12 Oct 2016
Monte dei Paschi di Siena (MPS), founded in 1472, is the world’s oldest bank, and one of Italy’s largest. It is a bank in crisis. Headquartered in a 14th century palazzo in Siena, the bank has fared particularly badly in recent Europe-wide banking stress tests, and is seeking €5 billion in recapitalisation funds. It has additionally, on 8 September, seen its CEO Fabrizio Viola agree to step down amid waning investor confidence.
The scandals that have engulfed the institution in recent years are the result of a combination of factors, many of them familiar to the international compliance community: weak regulatory oversight, poor governance, and mismanagement of risky financial products. The financial crisis of 2008 and the distinctly Sienese blend of banking and politics, derived in part from the unique characteristics of banking foundations in Italy, have only served to compound the problems at the bank. KYC360 examines some of the factors which have brought to the bank to the position in which it finds itself today.
The significance of MPS’ foundation, which has historically controlled the bank, cannot be understated. Following legislative reform in the early 1990s the non-profit activities of Italian public-sector banks were concentrated into these fondazioni (foundations), while the profit-making operations were consolidated under società per azioni (SpA), or joint-stock companies. The banking foundations were a new type of organisation whose sole purpose – in theory – was to carry out charitable activities. But they were initially required to hold the majority of shares in their counterpart banks which, for obvious reasons, gave the foundations significant influence and control.
In the late 1990s the foundations that met certain criteria were legally obliged to reduce their stakes in banks to below 50%. While many foundations diversified investments as a consequence, the Monte dei Paschi di Siena foundation (Fondazione MPS) remained the largest single shareholder in the bank until relatively recently. It was only in 2012 that MPS’ foundation was forced to decrease its stake from just under half of the bank’s shares to around 35% in order to repay creditors. With a 35% shareholding the foundation was still, however, MPS’ largest single shareholder, and preserved important rights including that of being able to veto any takeover bid. In March 2014 the foundation lost its status as largest shareholder when it reduced its stake through a series of sales to 5.5%. Depending on the outcome of current recapitalisation negotiations, the foundation may well exit the bank’s shareholder base altogether.
Banking foundations have traditionally contributed significant sums to local economies. The Association of Italian Banking Foundations and Savings Banks (ACRI) reported that the 88 Italian banking foundations jointly give around €1 billion annually to research and social projects, the arts, voluntary activities, public health, and local development. MPS is no exception. Referred to locally as “Daddy Monte” and “Siena’s ATM” the bank, via its foundation, has sponsored an array of Sienese activities and enterprises, including the local football and basketball teams, kindergartens, ambulance services, and Siena’s famous palio horse race. It also funded Siena Biotech, a company researching treatments for Alzheimer’s and Huntington’s, which after 14 years in business folded in 2015, failing to produce a single marketable therapy. According to the New York Times, until recently, the foundation spent €150 million annually on Siena and its surrounding region. Reuters estimated that the foundation gave out grants totalling €2 billion between 1996 and 2010.
Money means politics – as clearly reflected in the appointments to the boards of the foundation and the bank. The politically connected lawyer Giuseppe Mussari was the foundation’s Chairman between 2001 and 2006, and the bank’s Chairman between 2006 and 2012. His links with the left-leaning parties of Siena are well documented; according to official data cited in Huffington Post, between 2002 and 2012 Mussari (legitimately) donated €683,500 to the centre-left Democratic Party (and its predecessor parties), Siena’s dominant political force. Alessandro Profumo, the former head of UniCredit who succeeded Mussari in 2012, is also known for his personal links to the Democratic Party and openly expressed a willingness to enter politics in 2011. Further, the foundation’s constitution shows that of its 14 board members, four are drawn from Siena’s City Council, two are from the Provincial Council of Siena, one is from the Regional Council of Tuscany, and one is from the local Chamber of Commerce (the constitution also specifies appointments from the university and the archdiocese). The heavily politicised nature of MPS’ governance has undoubtedly undermined the independence and credibility of the bank, exposing it to risks which have contributed to the crisis it now faces.
It was in January 2013 that the bank hit the international headlines when it emerged that MPS had been internally investigating derivatives transactions after a contract with Nomura was discovered in a safe at the bank in October 2012. The contract dated to 2009, and was an agreement for a structured product dubbed ‘Alexandria’. Transactions with Deutsche Bank (‘Santorini’) and JP Morgan (‘Fresh’) would also be scrutinised to assess the extent to which they were used in order to camouflage earlier losses which had brought the bank to the brink of collapse. Much like offshore companies, derivatives per se are not illegal, but because of their high risk nature, proportionate measures are required to mitigate the risks associated with them. Several regional prosecutors’ offices – including Milan, Siena, Trani and Rome – became involved in investigating a range of complex financial transactions at MPS since 2008.
