Paschi Pressed to Disclose Derivative Losses as Vote Looms

Banca Monte dei Paschi di Siena SpA executives are under pressure from investors to fully disclose losses from derivative contracts as shareholders prepare for a key vote on its government rescue this week.

Monte Paschi shares fell 8.4 percent in Milan today, extending yesterday’s 5.7 percent drop after Il Fatto Quotidiano said former managers signed a derivative with Nomura Holdings Inc. three years ago that will cut earnings by 220 million euros ($293 million) in 2012. The lender pledged a full review of its accounts after Bloomberg News reported on Jan. 17 that Monte Paschi also engaged in a swap with Deutsche Bank AG that obscured losses before the bank’s bailout in 2009.

Former Monte Paschi Chairman Giuseppe Mussari resigned yesterday as head of the Italian Banking Association lobby group. The world’s oldest lender is under pressure to disclose the full extent of its use of derivatives after saying in November that it needed an additional 500 million euros of government money to bolster capital because of the contracts. Shareholders meet this week to approve two capital raisings required by the Treasury for the lender to get that aid.

“We will ask for full transparency,” Guido Antolini, a member of Associazione di Piccoli Azionisti Azione Banca Monte dei Paschi di Siena, an association of the lender’s individual investors, said in a telephone interview. “We will want to know what was inherited from previous executives and the actions that the bank is taking to repair the damage.”

Shareholder Vote

Shareholders will vote on Jan. 25 to approve two capital raisings allowing Monte Paschi to qualify for the additional funds that will bring the cost of its bailout to 3.9 billion euros. The lender is expected to report a 1.78 billion-euro loss for 2012, according to the average estimate of 16 analysts surveyed by Bloomberg.

“There is no doubt investors will vote in favor,” said Stefano Girola, who manages about 3 billion euros at Banca Albertini Syz & Co. in Milan and doesn’t own Monte Paschi stock. “Aid is essential to allow the bank to survive, even more so now that managers have to clean up the balance sheet.”

Monte Paschi’s board today received the backing of its second-largest shareholder, the Aleotti family, which owns 4 percent of the lender. The lender’s CEO is “working hard” to turn around the bank, Alberto Giovanni Aleotti, who also sits on Monte Paschi’s board, said in an e-mail. The board “is reviewing the bank’s figures and working with complete transparency,” he said. He declined to comment on the swaps.

Former Managers

The lender discovered in October that former managers signed an agreement with Nomura to cover losses on a mortgage-backed derivative entitled Alexandria with new, riskier derivatives, Il Fatto Quotidiano reported, citing an internal report by Chief Executive Officer Fabrizio Viola.

Nomura said yesterday that Mussari “fully reviewed and approved” the trade. Monte Paschi’s former chairman, in his letter of resignation from the lobby group, said he always acted according to the law. He didn’t respond to e-mails sent to his personal account or calls to the bank association’s Rome office.

Monte Paschi said in a statement the Alexandria transaction was part of “restructured transactions” whose effect is subject to a review that will be completed in the first half of February. It added in a later statement that the Nomura transaction was never submitted to the board for approval. KPMG, the bank’s auditor until April 2012, said it never received documents on the trade.

Deutsche Bank

The Italian lender also entered into a similar transaction with Deutsche Bank in December 2008 under which it received a

1.5 billion-euro loan that helped it to mitigate a 367 million-euro loss from an older derivative with the Frankfurt-based bank, Bloomberg News reported on Jan. 17.

Deutsche Bank reaped about 60 million euros in profit in the first two weeks of December 2008 through the loan, dubbed Santorini, according to more than 70 pages of documents obtained by Bloomberg News detailing the deal. As part of that trade, 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 trade in its annual reports.

“The authorities and prosecutors have to shed a light on what happened,” said Carlo Alberto Carnevale-Maffe, professor of business strategy at Milan’s Bocconi University. “This has been a problem of governance. Using derivatives to manage risks is appropriate, but this must be done with full transparency.”

Antonveneta Purchase

Monte Paschi’s woes can be traced to Mussari’s decision in 2007 to spend more than Monte Paschi’s market value at the time to acquire rival Banca Antonveneta SpA, just as bank stocks hit their peak. The lender paid Banco Santander SA 36 percent more than what the Spanish lender paid for Padua, Italy-based Antonveneta two months previously. Monte Paschi was forced to write down the acquisition by 4.5 billion euros last year.

Prosecutors in Siena are now probing allegations of market manipulation and obstruction of regulatory activities surrounding Antonveneta’s purchase.

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