Here’s Italy’s Latest Plan B Where Desperation Meets Insanity

Selling securities backed by defaulted loans to NIRP refugees.

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

Nerves are beginning to fray in Italy’s banking sector, as pressure rises on the worst hit banks to remove the most noxious elements off their books — most likely at big discounts that will further impair their balance sheets. On Saturday Italy’s finance minister, Pier Carlo Padoan, begged the ECB for more time for the banks to clean up their act.

“We cannot demand that suddenly banks offload their NPLs, because this could be potentially destabilizing, especially if the problem involves several banks in the same banking system,” Padoan told a news conference.

By “several banks,” Padoan means perhaps the 114 banks, of the close to 500 banks in Italy, that have “Texas Ratios” of over 100%. The Texas Ratio, or TR, is calculated by dividing the total value of a bank’s non-performing loans by its tangible book value plus reserves — or as money manager Steve Eisman put it, “all the bad stuff divided by the money you have to pay for all the bad stuff.”

If the TR is over 100%, the bank doesn’t have enough money to “pay for all the bad stuff” and tends to fail. In Italy, 24 banks are estimated to have ratios of over 200%.

On Tuesday it was the Governor of Bank of Italy Ignazio Visco’s turn to plead for more time. “The majority of bad loans are held by banks whose financial position does not require to sell them immediately,” he told European Union lawmakers.

One bank that does need to sell its bad loans immediately — originally planned for last year — is the poster-child of Italy’s financial crisis, Monte dei Paschi di Siena. According to a new report by Il Sole 24 Ore, the world’s oldest bank has a new, highly creative plan to save itself from the brink, which is actually an old plan that’s been dug up from the archives and repackaged.

The securitization option is back in the cards for the disposal of €29 billion of non-performing loans at Italian lender Monte dei Paschi di Siena (MPS) – maybe with US investment bank JP Morgan. This will be the strong point of the group’s industrial plan under consideration at the European Commission.

That’s right: the new “strong point” of MPS’ latest self-salvation scheme is to securitize €29 billion of toxic debt and spread it as far and wide as it possibly can, with the help of none other than JP Morgan Chase. In other words, have we finally reached the juncture of Italy’s banking crisis where desperation meets insanity — the insanity of yield-starved investors, those NIRP refugees that have been tortured for too long by the ECB’s negative interest rate policy?

Under this plan, the bank would slice, dice, and repackage non-performing financial assets, such as loans, residential or commercial mortgages, or other  sometimes uncollateralized Italian “sofferenze” (bad debt) into asset-backed instruments which can then be sold to yield-starved gullible investors all over the world. This is riskier than the subprime mortgage-backed securities in the US that played a major role in the global financial crisis.

Now banks, central banks, regulators and governments are talking about allowing the same to happen with assets that are not just at risk of failure but have already failed. In some cases they haven’t generated income for years and in many cases they are personal or business loans that are not backed by any collateral of any kind. The idea is for investors to use the inadequate and slow-moving Italian legal system to collect on this often illusory collateral if any.

The FT describes the idea of securitizing NPLs as “subprime derivatives on steroids,” but only in relation to China’s plans to do exactly the same thing with its own non-performing loans, which according to official figures recently surpassed the $200 billion mark. The FT has been a lot less critical of the same plans being hatched in Italy. Some economists are even calling for a Europe-wide securitization of toxic debt.

As the FT reports, one major hurdle Chinese banks currently face in securitizing their debt is getting rated by the international rating agencies. Not that it’s stopped them. As for banks in Italy, they are less likely to face such a problem.

As part of a deal reached with the European Union in January, 2016, Italian banks can bundle bad loans into securities and buy state guarantees for the least risky portions, provided those notes have an investment-grade credit rating. So the taxpayer would not only be on the hook for a portion of the NPLs underlying these securities, but also for the fees and profits generated along the way to securitize them.

In the first iteration of this process (depicted in this infographic by Deloitte), executed in September 2016, Popolare di Bari got informal approval from PricewaterhouseCoopers LLP and the Bank of Italy not only to remove the entire face value of the bad loans from its books but also to keep the senior portion of its securitization. The result: healthier looking balance sheets while the risks posed by its toxic assets have been shifted elsewhere.

Since then, Italy’s biggest and sole global systemically important bank (G-SIB) Unicredit has joined the party, shedding €17.7 billion of non-performing loans into two separate securitization vehicles, one managed by Pimco and the other by Fortress Investment Group. UniCredit retained minority stakes. The transaction was aptly dubbed Project Fino – as in, everything is just fine. By Don Quijones.

