Contagion from the 2 Friday-Night Bank Collapses in Italy?

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This is how desperate the Italian Banking Crisis has become.

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

When things get serious in the EU, laws get bent and loopholes get exploited. That is what is happening right now in Italy, where the banking crisis has reached tipping point. The ECB, together with the Italian government, have just this weekend to resolve Banca Popolare di Vicenza and Veneto Banca, two zombie banks that the ECB, on Friday night, ordered to be liquidated.

Unlike Monte dei Pachi di Siena, they will not be bailed out with public funds  only. Senior bondholders and depositors will be protected. Shareholders and subordinate bondholders will lose their shirts. However, as the German daily Welt points out, subordinate bondholders at Monte dei Pachi di Siena had billions of euros at stake, much of it owned by its own retail customers who’d been sold these bonds instead of savings products such as CDs. So for political reasons, they were bailed out.

Junior bonds play a smaller role at the two Veneto-based banks. According to the Welt, the two banks combined have €1.33 billion (at face value) in junior bonds outstanding. They last traded between 1 cent and 3 cents on the euro. So worthless. Only about €100 million were sold to their own customers, not enough to cause a political ruckus in Italy. So they will be crushed.

The good assets and the liabilities, such as the deposits, will be transferred to a competing bank. According to a rescue plan apparently drawn up by investment bank Rothschild that surfaced a few days ago, Intesa Sao Paolo, Italy’s second largest bank, would get these good assets and the deposits (liabilities), for the token sum of €1, while all the toxic assets (non-performing loans) would be shuffled off to a state-owned “bad bank” – and thus, the taxpayer. According to the Italian daily Il Sole 24 Ore, the bad bank would be left holding over €20 billion of festering assets.

[Update Sunday afternoon, June 25: the Italian government decided to commit €17 billion in taxpayer funds to bail out senior bondholders and depositors. This includes a €5 billion capital injection for Intesa, which is getting the good assets and liabilities, such as deposits. The €5 billion is to protect Intesa against losses from those assets. Prohibited “state aid” under EU rules? No problem. It has now been cleared by the EU Commission.]

It is testament to just how desperate the situation has become in Italy’s banking crisis. The country’s largest lender, Unicredit, is in no position to help out: it had to raise €13 billion of new capital earlier this year just to keep itself afloat.




Whether the deal with Intesa is still possible after the ECB’s decision to liquidate the banks, and what form this deal, if any, will take, and how much the taxpayer will have to fork over, and how to sugarcoat this in the most palatable terms is what the Italian government is currently trying to hammer out in its emergency meeting.

So how did it get this far?

Italy’s government has tried just about everything to save its banks. First it set up a bad bank called Atlante, but the Luxembourg-based fund was unable to raise enough funds to make any real difference. So the government set up another one, Atlante II. That, too, ran out of money.

In the absence of anything resembling a functioning market for deteriorated credit or a bad bank with enough funds to make a real difference, Italy’s banks were unable to offload their estimated €360 billion of non-performing loans, many of them with very weak, if any remaining, collateral underpinning them. Yet on average, they are marked at around 50 cents on the euro.

In addition, Italy’s court system makes collecting on collateral very difficult, and it takes many years, as funds have found out that bought non-performing loans. Hence the refusal by market players to buy non-performing loans now.

The next partial solution to Italy’s banking problem involved trying to save its most troubled lender, Monte dei Paschi di Siena. To stave off collapse, it hired JP Morgan Chase and Italian investment bank Mediobanca to help raise €5 billion of private capital. But that didn’t work either, with investors refusing to play along having already been burnt twice in two previous capital expansions.

In December last year, JP Morgan Chase gave up on any hopes of raising new cash from the private sector. The Italian government responded by announcing it would recapitalize the banks with €20 billion of public funds. There were two problems with this plan: First, €20 billion was never going to be enough to save the banking system; second, bailing out the banks, without at least bailing in some of their creditors, was no longer allowed by EU law.

But when things get serious in the EU, laws get bent. At the beginning of June, the European Commission gave MPS a provisional green light to begin offloading €26 billion of bad loans onto the Atlante II fund. The non-performing loans would be securitized and transferred to an ad hoc vehicle at a value close to 20% of their face value. The assets would be divvied up between the Atlante rescue fund and interested private investors.

If the transaction is completed by June 28, €8.8 billion of public funds will be released to plug MPS’ gaping capital shortfall. The European Commission also agreed that all investors who had bought MPS junior bonds would be eligible for a taxpayer funded refund

But two of the private investors – hedge funds Fortress and Elliott – walked away from the negotiating table in “a dispute over the sales terms,” which likely means that even an 80% mark down on MPS’ non-performing loans may not be enough to attract private investors. If they don’t come back, Monte dei Paschi will have only one willing investor to turn to: Atlante. In other words, back to square one.

The hedge funds’ withdrawal prompted fears that it could jeopardize not only the government’s efforts to save Monte dei Paschi but also Banca Popolare di Vicenza and Veneto Banca. That has now happened. Contagion at work. And the risk of further contagion is still huge.

There are dozens of small or mid-size institutions in similar shape as Banca Popolare di Vicenza and Veneto Banca, while the problem of what to do with MPS is still not resolved. Taxpayers are already on the hook for a banking crisis that was caused by years of reckless and, in some cases, criminal mismanagement. Now the ECB’s decision to wind down two banks in an orderly manner may end up triggering the disorderly failure of others. And if that picks up momentum, all bets would be off. By Don Quijones.

