Italy Banking Crisis is Also a Huge Crime Scene

Toxic loans as a result of corruption, political kickbacks, fraud, and abuse.

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

The Bank of Italy’s Target 2 liabilities towards other Eurozone central banks — one of the most important indicators of banking stress — has risen by €129 billion in the last 12 months through November to €358.6 billion. That’s well above the €289 billion peak reached in August 2012 at the height of Europe’s sovereign debt crisis.

Foreign and local investors are dumping Italian government bonds and withdrawing their funding to Italian banks. The bank at the heart of Italy’s financial crisis, Monte dei Paschi di Siena (MPS), has bled €6 billion of “commercial direct deposits” between September 30 and December 13, €2 billion of which since December 4, the date of Italy’s constitutional referendum.

Italy’s new Prime Minister Paolo Gentiloni, who took over from Matteo Renzi after his defeat in the referendum,said his government — a virtual carbon copy of the last one — is prepared to do whatever it takes to stop MPS from collapsing and thereby engulfing other European banks. His options would include directly supporting Italy’s ailing banks, in contravention of the EU’s bail-in rules passed into law at the beginning of this year. Though now, that push comes to shove, the EU seems happy to look the other way.

While attention is focused on the rescue of MPS, news regarding another Italian bank, Banca Etruria, has quietly slipped by the wayside.

On Friday it was announced that the first part of an investigation concerning fraudulent bankruptcy charges, in which 21 board members are implicated, had been closed. This strand of the investigation concerns €180 million of loans offered by the bank which were never paid back, leading to the regional lender’s bankruptcy and eventual bail-in/out last November that left bondholders holding virtually worthless bonds.

The Banca Etruria scandal is a reminder — and certainly not a welcome one right now for Italian authorities — that a large part of the €360 billion of toxic loans putrefying on the balance sheets of Italy’s banks should never have been created at all and were a result of the widespread culture of corruption, political kickbacks, and other forms of fraud and abuse infecting Italy’s banking sector.

Etruria is also under investigation for fraudulently selling high-risk bonds to retail investors — a common practice among banks in Italy (and Spain) during the liquidity-starved years of Europe’s sovereign debt crisis.

Put simply, “misselling” subordinated debt to unsuspecting depositors was “the way they recapitalized the banking system,” as Jim Millstein, the U.S. Treasury official who led the restructuring of U.S. banks after the financial crisis, told Bloomberg earlier this year.

At MPS, billions of euros worth of subordinate bonds were sold to retail customers, who now risk losing much, if not all, of their savings as a result. Their perilous fate is often held up as justification — some might even call it blackmail — for not bailing in junior bondholders as part of the bank’s resolution, as happened three years ago in Cyprus.

MPS is also facing criminal investigation for cooking its own books, with the help of two other banks. In early October MPS’s head offices, fittingly housed within a restored ancient fortress in downtown Siena, were transformed into a gargantuan crime scene after a Milan court ordered MPS, Nomura, and Deutsche Bank to stand trial for a string of alleged financial crimes. They apparently include crimes that the Bank of Italy, under Mario Draghi’s tutelage, apparently knew about yet sat on its hands.

The court also indicted 13 former and current managers from the three banks over the case, with prosecutors alleging they had used complex derivatives trades to conceal losses at MPS.

Yet, as has happened in just about every Western jurisdiction since the Global Financial Crisis (bar Iceland, of course), no one will be held to account for the myriad “alleged” white-collar crimes, misdeeds and misdemeanors that paved the way to Italy’s unfolding banking crisis. As in Spain, high-profile investigations will be launched and trials will be held, yet they will lead nowhere. And they will take years getting there.

In Spain judge Elpidio Silva dared to buck this trend when, in 2013, he sent Miguel Blesa, former CEO of Caja Madrid (now part of rescued Bankia), to jail for his role in alleged financial fraud and the wrongful “appropriation of funds.” But it was the judge who paid the price. Within days, Blesa was released by Spain’s public prosecution service. Judge Silva was forced to face trial on three counts: perversion of justice, infringing a defendant’s individual liberty, and turning the case into a cause célèbre against the banking profession. He was found guilty and expelled from the judiciary for 17.5 years.

If the last nine years have taught us anything, it is that banks — and bankers occupying the corner offices — operate above the law of just about any land. All too often they’re too big not to bail and too important and well-connected to jail. In some cases, banks are even deemed too broke to fine. As long as the people gaming the financial system remain immune from criminal prosecution, the crises will continue. By Don Quijones, Raging Bull-Shit.

