Paschi’s Fatal Sin Brings Nationalization for Oldest BankBy and
Monte Paschi directors astonished ECB rejected deal deadline
Tuscan lender centerpiece of 20 billion-euro state bailout
The silence was deafening.
On the afternoon of Dec. 9, Marco Morelli, chief executive officer of Banca Monte dei Paschi di Siena SpA, was preparing for a board meeting in the lender’s Belle Epoque-era offices in Milan when the news hit: the European Central Bank had rejected his bid for more time to raise the 5 billion euros ($5.2 billion) needed to stay afloat.
The gathered executives and their advisers from JPMorgan Chase & Co. and Mediobanca SpA, were incredulous that the ECB wouldn’t bend, according to people with knowledge of their deliberations. Calls were made and e-mails were sent to no avail. The moment of truth for the world’s oldest bank had come after years of missteps.
“It’s a national tragedy,” said Marco Elser, a Rome-based partner at Lonsin Capital Ltd., a British investment firm. “Monte Paschi survived the Inquisition, the unification of Italy, fascism and two world wars. But it couldn’t survive the mismanagement and corruption of bankers and politicians in the 21st century.”
It has also put taxpayer-funded bailouts back on the radar of European policy makers, an outcome they have spent years trying to avoid. The lender has become the centerpiece of a 20 billion-euro rescue plan for Italian banks burdened with about 360 billion euros of bad debt. It’s the country’s biggest intervention since Benito Mussolini seized banks in 1933 -- including Paschi -- as part of his wholesale nationalization of the private sector.
The bailout threatens disaster for those who trusted the Tuscan institution with their savings and could be a further blow to confidence in Italy’s frail financial system. Encouraged by the bank, thousands of households and small business owners had plowed their money into Monte Paschi’s shares and bonds. Under new European Union rules that protect taxpayers from bearing the costs of bailouts, stakeholders must absorb losses first.
The bailout may unleash a fresh wave of anger from Italians frustrated by a decade of economic stagnation. The rescue could also prove a lost opportunity if the state fails to root out the shoddy underwriting practices that have left Italy’s banking industry straining under bad loans that equate to one fifth of the nation’s output.
The industry’s next test will arrive in January, when UniCredit SpA, Italy’s biggest bank, begins selling 13 billion euros in shares. The Milan-based lender’s non-performing loans amount to about 15 percent of its assets, far less than the 35-percent ratio at Monte Paschi.
"Paschi’s failure and a state intervention will not help other Italian banks, but I don’t think this will jeopardize UniCredit’s capital increase," said Luca Peviani, who oversees 1 billion euros at P&G SGr SpA in Rome. "UniCredit doesn’t have anything close to Paschi’s problems. These are two different banks in two different situations."
Monte Paschi’s downfall is a saga that pivoted from the bank’s headquarters in the medieval Palazzo Salimbeni in Siena to the neo-classical finance ministry in Rome to the modern conference rooms of the ECB in Frankfurt. Yet it’s rooted in a deal that was supposed to vault Monte Paschi into the top tier of Italian banking.
In November 2007, on the cusp of the global financial crisis, the lender announced the purchase of Banca Antonveneta SpA for 9 billion euros in cash from Banco Santander SA. It wasn’t just the timing. Monte Paschi’s then-chairman, Giuseppe Mussari, pulled the trigger without examining the books, and paid a third more than the value Santander had attributed to Antonveneta when it bought the bank just weeks earlier.
The purchase was a financial stretch for Paschi, then controlled by a foundation with ties to local government. To avoid diluting its shareholder, the bank raised funds that would later prove insufficient to cushion the blows to profit.
As Monte Paschi’s profits suffered, Mussari turned to investment bankers for help. Monte Paschi paid Deutsche Bank AG and Nomura Holding Inc. hundreds of millions of euros to put together derivatives deals to staunch the flow of red ink. That included a 2 billion-euro transaction with Deutsche Bank to hide losses and fudge its financial condition.
The cover-up sparked outrage across Italy after Bloomberg News reported it in 2013, and prosecutors launched cases against the bank and many of its senior officers.
Still, political leaders didn’t dare let the institution fail. By 2016, Rome had pumped more than 4 billion euros into Monte Paschi and investors committed another 8 billion euros in fresh cash. In July, the ECB demanded that Monte Paschi raise capital again -- by the end of the year -- or face resolution, a deep restructuring that would impose widespread losses on bondholders.