ECB Shuts Down Veneto Banca and Banca Popolare di Vicenza. Read… Two Italian Zombie Banks Toppled Friday Night




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  75 comments for “Contagion from the 2 Friday-Night Bank Collapses in Italy?

  1. Raymond C. Rogers
    Jun 25, 2017 at 3:45 am

    Absolute madness. Sheer lunacy. It is a wonder as to how these national and block currencies hold any value whatsoever. But given how most people walk around aimlessly, the emporer will always be perceived as fully dressed.

    • Pierpaolo
      Jun 25, 2017 at 10:06 am

      Italian bonds are in the hands of banks.
      They did not sell Venetian banks to foreigners for 1.6 billion, but they give it to Intesa S. Paolo for € 1. They do not want strangers in their business?
      When Mr Passera presented the plan for Banca MPS, they refused to say that there were Arabs or other Funds. It did not go that way.
      If the Italian state does not take toxic credits, banks sell Italian debt.
      ECB has many Italian titles and this may also affect Europe, and this may be why Europe did not apply Bail In.
      From Italian, I am very angry because now we have to cover 20 billion deficits.
      Oil is $ 43, and a liter of diesel costs € 1.30, while some time ago when oil was $ 55, it costed € 1, 26.
      We’re already paying.
      Europe has been an accomplice to this casino. They’d have two MPS and other banks failing, taking those responsible and paying him everything.
      When there will be elections in Italy, I will vote for an anti-European party.
      In the US, certain managers would end up in jail, but here they go smiling.

      • John
        Jun 25, 2017 at 11:48 am

        Here in the USA they do not jail too many with real money or political power. Much the same as in the EU I would imagine. Theres an old saying; They jail the small thieves but make politicians out of the large ones.

      • TJ Martin
        Jun 25, 2017 at 12:28 pm

        Jail ? Here in the US ? Not hardly . More like they’re given a slap on the hand accompanied by multi million dollar golden parachutes and then prominent positions in the current administration is more like it .

        Jail indeed !

        • Frederick
          Jun 25, 2017 at 1:24 pm

          Speaking of that Where in the world is Jon ” the slime.” Corzine?

        • chip javert
          Jun 25, 2017 at 3:03 pm

          Well, he is actually considering a comeback (I mean all he did was co-mingle corporate & $700M of client funds, using them without permission). He’s banned from commodities futures trading for life, but not from running a hedge fund.

          Good to be a wealthy Democrat as all this was adjudicated in Obama’s term.

      • Gershon
        Jun 25, 2017 at 1:27 pm

        <i.In the US, certain managers would end up in jail, but here they go smiling.

        They’re smiling here, too. Not a single banker went to prison despite their massive, systemic financial fraud and lawbreaking that caused the 2008 financial crash. Meanwhile, “see no evil” Attorney General Eric Holder is now ensconced in a plum Wall Street job pulling down $2 million a year – just don’t call it a bribe for services rendered while a “public servant.” His even more odious successor, Loretta Lynch, and the equally worthless and co-opted Jeffery Sessions will not doubt rake in similar payola for their blind eye to Wall Street fraud and criminality.

        Laws are for the little people.

      • Jun 26, 2017 at 10:36 am

        It looks like Rothschild is committing Grand Larceny in favor of Intesa Sao Paolo Bank. They are paying 1 Euro for all the good debt plus all the deposits. That’s a windfall! CROOKS.

        Nowhere is there mention of how deeply into red ink is the failing bank’s balance sheet. What ought to be happening is that, first you find the red ink number, then you wipe out the shareholders and enough of the debt holders (plus a small amount), and then you sell the whole remaining thing to somebody like Intesa Sao Paolo for the 1 Euro.

        They would get the ‘small amount extra’ as incentive to take on a large amount of extra business. Instead of the taxpayers, it ought to be the creditors who take it on the chin. CROOKS.

        • Jun 26, 2017 at 1:32 pm

          Wait…

          Deposits are a liability. Deposits are NOT CASH. Deposits are an obligation to pay to the depositor their funds when they want it. But there is NO cash with that liability. The cash of those deposits was lent out to others (many of those loans have now become “non-performing” loans where the cash that was lent out will never come back).

          If a bank like Intesa takes €10 billion in deposits, it essentially takes on an obligation to pay €10 billion to the depositors, plus pay them interest on their deposits, but those deposits don’t come with cash. So the bank needs to be paid something near €10 billion in cash or other good assets such as good loans in order to break even on the deal, and more to compensate it for the risks and to make a profit.

          There is a lot of nonsense in the media because people misunderstand the nature of “deposits.” They think it’s cash or an asset of some sort that Intesa is getting. But deposits are NOT cash and have no cash associated with them. They’re a liability, and obligation to pay. That’s all they are.

          The terms when deposits are transferred are negotiated, depending on the quality of the assets that the banks gets in return for taking the deposits.

    • R Davis
      Jul 4, 2017 at 12:53 am

      In the crowd, a little boy looked & looked again, the Emperor had no cloths on, & he looked once more trying to understand.
      How could this be ?
      Good little boys behave well when they are out in company, they most certainly do not call out in public, he thought, as he raised his hand & pointed his index finger at the Emperor & said out aloud, for all to hear, “look, the Emperor has no cloths on.”
      And the spell was broken.
      One need only speak the words out aloud.
      For we all know that there is magic in truth.