“There is not and there will not be a banking crisis in Italy, nor will there be a European financial crisis coming from Italy,” explained European Commissioner Moscovici. But wait… So Who Gets to Pay for Italy’s Banking Crisis?

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  21 comments for “Italy Banking Crisis is Also a Huge Crime Scene

  1. nick kelly says:

    All true- but the tree trunk that broke the camel’s back was the defeat of the Renzi reforms and the chance to bring Italian politics out of the 19 th century. That’s when the chronic condition became acute.

    Capital flight has begun- with billions fleeing Italy.
    It’s one thing to fear a bank’s collapse- it’s another to fear the seizure of euro deposits and their replacement with lira.

    • Me says:

      Don’t use “Lira”.

      Use GOLD.

      • Chicken says:

        What gold? I guess the Italian government is beyond broke? Someone else private most likely will end up owning the landmarks.

        For instance, the Colosseum might be called Nomura Colosseum and the Autostrata will be called Deutsche Bank Autostrata.

        Welcome to The Hotel California

  2. Tom kauser says:

    Resolutio trusto corporationo

  3. nhz says:

    What else can you expect when the highest rulers in Europe, the unelected European Commission, are utterly corrupt and clueless? And when their partner in crime the ECB is run by people who have vast experience with fraud and extortion of taxpayers?

    What Italian banksters and politicians are doing is in no way different from what goes on at the highest levels elsewhere in Europe. Maybe they are a bit more careless with their crimes though than their Northern EU counterparts.

    In Netherlands many from the elite, especially politicians, got huge loans – often for millionaire properties – forgiven during the financial crisis because they were ‘unable to pay the mortgage’. Many of them are now living for free in their millionaire homes (keep in mind that most mortgages in Netherlands have zero down payment) and nobody seems to care. Some of the small fish were also forgiven their mortgages, e.g. some journalists and bloggers who complained in the social media. The banks couldn’t care less, they were temporarily owned by the government; the taxpayers got the bill and the banks could show how charitable they can act with OPM.

    • Frederick says:

      Thats outrageous quite frankly Why do you put up with nonsense like that? Looks like youre gonna need more rope

      • nhz says:

        Same story as in most other countries in the West: there is no real democracy, you can vote but don’t expect any change. Politicians from ‘left’ to ‘right’, together with the media and the ‘justice’ system, will make sure that the establishment remains firmly in control and the looting continues.

        Our prime minister already warned that the Russians (of course …) are going to manipulate our elections in March. So if PVV from Mr. Wilders becomes the largest Dutch party, they will ignore this for our own benefit, just like they ignored the Dutch vote in 2005 against the EU Constitution and the vote this year against the EU Ukraine treaty. We will probably have another tribe government next year, whatever the votes – like in most countries in the West.

    • Dan Romig says:

      As George Orwell explained: “All animals are equal, but some animals are more equal than others.”

      Obama had Holder and Lynch shelter the criminals on Wall Street, although their firms paid up some hefty fines. Of course, these fines were paid for by the corporate balance sheet.

      One of the ironies of the post Trump victory is Lynch expressing regrets for meeting Billy Boy on the tarmac in June. She did not seem to mind the DNC’s actions against Bernie when the fix was in for HRC. Our nation’s Attorney General is of the utmost honor and integrity, eh?

    • Chicken says:

      Corrupt yes but clueless, although it sounds like a good excuse it’s highly debatable.

      The beatings will continue until moral improves, perhaps fresh waves of refugees will change the subject of conversation to emphasize some other topic?

  4. Kent says:

    Banking in the United States was largely a purely fraudulent activity prior to the Great Depression. States and the federal government had any number of regulations but were generally unable to enforce them due to a lack of skilled manpower. Many great fortunes were made and lost from internal dealing.

    FDR changed that for 50 years or so with very tight and thoroughly enforced regulations, leading to the greatest era of general prosperity in the nations history. The American people’s fervent desire for deregulation has put an end to that though.

    • polecat says:

      “The American people’s fervent desire for deregulation”

      Ok …. you need to narrow that down a bit, me thinks …..

      if your talking about the upper 20% (including CONgress, Big Corpus, and the many trailing pundants & sycophants that grovel beneath them, then I would agree, the other 80 or so%, however, would likely find your statement rather galling !

      • George McDuffee says:

        RE: …the other 80 or so%, however, would likely find your statement rather galling !