How many Italian banks are insolvent? Turns out, a lot! But elections are coming up. Read…  Here’s Why Italy’s Banking Crisis Has Gone Off the Radar

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  34 comments for “Here’s Italy’s Latest Plan B Where Desperation Meets Insanity

  1. cdr says:

    If something has been securitized and packaged, someone will buy it – probably with someone else’s money. When I was a young kid, I once sold a Superman comic I received in the mail via subscription a couple of days before general release for more than sticker price. My pitch – nobody else has SEEN this before. You’re the only one to have it … at least for a day or two more. Too bad I developed a conscience at a young age.

  2. Cashboy says:

    The Italian people do not have too much personal debt compared to other countries (e.g. UK) but they have huge government debt.
    The ECB is totally skint as well so that would come down to EC member governments (appears to include countries that are not in the Euro).
    Desperate times and very embarassing for Mario Drago.
    I think the Euro is actually overvalued and could be doomed.

    • Frederick says:

      Yeah that’s what they’ve been saying for years now I’m not so sure the USD is any better to be honest I’m selling my remaining dollars and buying metals but that’s me Plus Trump is calling for a weaker dollar which will be necessary if he ever wants to bring any manufacturing jobs back to the USA

      • Gooden says:

        Trump is now officially dead. They showed him the pictures of JFk and told him what will happen if he doesn’t play ball.

        Wolf (although he is a lone wolf) has shown us Trump’s budget does not anticipate any surge in infrastructure spending.

        It’s now 100% war war war on the news cycle. Didn’t Trump run against endless wars? Expect Obama’s third term.

        He’s losing his base, no way he will be re-elected. Lame duck in the first few months, Jimmy Carter on steroids.

        Trump is a wimp.

        • d says:

          This is not apolitical site.

          I oppose P 45 as he is the wrong person for the job at this time.

          Many of the things he is doing, and wants to do. NEED doing, just not the way he wants to, or is doing them.

          Now when America says no or stop.

          It is advisable for Genocidal Dictators, and Religious Genocidal Maniacs. To listen and at least consider their actions. Not Laugh and carry on.

          1 thing P45 military action has done, is stop russian unabated aggression.

          The second thing it has done, is promoted china, to get a lot more aggressive toward DPRK.

          As they dont want their convenient knife they regularly twist in Americas back to get to hot to touch.

          Neither of these things is bad.

          Back on Topic.

          Italy is agin trying to Securitise its financial Garbage.

          As Germany and the EU commission are making more negative noises about the nasty little Mafiosi at the ECB. Buying more toxic italian bank debt and the italian state injecting more illegal state aid and taxpayers money, into the italian banking sector, with out first performing a mandatory bail in of said sector.

          No matter how this italian NPL garbage, it is sliced and diced, its still unrecoverable garbage. How could anybody with even half a brain, see it as an investment. Apart from of course, those receiving commissions for selling it.

          As for the italian pleas for “More time” for the bank’s to sell their NPL garbage

          More time, to do what.

          Continue to sit on the garbage, demanding completely untenable prices for it.

          Which is what the italian banks have been doing for decades, dating back to the 1980’s. And beyond.

          Which is why they still have it.

          The should have written it down, and off. Before the greek crisis started and they were forced to absorb the mandatory haircuts, on their obviously worthless when they brought it. greek state debt.

          Said Obviously worthless greek state debt haircuts, being the straw that has broken club med banking beyond repair.

          The Eu and ECB have been kicking the can that is irreparable Club-med banking. Since the Enforced greek State Debt Haircuts.

          Unfortunately for them, due to the nature of italian criminals, otherwise know as italian politicians, Compounded by global economic problems, the can has gotten bigger, not smaller, over time.

          Italy has to bite the bullet and bail in, or leave the Euro, and bail out.

          Failure to do one or the other, will soon (in relation to the time frame) result in the can exploding one day, instead of moving, when it is kicked.

          That will hurt everybody, MUCH MUCH more, than a controlled, sequential bail in process will.

          A controlled, sequential bail in process, being the simplest and best for the taxpayer method, of dealing with this issue, so keeping italy in the Euro.

          Italy could probably be allowed to fudge 100% compensation to those small “investors” who were “Miss Sold” italian Bank bond’s, with Bank finance. Or to get Bank finance.

    • MC says:

      For financial and fiscal purposes, Italy is usually divided in five areas: North-West, North-East, Center, South and Islands.
      The North-East has the highest leverage ratios by a fair margin, and also the highest percentages of “bad debtors”, reflecting the “damn the torpedoes” mentality of local banks, among which we find our old friends Veneto Banca and Banca Popolare di Vicenza.
      By contrast the South and the Islands have very low leverage ratios, but this is chiefly due to the fact those areas include many zones which even the EU recognizes as “strongly underdeveloped”, meaning dirt poor. Consumer-oriented banks have little interest in lending to truly poor people.