  2. Toyota TRD
    Jun 25, 2017 at 5:15 am

    Is gold and silver safe investment

    • OutLookingIn
      Jun 25, 2017 at 9:38 am

      Owning and holding physical gold and silver has been proven through thousands of years as the ONLY best wealth preserver.
      The ONLY question being one of security.

    • andy
      Jun 25, 2017 at 12:59 pm

      Safe investment is an oximoron. But gold is probably on par with classic cars, art, land, bonds, stocks, or cash.

    • Frederick
      Jun 25, 2017 at 1:25 pm

      Extremely safe The safest by far History teaches us that in physical form in your possession only of course

      • roger
        Jun 26, 2017 at 1:08 pm

        of course silver/gold survived the 1929 crasch….

        • nick kelly
          Jun 26, 2017 at 3:33 pm

          Not as well as cash. The 30’s were the revenge of cash on the spendthrift 20’s.
          Mansions went for taxes owing. Most assets especially stocks could be purchased for pennies on their August 29 value.
          In Canada a Federal employee had two five percent wage cuts, but his standard of living rose by much more, because he had some money when many people, including most farmers had none.

    • Boo Randy
      Jun 25, 2017 at 2:53 pm

      Asking random strangers on the Internet for investment advice maybe isn’t the soundest strategy, even if the folks in here are more savvy than the average bear.

      That said, with the Fed’s deranged money printing, buying physical precious metals as part of your investment portfolio is probably prudent.

      My personal favorite is platinum, which is 10X more rare than gold, has higher industrial demand, and dodgy sources of supply (Russia & South Africa), yet is priced ~$200 per oz lower than gold. When the flight to safety begins as the central bankers’ financial house of cards come crashing down, all of the precious metals should shine.

      • roger
        Jun 26, 2017 at 1:12 pm

        Platinum is an industrial metal,like palladium,rhodium and other PGM not safe haven. You cannot sell platinum in a fiat crasch,,nobody will buy it,,,,only silver/gold. Platinum is worthless as jewellery,use tiatium as well.

    • chip javert
      Jun 25, 2017 at 3:50 pm

      Toyota TRD

      (I could never understand how Toyota got talked into naming a US truck “TRD”).

      But I digress:

      There is no such thing as a “safe” investment. Nothing. However, there are some investments that are safer than others. Lots of people think precious metals qualify. Currently, gold is up 320% over 16 years and down 21% over the last 5 years.

      320% in 16 years sounds fabulous, but it translates into 7.5%/year (simple interest) – actually not bad in today’s environment. However, buying & selling physical gold involves fees. Depending on how much gold and how good a deal you get, these front & back-end haircuts probably start at 5% (can be as high as 10%). Netting out 5% haircuts results in a 16-year return of 6.75%/yr.

      Salesmen cherry-pick start & stop dates to dramatically alter this analysis. Be sure you understand why a particular set of dates have been used to convince you to buy (this applies to anything). For gold, 16 years ago was well before the financial crash, and gold was about $300/oz.

    • JMiller
      Jun 26, 2017 at 2:21 pm

      No investment is safe including gold and silver. Safe mean “not exposed to danger or risk”. Everything has risks so nothing is safe. Plenty of people have lost money in gold and silver.

  3. Mad Max
    Jun 25, 2017 at 6:33 am

    The one thing that is seemingly out of the question in any of these ‘solutions’ is fixing the underlying problem driving these NNPLs… i.e. fixing the underlying structural economic issues that result in zero growth year after year.

    • John
      Jun 25, 2017 at 7:14 am

      I think that’s jut their problem (and most countries in the world’s) now. There is no ‘fix’. Banking always comes down to some loans which are not repayable for whatever reason. And banks will always have someone else on the hook for those. Politics gets involved, and those who should pay get out of it, while those who weren’t in line for any profits end up footing the bill. (taxpayers). It’s a never ending game of fleecing somebody. They (bankers and politicians) just need it to seem as if the rules change, when they really don’t, to avoid their necks being stretched.

      • RepubAnon
        Jun 25, 2017 at 10:42 am

        Yes, and isn’t it interesting how the Charles Keating business model of selling trusting consumers uninsured bank stock rather than insured certificates of deposit keeps cropping up in these situations. I guess banning these practices would be just another burdensome government regulation…

        • John
          Jun 25, 2017 at 11:58 am

          Yes, Keating, McCain and 3 of their buddies were pulling crap like that way back when I was young. (a long time ago). I do not believe they ended up in jail for that even back then, but they sure did get negative publicity. Nowadays the liberal left of this country seems to think John McCain is all it. They probably have never heard of the Keating 5 and what a bunch of fricking criminals they all are.

        • chip javert
          Jun 25, 2017 at 4:03 pm

          On the flip side, if you ban “little guys” from higher return investments, SJWs will scream & yell about fixing the system against the little guy.

          In good times, “little guys” will swear up and down that they fully understand the risks they are taking, and in fact are required (in the USA) to sign documents to that effect (don’t have a clue what they do in Italy).

          Excuse my cynicism, but Italy isn’t compensating “little guys” because they were innocent victims of a scam (some were, most probably weren’t), they’re being compensated because they’re a significant number of voters.

        • nick kelly
          Jun 25, 2017 at 4:24 pm

          Keating pulled a long sentence. Don’t know how long he served or if he’s alive.