        Actually no, and there lies the problem (although I think it is greater than 90% rather than 80%). A significant fraction of the large majority does indeed support “deregulation,” despite its many demonstrated bad effects such a the 2008 financial implosion (repeal of Glass-Steagal and the CFTC “modernization act), air line deregulation leading to the loss of 2 of the 3 large civil aircraft companies (Douglas, Lockheed gone, Boeing still standing but largely dependent on defense work), deindustrialization leading to the destruction of the blue-collar middle class, with artificial intelligence/computerization rapidly reducing the white collar middle class, and robotics/autonomous vehicles about to destroy the service industries such as trucking.

        One major problem seems to be a lack of (or unwillingness to engage in) examination their socio-political assumptions in this new socioeconomic/cultural era with vastly different conditions and circumstances from those existing when the assumptions were first developed, possibly by their great-great grandparents.

        A second related problem is the reluctance of many people to vote for what has historically proven to be in their long-term best self interests. Simple self interest should of course not be the only factor, but it is a very stupid turkey that votes for “Thanksgiving.”

        A third major factor is government over-regulation concentrating on the trivial and wrong things, ranging from homeowners associations preventing veterans from displaying an American flag at their homes, to the Federal government controlling how much water you can use to flush a toilet, and “protecting” the mud hole in a farmers field, while the financial services industries, the pharmaceutical industries, the energy/petroleum industries, and many more are allowed to run amok.

        • Maximus Minimus says:

          …but it is a very stupid turkey that votes for “Thanksgiving.”
          Haven’t heard that one, yet, but it is precisely what I is happening. That’s beside the fact that as nhz noted, you can vote for any establishment party, you always get the same outcome. So what’s a blue/white collar, former middle class voter to do; vote for the only alternative party.

    • unit472 says:

      Regulation is of little use when the problem is fraud. Corrupt bankers can lend out the banks money and its gone. When bank examiners discover the loans were illegal its too late. There is little for the bank to recoup except some worthless collateral. That’s why I am somewhat sympathetic to the plight of Italian investors who were saddled with those subordinate bank bonds. They didn’t know the banks were run by incompetents or crooks. Of course bailing them out leaves only the even more innocent taxpayer holding the bag.

      Unless someway is found to hold bank officers and directors personally liable for the losses a bank suffers from corruption or mismanagement this problem will persist.

      • Christopher Martin says:

        One thing we did get right in NZ was to pass a law making directors personally liable for misconduct. Our major banks are all overseas owned but we did have ‘finance companies’ which collapsed and have been found guilty of misleading investors. Directors were convicted with prison sentences, including a former minister of finance (knighted by the queen). Just signing off on fraudulent reports makes the directors liable and can be banned from holding future directorships.
        I hope the authorities in Italy are also looking at the role of auditors/accountants who are surely complicit in the activities of their bank clients.

  5. George McDuffee says:

    RE: As long as the people gaming the financial system remain immune from criminal prosecution, the crises will continue.
    Indeed! Any regulation/legislation not backed with significant criminal and civil penalties providing for not only *INDIVIDUAL* fines, and in most cases prison time, is worthless “scolding” and “finger wagging.”

    At the very least, any corporate fines should first come from the executive bonus pool.

  6. Chicken says:

    It may appear otherwise, however, regulation is carefully written to protect elite class from the middle class. It’s a rock-solid system fully supporting free (not fair) trade.

    Everything is done by mandate.

  7. Bases Trust says:

    Etruria is also under investigation for fraudulently selling high-risk bonds to retail investors — a common practice among banks in Italy (and Spain) during the liquidity-starved years of Europe’s sovereign debt crisis.

  8. marty says:

    “regulation is carefully written to protect elite class from the middle class.” YES AND YES AND YES AGAIN. Finally someone succinctly states the truth. Read the Marxist Gabriel Kolko’s The Triumph of Conservatism. Corporations write the regulations that the govt enacts to stifle competition and protect themselves from accountability to their customers. We do NOT need more regulation. We need genuine de-regulation, but we never get it due to the fascist nature of our system

  9. mark spartz says:

    Failure is the ultimate regulator…real fear of bankruptcy would do far more than reams of regulations.

    • George McDuffee says:

      RE: …real fear of bankruptcy would do far more than reams of regulations.
      But only if bankruptcy has significant personal effects such forfeiture of assets including pensions, abrogation of employment contracts including separation/termination payments, and possible prison time for the analog of “careless and reckless operation of a motor vehicle resulting in death.”

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