Paschi Hidden Deals Bring 730 Million Euros of Losses

Banca Monte dei Paschi di Siena SpA, the Italian bank engulfed by probes of its former managers, will take a 730 million-euro ($987 million) hit to its assets after accounting for structured deals that hid earlier losses.

Italy’s third-biggest lender said that the impact of a trade dubbed Santorini will be 305.2 million euros, while a deal labeled Alexandria will bring losses of 272.5 million euros. Monte Paschi rose in Milan trading, paring losses to 18 percent since Bloomberg News first published details of Santorini on Jan. 17.

“The amount isn’t bad -- no further capital will be needed,” said Ronny Rehn, an analyst at Keefe, Bruyette & Woods in London. Still, “the restructuring of the bank is being done in the wrong way. Monte Paschi needs equity, not more debt carrying a coupon greater than the return-on-equity it will be able to achieve for years to come.”

Chief Executive Officer Fabrizio Viola today ruled out the existence of any more transactions that disguise previous losses as his management sought to reassure depositors and investors it will succeed with a turnaround plan that is central to a 3.9 billion-euro taxpayer bailout due this month. The subject of investigations spanning from allegations of market manipulation to false bookkeeping, Monte Paschi will use state funds to boost capital after not meeting regulators’ minimum requirements in a rescue some lawmakers and consumer groups oppose.

Shares Climb

“We have completed the analysis of the financial portfolio and there are no more Santorinis,” Viola said on a call with analysts. There’s been a “gradual return to normality” among corporate depositors after initial “volatility” when news first broke about the losses, he said.

Monte Paschi climbed 4.1 percent to 23.99 cents, valuing the world’s oldest bank at 2.8 billion euros.

The lender is restating the value of assets to reflect accounting errors on existing transactions at the time of the Santorini and Alexandria deals, the bank said. Santorini absorbed a fair value loss of 429 million euros in 2008 from a previous equity swap, while Alexandria incorporated a loss of 308 million euros, Monte Paschi said.

The bank is also taking a 151.7 million-euro hit from a third transaction, Nota Italia, whose fair value wasn’t reflected accurately during the life of the deal. Monte Paschi said it paid 139 million euros to restructure Nota Italia on Jan. 23, removing the risk related to Italian government bonds.

Draghi’s Role

The Bank of Italy, which oversees Monte Paschi, has drawn criticism from lawmakers for failing to force the bank to reveal the deals after spotting accounting anomalies in its inspections.

“The Banca d’Italia has done everything it should,” European Central Bank President Mario Draghi, who ran the Italian central bank at the time of the deals, said today. “It was me who signed both inspections. Don’t forget it was Banca d’Italia who gave most of the papers to the judiciary. Normally if you have a fraud, the supervisors don’t have police powers,” Draghi told reporters in Frankfurt.

The Bank of Italy loaned Monte Paschi 2 billion euros in 2011 to help protect its access to ECB financing, said an Italian central bank official.

Santorini, which saw Monte Paschi borrow about 1.5 billion euros from Deutsche Bank AG, helped Monte Paschi obscure a loss from an older derivative contract with the German lender, according to documents outlining the deal and obtained by Bloomberg News. As part of the arrangement, the Italian lender made a losing bet on the value of the country’s bonds.

Assets Seized

The use of long-term repos is common among banks, Viola said on the call today.

Monte Paschi said yesterday the restating will free up about 25.4 million euros from lower charges this year.

The bank’s pro-forma core Tier 1 ratio, a measure of financial strength, was 12.1 percent as of Sept. 30, Monte Paschi said. Tax benefits may reduce the net impact of losses, Chief Financial Officer Bernardo Mingrone said on the call.

Italy’s finance police yesterday said they executed five warrants to seize about 40 million euros in cash and securities as part of the criminal investigations. The assets were seized from trustees and banks as a preemptive step amid allegations of fraud against Monte Paschi, the police said in a statement, without identifying suspects and where the money was seized.

Prosecutors are investigating the bank under laws governing company responsibility to see whether crimes were committed by former executives, according to people with knowledge of the operation who declined to be identified. Former Monte Paschi employees are due to be questioned in Siena this week and next, one of the people said.

Government Bailout

The criminal probe is focused on Monte Paschi’s 2007 agreement to buy Banca Antonveneta SpA for 9 billion euros. Banco Santander SA had valued the lender at 6.6 billion euros when it purchased ABN Amro Holding NV’s Italian assets two months previously.

Under the government’s rescue plan, Monte Paschi will sell securities to the state paying a 9 percent coupon that may rise to as much as 15 percent. Viola said on Jan. 28 the board will complete the bailout request by early February, and the Italian Treasury will conclude the transaction by the end of the month.

Terms of the bonds have been approved by the European Union and shouldn’t change, Mingrone said today.

For Draghi, who is preparing the ECB for direct supervision of some of the region’s lenders, there is at least one lesson to be learned from Monte Paschi.

“If anything, one of the things the story shows, having more powers would have helped,” he said.