    • walter map
      Jun 25, 2017 at 9:48 am

      “fixing the underlying structural economic issues that result in zero growth year after year.”

      The only “growth” is in the Financial Industrial Complex – banks – which crowds out growth in the real economy by appropriating its product. The FIC grows by lending to the real economy, which it expects to grow when it can’t, resulting in bad loans which can only be covered by further cannibalizing the real economy.

      The distortions are profound. Since the FIC can’t grow by encouraging growth in the real economy it instead grows by engineering asset inflation, issuing more bad loans, and requiring more bailouts extracted from the real economy.

      The only solution is to get the parasites under control, which isn’t going to happen because the parasites have achieved regulatory capture. They’re running the show.

      Huis clos. There is no way out short of economic collapse.

      • kam
        Jun 25, 2017 at 10:08 am

        Well stated. All new money/credit goes to the financial industry cancer which keeps growing as the real producing economy shrinks. Like all cancers, they will consume the host.

      • John M
        Jun 25, 2017 at 1:52 pm

        Walter,

        Your synopsis nailed it. An economic collapse is coming.

        • nick kelly
          Jun 27, 2017 at 7:21 am

          We could speed it up by outlawing banks.

  4. Alessio
    Jun 25, 2017 at 7:11 am

    Junior bondholders of Monte dei Paschi are from the town of Siena (enclave of Matteo Renzi Democratic party), while the ones of Veneto bank are from North east of Italy (enclave of Northern league party allied of Berlusconi). Now Democratic party run the show and decides who gets save and who gets nothing.

  5. cdr
    Jun 25, 2017 at 7:42 am

    1) The Eurozone will kick the can until the end of time and beyond if needed rather than solve a problem like this. Debt will be laundered and the ECB will end up with a lot of it later as a part of QE. Nobody will look too close at the basis for it if the alternative is actual costs being borne by someone real.

    2) The process described in point 1 will end only if outside events force them to end.

    3) What is a realistic scenario that would cause the Eurozone to act responsibly towards debt and living within their means? Obviously, it will be forced upon them and not voluntary. It will be a chain of events, like a crack in a dam growing bigger before it breaks and floods the countryside below. How long can ECB QE really last before people stare in wonderment at it?

    Any ideas? From anyone? Or will articles like the one above be standard examples of Euro-finances for another decade or more?

    • cdr
      Jun 25, 2017 at 8:00 am

      Personally, I suspect the ECB will end up recapitalizing the banks. Some new form of capital will be designed and created for this purpose. Any illegalities will be laundered away by passing the debt through a few entities before the ECB acquires it. Unlimited recapitalization will be the result. Italian banks will be touted as the world’s safest. Nobody will blink an eye. It will possibly be hailed as genius. People who ask uncomfortable questions will be shut out, ridiculed, and ignored.

      Japan to follow with direct write-off of BOJ owned debt in a few years. Also to be hailed as genius.

      • cdr
        Jun 25, 2017 at 8:13 am

        It will be called the Temporary Bank Recapitalization Mechanism.

        Given the alternative that the entire Eurozone banking system is at risk and so is the end of the monetized Euro debt based lifestyle and the free ride it offers, a wink and a look the other way will work well. Nobody will seriously ask for a definition of ‘Temporary’. After all, it’s only temporary. And for a really good cause.

        • CV5
          Jun 25, 2017 at 5:09 pm

          “It will be called the Temporary Bank Recapitalization Mechanism”

          Banks and only banks can recapitalize with something that is NOT capital.

          When will we ever learn?

      • MC
        Jun 25, 2017 at 8:34 am

        European banks have effectively been recapitalized by the ECB since the start of T-LTRO (Targeted Long-Term Recapitalization Operation) in 2014. T-LTRO was originally “sold” as a way to reward banks lending to the real economy but, to quote a well known website, “ended up being the same music over again”.
        How much good did it do?

        This attempt by the ECB and its members to save every single bank reminds me of Sumitomo Bank’s attempts to save Ataka Sangyo back in the 70’s.

        Ataka was the largest independent (IE: not part of a keiretsu) trading house in post WWII Japan. From the outside it looked as solid as a rock but suddenly, in 1975, it was discovered it had accumulated debts worth billion of dollars (in 1975 money).
        Sumitomo, their main bank, stepped in but soon found itself in way way over its head. Like an old cartoon, there were debts hidden in every nook and cranny of Ataka operations.
        Faced at the same time with the bailout of Mazda, Sumitomo started showing some signs of financial strain but wouldn’t let go.
        Its leadership appealed to other Japanese keiretsu, saying Ataka’s bankruptcy would have hit the Japanese economy hard. This plea was met with a mixture of silence and jeers: Ataka was well known for being poorly run and a hotbed of financial scandals.
        In 1977 Itochu bought Ataka’s mining concessions in Indonesia, Malaysia, Chile and Brazil for a pittance and that was it: there were no more assets anybody in his right mind would have wanted to buy at any price.
        Sumitomo finally decided to eat up their losses and to move on but not without a major board of directors shakeup: back in those days shareholders and investors demanded something akin to accountability.

        • Gershon
          Jun 25, 2017 at 1:31 pm

          God forbid that we ever allow true price discovery or let insolvent banks doomed by their own greed and recklessness go under.

