Monte Paschi Hid Documents on Deals, Bank of Italy Says

Banca Monte dei Paschi di Siena SpA, the Italian bank seeking a second state bailout in four years, hid documents from regulators on financial transactions that may prompt the lender to restate profit.

“The nature of some transactions involving Monte dei Paschi di Siena reported by the press has been disclosed only recently after hidden documents were found by new executives,” the Bank of Italy said in an e-mailed statement yesterday. “The transactions are now being reviewed by the central bank’s oversight division as well as judicial authorities.”

Monte Paschi said on Jan. 17 it will review its accounts after Bloomberg News reported the lender engaged in a derivative with Deutsche Bank AG in 2008, dubbed “Project Santorini,” that obscured losses before it sought a government bailout the next year. The Siena-based bank said in a statement yesterday it’s reviewing three money-losing derivative deals, dubbed Santorini, Alexandria and Nota Italia, which led to losses for the bank.

“This does not clarify if there are other deals that may have allowed Monte Paschi to delay recognition of losses and/or lower artificially their risk-weighted assets,” Alberto Cordara a London-based analyst at Bank of America Corp., with an underperform recommendation on the stock, wrote in a note today. The Bank of Italy statement “may entail a high risk of litigation,” he said.

Stock, Bonds

Monte Paschi fell as much as 7.6 percent in Milan today, the biggest drop on the 46-member Stoxx 600 Banks Index and extending a five-day decline to 20 percent. The company lost 6.8 percent to 23.69 cents by 4:15 p.m. The bank’s 4.875 percent bonds due 2014 dropped as much as 1.65 percent to 99.31 cents on the euro, the biggest decline since they were sold on Sept. 11, Bloomberg Bond Trader prices show. That pushed the yield up to 472 basis points more than the benchmark midswap rate, compared with a low of 314 on Jan. 18, according to data compiled by Bloomberg.

Executives at Monte Paschi, the world’s oldest bank, are under pressure from investors to fully disclose losses from derivative transactions after saying in November it needed an additional 500 million euros ($666 million) of government money to bolster capital because of the contracts. Shareholders meet this week to approve two capital increases required by the Treasury for the lender to get that aid.

Full Transparency

Monte Paschi’s losses from the transactions under review were about 720 million euros, Il Messaggero newspaper reported today, citing an interview with Chief Executive Officer Fabrizio Viola. Former managers signed a derivative with Nomura Holdings Inc. three years ago that cut earnings by 220 million euros in 2012, Il Fatto Quotidiano reported two days ago.

“The transparency must be full,” the Associazione di Piccoli Azionisti Azione Banca Monte dei Paschi di Siena, an association of the lender’s individual investors, said in a statement yesterday. “The biggest shareholders must take the responsibility and burden of financial strategies put in place to hide losses.”

Monte Paschi, which may decide to renegotiate the deals, said aid already requested from the government will cover the impact of the transactions on its accounts.

Shareholders will vote tomorrow on 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, based on the average estimate of 16 analysts surveyed by Bloomberg.

Regaining Confidence

“The ongoing clean-up of the balance sheet by the new management is a pre-requisite to regain investors’ confidence,” Anna Maria Benassi, an analyst at Kepler Capital Markets who advises clients hold the share, wrote in a report today.

Italy’s Treasury said in a statement today that conditions for Monte Paschi’s rescue have not been met. Shareholders must first approve the capital increase, and the Bank of Italy must give its opinion on Monte Paschi’s current and expected financial strength, the Treasury said.

The bank’s former chairman, Giuseppe Mussari, resigned two days ago as head of the Italian Banking Association lobby group.

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 Viola.

Reviewed Trade

Nomura said on Jan. 22 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 lawfully. He didn’t respond to e-mails sent to his personal account or calls to the association’s Rome office.

Monte Paschi said in a statement two days ago that the Alexandria deal 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.

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.

Similar Deal

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.

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 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.

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