      While we are at it the Center leads the way when it comes to bad loans, but that’s chiefly because of MPS, which is still the largest bank in that area by a fair margin. I am ready to bet a shiny sixpence if all the NPL’s hidden in every nook and cranny of the Italian banking system were to come to light nobody would have cause for rejoicing.

    • Justme says:

      Huh? All those bad loans are private debts not government debts. And there seems to be plenty of them. So if the private debt is low, a you claim, the default rate must be VERY high in order to have such a large volume of defaulted debt.

      • d says:

        A large % of that debt is fraudulent Mafia debt, and the Mafia owned politicians and bankers, are in it up to their necks.

        The debt is unrecoverable, as the collateral pledged.

        A dosent exist.

        B dosent belong to the person who pledged it, who was not authorised to pledge it. So unenforceable claim against it.

        C is worth 1 % of what the valuation on it.

        The banks know this and have been rolling this debt for Decades. As they know they can never collect on it.

        • Laurence Hunt says:

          More needs to be said about how organized crime fits into this picture.

        • d says:

          You are talking about italy. It is impossible to tell where the Mafia stop and Politicians, Bankers, General business, Freemasons, the Police, Judicary, Tax depatrment, Etc, Start.

          Silvio Berlusconi, Media Mogul, Polotician , Member of the infamous PS 2 Masonic lodge, Criminal, and heavily connected “Family Man” at the highest levels. It is unknown if he is also an official “Family Member”.

          Where are you, and your country, when that act is Prime Minister, or still and active leader of a political/Family faction.

          The only difference, between, china, russain, and italy, is that italy is a multi party “Mafia State”, with a little transparancy, and a little independent power power left in the Ballot box and some small sections of the National administration.

          How much of the State antimafia activity in italy, is simply a Mafia war, between the oldguard and the drug lord’s.

          Which goes back to Lucky Luciano, and Arnold “The Brain” Rothstein. Who put it into Mayer and Luckys heads, that dope was the locial replacment for booze.

  3. cdr says:

    The more I think about this, the more fantastic it looks.

    You have the largest banks in the country loaded with bad debt. If it’s recognized, the bank fails and / or the taxpayers and/or depositors make it up. It would result in a national financial failure of legendary, historical proportions. A certainty if ignored.

    So, what happens. A high level govt muckity muck says “get this off the books. We’ll cover you. It’s legal because we, the government, says it is. Sell it to foreigners. You figure out how.”

    It’s fraud at the national level being perpetuated on all comers. Yet, it’s legal and, because other people’s money will likely buy it and fees will be charges as commission to sell it, an actual sure thing for all who can unload their trash.

    The Eurozone – where financial fraud becomes economic policy. It’s legal here!

    • TJ Martin says:

      ” The Eurozone – where financial fraud becomes economic policy. It’s legal here! ”

      And this comes as a surprise ? But perhaps the better question should be ; Where on planet earth to one extent or another is this not the case ? From my reasonably educated and informed point of view to borrow an analogy the economies of the world have become a sophisticated shell game .. of epic proportion .

      • cdr says:

        “And this comes as a surprise ? ”

        Yes and no. The Eurozone is a perfect example of a gang in control using every advantage to push their bad ideas onto others at their cost because the gang in control has no skin in the game and profits from it. On a micro-scale, as in an office where the boss works elsewhere, it’s idiots in charge and in firm control.

        It’s human nature and entropy to a degree.

        You just hope for better because you want to believe the lies.

        Also, everyone wants something for nothing so a central bank that prints utopia at will is a magic place. So, thing are not so simple. Work and sacrifice vs free printed wealth. The game is to stick the bills with someone else. On a continental scale.

        • Jerry says:

          Socialism is for dummies.

          Sooner or later you end up with too many takers and not enough makers.

    • JMiller says:

      More accurately, stockholders, bondholders and perhaps uninsured depositors may suffer losses in a bank failure. And you are correct that the taxpayer could end up paying for some of it since bailouts could still occur contrary to what some in the ALT media say.

  4. unit472 says:

    Well the whole edifice of the EU is being propped up by bonds in the European ‘Stability Fund’ marketed as AAA based on the guarantees of the member nations who are most definitely not AAA and those funds will be raised to bail out the governments after they have to bail out their banks.

    Reminds me of that scene in the movie Papillon where the bounty hunters sell a boat with a rotten bottom over and over again to escaping criminals so they can make more money turning them in.

    • TJ Martin says:

      ” Reminds me of that scene in the movie Papillon where the bounty hunters sell a boat with a rotten bottom over and over again to escaping criminals so they can make more money turning them in ”

      If I may say that is an absolutely brilliant and apposite analogy .