  6. Drango
    Jun 25, 2017 at 7:50 am

    These Italian banks are small potatoes. The real fireworks will start when Deutsche Bank can no longer cover up its toxic balance sheet. It will be interesting to see how far the EU bends the rules when it faces an existential crisis like a Deutsche Bank meltdown. I have a feeling those rules will be tossed out the window, and Merkel will be able to use the same skills she learned with the Greeks on the German taxpayer.

    • Gershon
      Jun 25, 2017 at 1:34 pm

      Agree, Drango. DB’s massive derivative overhang will one day explode like a supernova. And all of Goldman’s horses and all of Goldman’s men (and Old Yellen) will not be able to put Humpty Dumpty together again.

      The subsequent financial wipeout of the middle and working classes and retirees might FINALLY be a catalyst for the sheeple to wake up and start fighting back. But I doubt it.

  7. George
    Jun 25, 2017 at 8:11 am

    Moments like these provide a lot of insight into what is actually going on behind the scenes. For example, do the Italian regulators actually know what the good assets vs. bad assets are? If they do, they should roll the good assets into a solvent but marginal bank to shore it up and thereby reduce the risk of having to bail out another bank in the future. If they don’t, they should roll the “good” (i.e. less questionable) assets into the strongest bank they can find to avoid further possible contagion. Which approach they choose will tell us how strong of a grasp the Italian regulators have on the balance sheets of the Italian banks. Mr. Brunetta may be wrong about this being a “gift” if the “good” assets end up on Intensa’s books.

    • JR
      Jun 25, 2017 at 10:57 am

      Great question – if one extends the theme found in the NYT coverage if this entertaining situation – that the SOP (Standard Operating Procedure) of the NE banks in Italy was allegedly to strong-arm loan requestors to take out an additional equal-sized loan to buy shares in the bank. Recovery of “toxic assets” – aka NPLs – will certainly be difficult if the “collateral” for these loans are NE bank shares. Talk about underwater assets in the Veneto – sounds like the tide came in – instead of going out!

  8. Kent
    Jun 25, 2017 at 8:52 am

    Wolf,

    I don’t understand why the Italian government doesn’t just liquidate the non-performing loans, instead of selling them off to a bad bank. I understand the concept of a bad bank to buy time so you don’t get a general asset price collapse, but we’re 10 years in at this point.

    Who are the counter-parties to these loans that they have the power to force the taxpayer’s to pay them for their own stupid risk taking?

    • Petunia
      Jun 25, 2017 at 12:44 pm

      The concept of the bad bank is a vehicle for bailing out the lenders. The problem is that they are afraid to do it without a very good reason they can point to as a trigger. When the people hit the streets en mass wearing black shirts, then they will do it, and blame it on the political situation.

  9. KiwiinCanada
    Jun 25, 2017 at 9:31 am

    The ECB is already loaded with sovereign debt issuance that will eventually have to be written down to actual market value. Is it a big stretch to include on this already bloated balance sheet the recapitalization of the banking system in the Euro Zone? The losses will be in the 1 Trillion Euro level about the same as the expected losses on the sovereign debt. However even if this could somehow be arranged with the losses allocated to the tax payers of the Euro Zone as a whole, a hazardous perhaps impossible political process at best, it will not solve the fundamental problem. Peripheral Euro Zone seem unlikely to be competitive without the option of devaluing their currencies. This appears to be the end game unless their is a miraculous restructuring of how these political economies work. As devaluation in the current circumstances is not possible without severe consequences and the restructuring requires overturning habits engrained for centuries I am not sure if there is a happy outcome. Perhaps if no more sovereign debt is purchased by the ECB at below market rates and no more loans are made which will eventually become non performing time will resolve the issue. Digging a deeper hole seems necessary for the politics to work but at some point the hazards become to great.

  10. unit472
    Jun 25, 2017 at 9:46 am

    The NPL on the books of the Italian banks may just be the tip of the iceberg. How many billions of Italian government bonds do they hold and how can the Italian government service its debt once the ECB ends QE?

  11. OutLookingIn
    Jun 25, 2017 at 9:55 am

    These things take time to come full circle.
    Think the “Asian Contagion” of 1997 which started in the Thai baht. It then moved onto Hong Kong and eventually westwards to Moscow, where it crashed the Russian bond market. Guess who was exposed up to there eye balls in this bond mess? If you said Long Term Capital Management (LTCM) go to the head of the class.
    The entire convoluted financial crisis took just over a year to complete the circle. Twenty years ago things moved slower, whereas now financial time and space are tightly compressed.
    As with the LTCM crises, it was the over exposure to derivatives that caused the default fears to come home to roost.

  12. Stevedcfc72
    Jun 25, 2017 at 11:25 am

    Unicredit owe under the TLTRO programme – 51.2 billion euros as of 31st March 2017. I believe I read somewhere this is the very maximum they can borrow under ECB rules.

    As mentioned by Wolf above they had to also raise 13 billion euro capital raise as well.

    Talk about a patient being kept alive on life support. 118,000 employees at this bank.

  13. Wilbur58
    Jun 25, 2017 at 1:05 pm

    I’m really sick of reading about all of these pathetic solutions when there is just one:

    1) Bail out the depositors at a state run bank, period. They have their money, but it’s no longer with a private bank. Force the stupid failed bank to do the servicing until the state has the employees to do it.

    2) Everyone else is f’d.

    What is so complicated about this? Why is this never even on the table?

    There are no significant amounts of small people who would actually get hurt vis a vis bonds and equities. The enormous reduction in asset and living costs would more than make up for any losses.

