Monte Paschi Accounts Questioned in Suit Opposing State Bailout

Banca Monte dei Paschi di Siena SpA may face as much as 1.5 billion euros ($2 billion) more losses after misrepresenting derivatives transactions, a consumer group challenging the lender’s bailout alleged in a court filing.

Monte Paschi, the world’s oldest lender, is being probed by regulators and prosecutors after using derivatives to hide losses. In one transaction that wasn’t fully disclosed to shareholders, the bank made a money-losing bet on the country’s government bonds in a structured deal disguised as a loan, Bloomberg News first reported on Jan. 17.

The bank may have to classify that bet as a credit default swap and record a trading loss as the value of Italian bonds fell after the deal was put in place, consumer group Codacons, based in Rome, said in the court filing.

“It’s highly probable that these operations are in fact credit-default-swap deals artificially documented as assets (government bonds) and debts (repos),” Giuseppe Bivona, a former Goldman Sachs Group Inc. and Morgan Stanley banker who is advising Codacons, wrote in a report submitted to the court and obtained by Bloomberg News.

Officials for Monte Paschi in Siena and the Rome-based Bank of Italy, the firm’s regulator, declined to comment. The administrative court for the region of Lazio will hold a hearing on Codacons’s request to halt the bailout tomorrow.

Monte Paschi, engulfed by probes of its former managers, said on Feb. 6 it will take a 730 million-euro hit to assets after reviewing structured deals from 2008 and 2009 that hid losses. Monte Paschi is seeking state funds to boost capital after failing to meet regulators’ minimum requirements in a rescue some lawmakers and consumer groups oppose.

Santorini, Alexandria

Italy’s third-biggest lender has 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.

“Alexandria and Santorini are exposures that we have as an AFS reserve and that will be totally associated to future trends of our spreads over Italy’s sovereign-debt risk,” Chief Financial Officer Bernardo Mingrone said during a conference call with analysts on Feb. 7, according to a Bloomberg transcript.

“These transactions that Monte Paschi has assessed are very common with the entire banking system and are documented this way by the market in general,” Mingrone said on the call, in answer to a question from Bivona.

‘Same Practices’

On the same call, Chief Executive Officer Fabrizio Viola declined to disclose the details of the contracts.

“As far as this issue is concerned we have highlighted in our press release too that on the part of the supervisory authorities, there are some talks in place and that concern the entire banking system,” Viola said. “We are not a specific or peculiar case. But we think we are a bank that operates exactly in the same way as and according to the same practices as the other Italian banks.”

Codacons’s consultant Bivona, who ran Goldman Sachs’s fixed-income sales for Italy from 2008 through 2011, said Monte Paschi may have a “gigantic” trading position that might be larger than Long-Term Capital Management’s value-at-risk when the hedge fund failed in 1998, according to the filing.

The Bank of Italy spotted accounting irregularities that allowed Monte Paschi to mask losses more than two years before the lender was forced to say it will have to restate profit. In 2010, “a problem came to light” on Monte Paschi’s booking of the Santorini deal, the regulator said in a Jan. 28 report. The Bank of Italy alerted “other authorities” a year later and talks with those regulators, which it didn’t identify, haven’t concluded.

Before it's here, it's on the Bloomberg Terminal.