One of the principal factors driving the spiralling losses at MPS was its acquisition of Banca Antonveneta in 2007. Santander had bought Antonveneta from the break-up of Dutch bank ABN Amro for €6.6 billion and sold it to MPS shortly afterwards for €9.2 billion. Some bankers defended the price-tag, saying that it was necessarily high in order to compete with other bidders, and that it was not out of place at the height of the boom. Other (mainstream) theories relating to the acquisition are that: MPS paid a vastly inflated sum, some of which was used to pay bribes; MPS had failed to conduct due diligence on Antonveneta; MPS had breached competition rules in its acquisition; and Italy’s regulator, the Bank of Italy, had failed in its supervision of the takeover.
The downturn hit in 2008 and MPS was plunged into financial crisis. Between 2001 and 2007 MPS’ profit had jumped 132%, but between 2007 and 2013 the bank’s market value dropped from €11.4 billion to €2.4 billion. Between 2011 and 2015 MPS reported €14 billion in losses, and has received billions in state bailouts.
Two key governance failings are clear from media coverage detailing the demise of MPS. Firstly, senior management did not have a sufficient understanding of financial markets. A source told Reuters that the former head of the bank’s finance unit, Gianluca Baldassarri, was considered the “golden goose” for MPS while the bank was doing well, and, as a result, the complex deals he entered into were insufficiently scrutinised by other senior executives. Secondly, the concerns that were raised were ignored. A senior manager at the bank reportedly sent hundreds of internal emails to MPS’ executives between 2006 and 2012 expressing serious concerns over Baldassarri’s trades. A letter addressed to MPS’ then general manager Antonio Vigni in 2009 also separately alleged that Baldassarri and his team “made deals outside market prices and used an array of small, obscure brokers as counterparts”.
Numerous strands to the investigations have sought to understand these, and a range of other, failings and allegations. The year following the 2013 revelations saw the Rome public prosecutor probing the possible involvement of the Vatican Bank; an MPS independent director being suspended over suspected leaks of information; and the suicide (some allege murder) of MPS’ former head of communications.
A week after MPS was named the largest bank to fail Europe’s stress test, in October 2014 a Siena court found Mussari, Vigni and Baldassari guilty of obstructing the supervision of the Bank of Italy in relation to the hidden contract found in 2012. The three men, who denied the charges, were sentenced to three years and six months’ imprisonment. A tangle of appeals and other related cases have ensued, many of them still unresolved. One of the most recent judicial developments was the news on 18 August 2016 that MPS’ CEO Fabrizio Viola (appointed in 2012 and shortly to leave the bank) and Alessandro Profumo (chairman 2012-2015) had been formally placed under investigation in relation to the accounting treatment of the Alexandria and Santorini contracts between 2011 and 2014. Despite the fact that the two men are respected bankers and the probe is seen as fairly routine (it was subsequently reported that prosecutors had filed a request to close the probe), it is a blow to the reputation to the bank that it can ill afford.
MPS has now become a matter of national political importance, and presents a major challenge to Prime Minister Matteo Renzi’s government. Renzi’s continued leadership depends on the outcome of a constitutional referendum planned for October this year, and he will be highly conscious of the ramifications of any rescue deal for his campaign. Under new “bail-in” EU rules which came into force in January 2016, junior creditors, often institutional investors, are required to shoulder the financial burden of any bank’s rescue deal, to avoid taxpayers footing the bill. This has created a problematic situation for Renzi’s government as billions in bonds are held by household investors in Italy. The suicide of a pensioner who lost thousands in a small bank’s junior debt in December 2015, and which caused a public outcry, will be fresh in political memory. It may be that the €5 billion recapitalisation agreed by a pool of investment banks led by JP Morgan during the summer means that a “bail-in” scenario is avoided.
Headline news is expected to continue for some months yet. The future of the MPS foundation as a shareholder in the bank is in doubt, and some have speculated that a takeover is on the horizon if the recapitalisation goes ahead. Governance changes are expected, and the ongoing judicial processes are slowly, but surely, unfolding.
Count this content towards your CPD minutes, by signing up to our CPD WalletFREE CPD Wallet