    The only people who really get hurt are the rich who should be assuming all the risk in the first place.

    Can someone please enlighten me on why my “one solution” isn’t the best one?

    (Great work Don Quijones!)

    • Wilbur58
      Jun 25, 2017 at 1:15 pm

      One other thing… all performing assets go to the state-run bank to help pay for overhead.

    • Gershon
      Jun 25, 2017 at 1:36 pm

      Or the insolvent banks and holding companies could have a really big bake sale and car wash….

    • chip javert
      Jun 25, 2017 at 4:24 pm

      Wilbur58

      Good rant.

      However, when you piss of as many voters as you propose doing (including tens of thousands of soon-to-be-fired bank employees), they tend to not vote for you again.

      The world-wide preferred solution is two-fold:

      1) “Gently” inflate away (2-3%/yr) the problem

      2) Gradually write-off the garbage out of bank earnings (aka: reserve for bad debt).

      The current problem is inflation is “below target”, bank earnings suck and bad debt (NPL) is exploding.

      • Wilbur58
        Jun 25, 2017 at 4:29 pm

        Chip,

        Why would my solution upset voters?

        Absorb the employees into the state-run bank.

        God knows I’m not victim to the ridiculous delusion that private is always better than public. (Cable tv? Telecom? Utilities?) Minimum wage bank employees should be thrilled to have government jobs instead of public.

        • chop javert
          Jun 25, 2017 at 4:47 pm

          Wilbur58

          If that pool of bad assets is absorbing capitol (aka: not making any money), how are you going to continue to pay them (complicating things, Italian bank employees are paid way above their actual value-add).

          That is a primary reason governments kick the can down the road, waiting for the world-wide preferred solutions (#1 & #2, above) to solve the problem.

        • chip javert
          Jun 25, 2017 at 5:00 pm

          A second thought: not all depositors are innocent victims.

          Anecdotally, in the Cyprus bank failures, the Russian oligarchs/mob had significant deposits because they thought their cash was safe. The solution to “bail in” very large depositors was probably a huge cold shower for that crowd.

        • Wilbur58
          Jun 25, 2017 at 6:09 pm

          Hi Chip,

          Please define “bad assets”. I’m interpreting that to mean loans made by the banks that aren’t getting paid back. In that case, who really cares about them? The state can work out some sort of re-structured loan with the debtor so that it isn’t just Christmas time for all bad debtors, especially commercial real estate developers for example.

          Maybe I don’t understand your question. How are bad assets “absorbing capital”? The money’s been lent out already, correct?

          Good point about depositors. Here’s another rule for my handling of insolvent banks… all depositors are protected that live in the country or at least have direct business interests in proportion to their deposits in said country. How’s that?

          And again, I can’t stress enough how much I don’t give a F about “Senior Bond Holders”. The state can run banking just as well as the private sphere can.

          The world still spun around and grew economically without myriad forms of financialization.

        • chip javert
          Jun 25, 2017 at 6:55 pm

          Wilbur58

          The government can’t simply mandate that NPL loans are worth anything.

          When an asset first becomes a “Non-Performin Loan”, (at least in the USA) the debtor has stopped paying on the loan for some period of time (i.e. we are not talking about “late payments”). Statistically, the longer a loan is NPL, the faster & lower its probability of ever being repaid drops (the business has failed, or the bad guys ran off with the cash).

          Unlike in the USA (NPL loans are quickly written off & sold to scavengers who specialize in squeezing some value from them), Europe (especially Italy) has laws preventing quick sale of bad assets to scavengers. This allows underlying assets to further decay: a building abandoned for 6 months can probably be re-used; a building abandoned for 6 years probably cannot.

          When money is lent out, the expectation is the loan will be repaid, and is carried on the books at 100 cents on the dollar. As the loan experiences problems, the chance of the bank getting back 100% begins to decline. Banks recognize this and incrementally write down the loan (if they have the capital, which include loan loss reserves). Once it is declared NPL, the entire amount is written off. Even if the bank has no capital, it still owes depositors their money. So the bank owes more cash (depositors, bond holders, other debts) than they have assets (healthy paying loans) – this is technically the definition of being bankrupt.

          You are correct in that the cash position of the bank doesn’t really change with a write-off, but the bank’s expectation for future cash flow from loan repayments drastically decreases. Once depositors hear this, they generally run to the bank to withdraw accounts.

          This is why poorly-capitalized banks are highly reluctant to take necessary write-offs. Banks can stumble along like this for an amazing amount of time (if allowed by regulators), but they become increasingly fragile financial sink holes who can’t really afford to do any new lending or refund customer deposits.

          When things get this bad (example: USA 2008-10), no stockholder or bondholder will invest more money, so tax payers inject cash to pay off depositors.

        • chip javert
          Jun 25, 2017 at 7:07 pm

          Wilbur58

          You and I strongly disagree on any government’s ability to run a bank. Just look at how they run Social Security, or the 10-30% fraud in Medicare/caid. Simply look at how inept government regulators are at reviewing performance of existing banks. Remember a few years back when Argentina simply nationalized retirement savings?

          Be careful what you ask for (the government can’t even run the post office) – do you really want a bank run like the DMV?.

          Governments aren’t necessarily malicious, they just run things as jobs programs, not as banks or post offices.

        • Wilbur58
          Jun 25, 2017 at 11:52 pm

          Hi Chip Javert,

          I think you’re presenting a bit of a false dichotomy.