It wasn’t a task that daunted the biggest U.S. bank. JPMorgan CEO Jamie Dimon discussed the fate of Monte Paschi with Prime Minister Matteo Renzi over lunch in Rome, according to a person familiar with the conversation who asked not to be identified. Within days, JPMorgan had a seat at the table of Monte Paschi’s restructuring.
With Mediobanca, Italy’s biggest independent investment bank, and JPMorgan, then-CEO Fabrizio Viola put together a turnaround plan that hinged on raising 5 billion euros in equity and disposing of almost 28 billion euros in bad loans. The fresh capital would essentially be used to absorb the losses the bank would have to book after selling the soured loans.
Within weeks Viola quit, and Morelli, the head of Bank of America in Italy, took over. A wiry fitness enthusiast, he’d served in senior positions at Monte Paschi from 2006 to 2010, including as chief financial officer at the time of the Antonveneta acquisition. Morelli, who wasn’t implicated in the legal cases, told Bloomberg Television in October that he was “the one who raised concern on a number of things the bank was doing.”
Morelli pledged to return Monte Paschi to profitability. Key to the bank’s long-term viability would be a revamp to a lending culture that had been driven more by relationships than sound practices. He embarked on an intercontinental roadshow to sell the deal. He pitched to hundreds of money managers in London hotel ballrooms and New York skyscrapers, and to sovereign wealth funds in the petroleum kingdoms on the Persian Gulf. Names of potential marquee investors, including the Qatar Investment Authority, dribbled out.
It wasn’t going well.
In early December, Citigroup Inc., a contributor to a bridge loan crucial to the bad-loan disposal, abruptly dropped out, according to people familiar with the transaction. JPMorgan’s bankers scrambled for a replacement, and in less than a week managed to plug the gap by taking on a bigger chunk of the loan and bringing in Credit Suisse Group AG and HSBC Holdings Plc, the people said.
By now, as Paschi’s depositors fled, JPMorgan was potentially exposed for more than 3 billion euros, said one person. The bank’s top management, including Dimon and investment-bank head Daniel Pinto, were receiving several e-mails a day from their Italian colleagues with the latest on the race against time, the person said.
Hours after Monte Paschi had to officially drop the plan for the lack of investors, Dimon sent a letter to his team praising them for “the extraordinary work” they did to support Paschi.
Efforts like this don’t always work, Dimon said. “We never know exactly how things will turn out or what the future will bring, but we pursued the best possible hope for a private-sector solution and gave it our all.”
One of the critical moments for the bank was when Italian voters overwhelmingly rejected a constitutional referendum that prompted the premier to quit. The measure, which would streamline the legislature, had nothing to do with banking. But its defeat and the prospect of political upheaval gave investors yet another reason to steer clear. The bank’s shares were down more than 80 percent in 2016.
On Dec. 8, the bank, citing the turmoil, petitioned the ECB for more time to pursue its deal. The next day, Morelli and directors on the bank’s 12-member board assembled in Milan for a 3:30 p.m. meeting to await the ECB’s decision, take stock of the situation, and weigh the next steps.
After the bad news broke in the press in the early afternoon, the board postponed the meeting for 30 minutes as Morelli and the directors sought clarification on the situation in Frankfurt. They got nothing but silence, according to people familiar with the events.
The central bank’s supervisory officials felt they’d already been very patient with Monte Paschi and concluded that the recapitalization plan wouldn’t work even with an extra 20 days because demand wasn’t really there, according to sources with knowledge of their decision-making process. An ECB spokeswoman declined to comment.
“Let’s call time on this fiction and let the Italian state step in with a sustainable rescue plan,” says Sony Kapoor, the managing director at Re-Define, a London-based research firm.
Now that Monte Paschi is a ward of the state there are a raft of questions that remain unanswered. Who will run the bank? In a country where political leaders have long influenced private banks, how can the government assure investors and depositors that a nationalized lender will return to sustainable profit?
"I feel like someone who was trusting and has been ripped off,” said Franco Domenichini, a pensioner whose 50,000 euros of bonds in Monte Paschi are at risk. With the state only "what is salvageable will be saved."
— With assistance by Alessandro Speciale, Tom Beardsworth, and Paul Gordon