible for this story: Edward Evans at eevans3@bloomberg.net; Craig Stirling at cstirling1@bloomberg.net
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