          The state can run a bank. It might not be the best bank and other private banks can remain, if solvent. This isn’t all or nothing. But when the private banks for south, the state bank remains. And it doesn’t exist to profit and gouge.

          Social Security is complicated. Do I support a regressive tax? Absolutely not. Did the program as designed work relatively well until administrations decided to start looting the pot? Yes.

          From a further back perspective, one must understand that the aim of all Republicans is to gut programs like social security and the US Postal because then it’s an offset for lower taxes on the rich. It’s what they do. It doesn’t mean the programs are flawed.

          The US Postal works perfectly fine and is a horrible example for you to use. The only reason it became considered underfunded is because a Republican congress decided that the US Postal’s retirement benefits must be funded 75 years in advance. Presto!
          It’s underfunded. We must get rid of such waste! It’s ridiculous.

          You attack government bank regulators. Their elected superiors are fully paid for by the banks. The corruption is the problem, not “government”. There’s this other possibility called “effective government”.

          Are you going to try and tell me that your cable/internet company runs much better than dmv? (These days, you make an appointment at dmv and get pretty quick service.) Are you going to tell me your cell phone company is so superior? Your utility?

          Give me a break. Industries of a certain scale become public/private hybrids to an extent anyway.

          Why do you only attack government? What about the for-profit health insurance industry? How does that benefit anyone. But you only attack government.

          I don’t think there’s anywhere for this conversation to go because I have you pegged into a binary, “private = good public = bad”.

          Personally, I believe we need both and a good balance to it. All private means nothing but monopolies, oligarchs, kleptocracy, and serfdom. Financial might makes right.

          The fourth factor of production is the state. I believe in the state. I don’t want a private police force. I don’t want private fire departments. I don’t want a private military, though it appears we have one at this point. I want objective, unpaid for referees in our society.

          I don’t think all private is bad and all public is good. Both can have pros and cons.

          At this point in time, the thing the “free markets” people don’t understand is that their utopia exists right now. The current state of our economy is very much a free market environment. It’s the weakness of the state against the oligarchs that’s led to extreme income inequality. Thus, it’s only a stronger state that can improve it.

          Finally, I think we’re having two different conversations about NPL’s. I propose that deposits for locals and honest businesses be insured. Their balances can be moved to the state bank. I believe the state bank could also take healthy assets and apply their revenues to overhead. And when it comes to NPL’s, let’s break apart land and money.

          If an asset is a building per your example, said building goes to the state. If the debtor can restructure the loan reasonably, fine. If not, the state owns the building. The end.

          Now let’s say it was simply a loan. Again, let the state bank have the receivable as well. Whatever can be had by the state, then great. Restructure as best as possible. But if the money can’t be had, ultimately, who cares?

          We don’t need frickin’ bondholders for liquidity. We just don’t. There is no f-ing liquidity anyway. All corporate money is going to buybacks and dividends. It’s ridiculous. No one is financing any production whatsoever. So, you know what? F them all. Let them suffer huge losses for their corrupt, myopic stupidity.

          I’m Wilbur and I approved this message.

  14. raxadian
    Jun 25, 2017 at 2:07 pm

    Why can’t they just let the banks fall? If Italy keeps getting debt this way it will end in a default.

    • chip javert
      Jun 25, 2017 at 4:42 pm

      Well, try running a so-called modern economy without banks, and you will soon find out. This almost happened when Greeks could only withdraw small amounts of their own money.

      Because of what society wants from banks, they are all structurally fragile by design: banks use short term liabilities (aka: customer deposits & bonds) to fund longer-term commercial, residential & retail loans. Senior bond debt help stabilize bank’s cash flow (one reason banks take good care of owners of senior debt). If senior bond holders continually see their investments “bailed in” to save corrupt banks, they will (at the very least) demand significantly higher interest rates on senior debt.

      • raxadian
        Jun 25, 2017 at 8:15 pm

        I am not saying not using banks, just not letting the state get in debt to save banks. State intervention is just opposite of the so called Liberal Economics isn’t it? What a bunch of hypocrites.

        • chip javert
          Jun 25, 2017 at 9:23 pm

          The alternative is accepting that depositors (large & small) are going to lose a significant amount of money (and will not vote for you). This is why we have state/national banking laws & regulators – the are to prevent this.

          What’s happening in Italy is a failure of both the banks and the state regulators.

        • Wilbur58
          Jun 26, 2017 at 9:10 am

          Chip,

          Again, you’re creating a false dichotomy. Either all stakeholders get saved in a bailout or none.

          “There is an alternative”. FDIC insures the depositors. Thanks to you, I’d also include that foreign depositors with no real interest in the country don’t get bailed out.

          All bondholders and shareholders have no recourse.

          If this leads to higher interest rates, so be it. Asset prices come crashing down to where they should be.

          Voters would love this!

        • chip Javert
          Jun 26, 2017 at 2:19 pm

          Wilbur58

          I appreciate the intensity of your response, but the regulators have a good deal of discretion as to who get hurt financially, especially above the “guaranteed deposit” amount level.

          Painful as it is, this is not a false dichotomy, it is a financial fact of life.

          Or, said another way, this is what happen when backing regulators run out of other people’s money.

