EU Lawmakers Criticize Deutsche Bank’s Monte Paschi Derivative

Deutsche Bank AG and Banca Monte dei Paschi di Siena SpA were criticized by European Union lawmakers for entering into a derivative that obscured losses at the world’s oldest lender before it sought a taxpayer bailout.

Monte Paschi said yesterday it will hold a “thorough” review of its accounts after Bloomberg News reported that Germany’s largest bank loaned Monte Paschi about 1.5 billion euros ($2 billion) in December 2008 through a deal that helped the Italian lender mitigate a 367 million-euro loss from an older derivative contract with Frankfurt-based Deutsche Bank.

“The only way to prevent this kind of thing is through simplicity so that things can’t be hidden in complexity,” Sharon Bowles, chairwoman of the European Parliament’s economic and monetary affairs committee, said by e-mail. “This ultimately means banning products with complex play-offs.”

The criticism adds to pressure on both lenders which are already being examined by regulators. Deutsche Bank is being probed over allegations it rigged global interest rates and Monte Paschi is being investigated for market manipulation before its bailout. The Italian lender, which lost money from the trade, is seeking 500 million euros more from taxpayers, bringing the total cost of its rescue to 3.9 billion euros.

Deutsche Bank reaped about 60 million euros in profit in the first two weeks of December 2008 through the loan, dubbed Project Santorini, according to more than 70 pages of documents outlining the deal and obtained by Bloomberg News. As part of the deal, the Italian lender made a losing bet on the value of the country’s government bonds, according to six derivatives specialists who reviewed the files. Monte Paschi never disclosed the effect of the 2008 transaction in its annual reports.

‘Bad Investment Choices’

“This case is yet another example of a bailed-out bank having misled customers and taxpayers by taking unnecessary risks in their trading activities,” Arlene McCarthy, the European Parliament lawmaker in charge of steering rules against market abuse through the assembly, said by e-mail today. “It’s essential that we have strong EU rules which ensure full transparency and protect consumers and taxpayers paying for the bad investment choices of banks.”

The European Market Infrastructure Regulation will prevent similar transactions because trades would have to be centrally checked by a central counterparty and reported to the regulator, McCarthy said.

Kathryn Hanes, a spokeswoman for Deutsche Bank in London, reiterated the bank’s earlier statement on the transaction, saying it “was subject to our rigorous internal approval processes and also received the requisite approvals of the client who was independently advised.”

A spokeswoman for Monte Paschi declined to comment. The shares fell as much as 1.3 percent in Milan trading and were down 0.7 percent at 29.65 euro cents as of 3:25 p.m. today.

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