Italian bank Monte dei Paschi di Siena is the world's oldest bank. It is also the only bank that failed the recent European Central Bank stress test of 51 banks. Should Europe see a major recession lasting two years or more, Monte Paschi would see its capital completely wiped out, due to its massive portfolio of toxic loans.
Having burned through €8 billion in bailouts in the last two years, the bank is once again on the verge of insolvency, perhaps for the last time. Thousands of ordinary Italians would see their "safe as houses" investments in the bank wiped out if it fails.
Monte dei Paschi's board of directors are counting on a €5 billion "cash call" to private partners and a sale of non-performing secured loans in a last ditch effort to stave off a bail-in of investors and depositors, but the odds seem insurmountable.
The Model Of Socially Responsible Banking
Monte dei Paschi di Siena Bank was founded in 1472, twenty years before Columbus discovered the Americas. It was set up as a charitable institution by the government of the Republic of Siena as an alternative to predatory pawnbrokers and moneylenders. For hundreds of years, it was hailed as the model of a socially responsible bank.
How Did Monte dei Paschi Get In This Mess?
Like many companies riding a bull market, Monte dei Paschi overpaid for the acquisition of a rival at exactly the wrong time. In 2007, "acquisition fever" was running rampant as companies sought to capture more market share. Spanish megabank Banco Santander had purchased Italian bank Banca Antonveneta late that year, and immediately "flipped" it to Monte dei Paschi for €9 billion in cash.
This was a prudent move by Santander, as less than a year later, Lehman Brothers collapsed and caused the global financial crisis. It was not such a good move by Monte dei Paschi, as they neglected due diligence by not examining Antonveneta's books before the purchase. They were therefore suddenly and unexpectedly saddled with a tremendous amount of non-performing loans.
Italian banks have traditionally shied away from derivatives and packaged debt instruments such as mortgage-backed securities. Instead, they have focused on loans to small and medium-sized businesses. While this shielded them from the initial derivatives crisis that enveloped the banking sectors of other nations, it left them particularly exposed to a recession in Italy. The global recession caused by the financial crisis hit Italy hard. The nation lost 25% of its industrial capacity from 2007 through 2013, with an average of 150 businesses going bankrupt each day.
As the recession in Italy deepened, the massive number of bankruptcies soon soured the balance sheets of the Italian banking sector. Giuseppe Mussari, who had been appointed Chairman of Monte dei Paschi in 2006 despite having no banking experience, moved to hide the extent of toxic loans at the bank. He dove into derivatives contracts to counter the $925 million in losses incurred in the Antonveneta deal and in toxic loans. In 2009, he obtained the first government handout, €1.9 billion to recapitalize the bank.
In 2013, news broke that Mussari had used billions of euros in private loans with other banks to hide losses. Monte dei Paschi had also blown through that €1.9 billion government bailout, and was broke again. A national scandal ensued, as the Italian government was forced to roll over the previous aid and add new funds for a total of €4.07 billion. In November 2013, a reorganization at the bank was finalized, with Monte dei Paschi selling €3 billion in stock (later increased to €5 billion), and laying off 8,000 employees.
In November 2014, Monte dei Pachsi failed the first EU-wide bank "stress test," by €2.1 billion. This result meant that the bank would suffered €2.1 billion more in losses than it had in assets. As a result, the bank issued a € 3 billion "cash call," requesting current stockholders to sink more money into the bank. Mussari and two other Monte dei Paschi executives were sentenced to 3-1/2 years in prison shortly afterward for lying to banking regulators concerning the losses from the Antonveneta acquisition and secret loans from other banks that they had used to conceal losses.
By the end of 2015, Monte dei Paschi had approximately €49 billion of bad loans on the books. With it obvious that the bank was on the edge of a collapse that would take billions of euros in "mom and pop" investors' money with it, the Italian government began negotiations with the EU and ECB in June 2016 for a waiver to recently-passed bail-in laws. The previous bail-in of four regional banks had led to widespread unrest, and at least one pensioner committing suicide after losing his savings, which was tied up in bank bonds.
A timeline of Monte dei Paschi di Siena from medieval times through today can be found at Bloomberg.
Monte dei Paschi's Last Chance
Last month, Monte dei Paschi's board unveiled what they touted as the restructuring that would finally put the bank or solid footing, without needing a bail-in. The privately-financed plan, which has been approved by the European Central Bank, involves raising €5 billion by the end of the year in a new cash call, and spinning off its bad loans in a new venture, priced at 33% of face value.
This rescue plan is problematic on several levels. To start, Monte dei Paschi is only worth €747 million. Wringing an additional €5 billion from investors will be the definition of a Herculean task.
Secondly, the bank is asking too much for its non-performing loans. Monte dei Paschi wants to sell €27.7 billion in face value of bad loans for €9.2 billion (33% of face value). Potential buyers are proposing paying only 20%-25% of face value.
Other banks are working to build funds for the Italian "bad bank" fund known as Atlante to the point where it can underwrite €1.6 billion of some of Monte dei Paschi's most toxic assets.
Even should the plan come together against all odds, Monte dei Paschi is paying exorbitant fees to obtain underwriting for the cash call. Of course, anyone brave enough to get involved in this bank attempting to solicit more money after wasting so many other bailouts should be rewarded for taking on the risk.
Playing For High Stakes
Nearly every bank in Italy is grappling with its own mountain of non-performing loans, but have donated to the Atlante bad loan fund to take on some of Monte dei Paschi's bad debt. If Monte dei Paschi fails, it is likely to take the rest of the Italian banking sector with it. This in turn would like bring about an EU-wide banking crisis. Where once "all roads led to Rome," it is now "All contagion comes from Rome."
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