        • chip Javert
          Jun 26, 2017 at 2:21 pm

          backing regulators = banking regulators

  15. Jun 25, 2017 at 4:57 pm

    I have updated the article based on the latest developments:

    [Update Sunday afternoon, June 25: the Italian government decided to commit €17 billion in taxpayer funds to bail out senior bondholders and depositors. This includes a €5 billion capital injection for Intesa, which is getting the good assets and liabilities, such as deposits. The €5 billion is to protect Intesa against losses from those assets. Prohibited “state aid” under EU rules? No problem. It has now been cleared by the EU Commission.]

    • chip javert
      Jun 25, 2017 at 5:11 pm

      Quick work, Wolf (and EU!).

      Well, with $360B of Italian NPL (or what ever today’s scientific-wild-ass-guess at what the number is), Italy only has to come up with another $343B to fix this week’s problem (not to be confused with fixing next week’s problem).

      Assuming you believe the $343B number, that’s only $4,000 for every man, woman, child & fetus in Italy – remember, this does not fix the problem (corrupt bankers & regulators), it just washes away this week’s best guess at bad debt.

      • Stevedcfc72
        Jun 26, 2017 at 2:52 am

        That’s the question chip javert reference what is the true number ref NPL’s in Italy.

        If you were a Director at the banks currently in the news you would probably be hiding the true figure of NPL’s.

        It will be interesting to see what Intesa find after going through the books.

        • chip javert
          Jun 26, 2017 at 2:25 pm

          If I were an Italian bank director I’d be looking to retire as far away from the EU banking-crap-pile as I could possibly get.

          Wild-ass-guess: the Italian NPL is 2-3 time as high as is currently admitted (not $4,000/person, but $12,000/person).

        • Stevedcfc72
          Jun 27, 2017 at 1:43 pm

          Just for you Chip Javert.
          Net Doubtful Debts by Bank. (In Billions). End of Dec 2016.
          Divided by total loans – % of total loans
          Veneto Bank – 5.1billion – total loans 19.3billion – 26.4%
          Popular Di Vicenza – 5.2billion – total loans 22.6billion – 22.9%
          Monte De Paschi – 20.2bn – 102.4 billion – 19.7%

          Unicredit 24.9bn – 444.6 billion – 5.6% (took 13 billion write down last year.)
          Intesa 29.8bn – 364.7 billion – 8.2%
          Ubi Banca 8.1bn – 81.8 billion – 9.8%
          Banco BP Milano 3.6 billion – 34.3 billion – 10.5%
          Amazingly Mediabanca 921 million – 37.1billion – 2.5%

          The crazy thing is a lot of the banks have had big write downs already to get to these numbers.

          Regards
          Steve

  16. cdr
    Jun 25, 2017 at 6:00 pm

    How much of the 17 billion euros will eventually be laundered through ECB QE?

    • Jun 25, 2017 at 6:10 pm

      All of it? Since the ECB is buying Italian government debt, and since an Italian runs the ECB, and since he used to run the Bank of Italy which was supposed to regulate these two and the other Italian banks….

  17. roger
    Jun 26, 2017 at 1:20 pm

    Fixing and tricksing is the word,,,,sit and listening when ECB and FED talking economy,,,does a normal person understand what they talking about or who are they talking TO ????to bankers and traders

  18. Stevedcfc72
    Jun 29, 2017 at 11:59 am

    Hi Wolf,

    Hope you’re well.

    Need your help.

    Monte Dei Paschi are selling 26 billion euro’s of Gross Non Performing Loans @ 21% 0f face value = for 5.5 billion euro’s physical cash from the Italian Government as a bailout to improve their capital-CET ratio and reduce their balance sheet. Using a bit of Atlante cash as well 1.5 billion euro’s.

    Therefore a loss of 20.5 billion euro’s – 79% of face value.

    Am I right that the provision-coverage in place on the balance sheet will cover this loss therefore no extra hit to the Profit and Loss?

    Am I also right that still leaves 20 billion euro’s of gross non-performing loans on the balance sheet, even after this exercise?

    Does this mean that all the other Italian Banks with 350 Gross NPL’s at 21% face value potentially (Using MDPS as a standard) could be sitting on 275 billion euro’s of losses with roughly half of that covered by provisions at this moment in time?

    Regards
    Steve
    UK

    • Jun 29, 2017 at 1:19 pm

      >> 1. “Am I right that the provision-coverage in place on the balance sheet will cover this loss therefore no extra hit to the Profit and Loss?”

      Yes, IF they set up provisions for ALL the non-performing loans they’re selling at the net loss amounts at which they’re selling them for. But I don’t know if they set up provisions of €20.5 billion, which is what it would take. I doubt they did.

      >> 2. “Am I also right that still leaves 20 billion euro’s of gross non-performing loans on the balance sheet, even after this exercise?”

      No. When they sell those loans, they will write off the remaining balance. So the balance of those NPLs will be gone. The amount of provisions they set up for the bad loans will lower the loss of the write-down. So they will take in €5.5 billion in cash and write down to zero the remaining €20.5 billion – so a loss of €20.5 billion. But they have set up some provisions. Which means they already recognized losses in the amount of those provisions. I don’t know the amount of those provisions related to those loans, but let’s say it’s €12 billion, so their loss when they book the transaction would be €20.5 billion – €12 billion = €8.5 billion. And the loans would be gone from their balance sheet. But it would also lower their equity by an additional €8.5 billion.

      >> 3. part one: yes; part two: I don’t know what the total amount of the provisions for all Italian banks is.

      But remember: any bad loan that was part of the NPLs some time ago but that was already written off is now no longer part of the NPLs… it’s already gone.

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