  5. NY Geezer says:

    Almost weekly I receive offers from Schwab of opportunities to purchase new bond issues which I just ignore. I suspect that pension and bond funds that invest other peoples money are amenable to these offers especially if fund managers receive bribes.

  6. mvojy says:

    JP Morgan should be prosecuted if they package up and sell this debt that is KNOWN to be 100% toxic. If you sell stock for a company that is known to be bankrupt aren’t you committing fraud?

    • Bruce Adlam says:

      Maybe it needs to be taken to court and tested and or reporters do there job and start digging around

      • Gershon says:

        You’re innocence is touching, Polyanna. When our regulators, enforcers, and judiciary have all been captured by the banksters, no TBTF bank or its Fed accomplices need ever fear any consequences for defrauding retail bag holders, er, “investors.”

        • Bruce Adlam says:

          Thats why the over valued us stock and real estate market needs to crash to hurt enough people to expose the fraud and corruption that’s going on on an epic scale around the world. Sad but that is what it seems to take like 1929 into the 30s

      • robt says:

        Only the tin hat guys would report on it. The MSM would run ads for it.

  7. George McDuffee says:

    While I am not an accountant, IMNSHO the problems all seem to trace back to compounding failures and abuse of discretion in the valuation process, and quite likely serious organizational fraud. The justification for the amounts, terms and conditions of the loans is separate topic and is not considered.

    While it is bolting the door after the horse [and its bit, bridle, saddle, blankets, etc.] has been stolen, It is suggested that some standard be imposed requiring the write-down of the value of the loan based how long it has been in default to prevent any repetition. Very close monitoring will be required to minimize evasion by re-financing a loan to “re-set the clock” or modify the terms.

    One possible scheduled:
    Days Delinquent book asset value based on loan balance
    unless lower because of other factors such
    debtor bankruptcy, or “going concern” caveats in the auditors/annual reports.

    0-30 95% of loan value
    31-90 75%
    91-180 50%
    180-270 25%
    270-365 10%
    >365 0%

  8. Ricardo says:

    I started reading economic blogs like Wolfstreet to try and understand more about how economics work and while I have gained some understanding of the economic system after reading an article like this I have to say I am left speechless.
    So a bank can take a loan that has not been repaid by the person/company who borrowed that money and then chop it up into small pieces and repackage it to sell to new customers who will purchase it in the hope of making a profit from a debt that has not been repaid.
    If I have understood this correctly then all I can say is the world has gone mad and I am left speechless at the stupidity of people to be involved in this dishonesty. Both seller and buyer.
    Please correct me if I am wrong with my analysis of this scheme.

    • GSH says:

      You got it. But it also looks like the tax payer will be roped into guaranteeing some part of the new (in)securities and the investment banks will make a killing securitizing the junk. What is not to love?

    • AC says:

      I think they call it gestalt? Where a huge pile of sorted garbage is somehow more valuable than many small piles of garbage. Presumably because you then know exactly how worthless it is.

      This was the essence of the subprime mortgage problem, and their associated mortgage backed securities. Their related credit-default swaps will make you feel homicidal if you look at them closely enough.

      Look at the current subprime auto loan situation, with its related asset-backed securities.

      You should like this, too:

      Virtually nobody believes this when they first read it.

      • James Levy says:

        This is a lot like the end game in most wars. It eventually becomes obvious to one side that they are going to lose. But they play out the string, hoping for a miracle or that exhaustion on the other side buys them a better deal at the peace talks. Most times things just wind up worse for the loser and a lot of people die who wouldn’t have if reason had trumped hope. Economists, bankers, and politicians are all in thrall to hope, because most of the smarter ones know that the whole system is likely to crater but they feel if they play out the sting, maybe, just maybe, a miracle will emerge and bail them out of the catastrophe. Planning and executing a strategy for mitigating the catastrophe is beyond them–they lack the imagination and will for that. So this is the kind of skullduggery they resort to in order to buy just a little more time for a miracle.

    • You’re right. This is so breathtakingly cynical, I couldn’t even believe my own lyin’ eyes for a second.

    • cdr says:

      It’s not complicated. You understand perfectly. The grease that makes it work is using other people’s money. There’s lots of variations on that theme.

  9. disc_writes says:

    Thank you for covering Italian financial problems. As an Italian abroad, I follow the news with apprehension, and am not able to find worthwhile news in most European mainstream media.

    As an aside, I check out Tradingeconomics every now and then. The Italian General Government External Debt has more than doubled essentially overnight to more than 2 trillion Euro:

    Anybody knows what that indicator is, and why it changed?

  10. R Davis says:

    Bankruptcy is a legal status of a person or other entity that cannot repay the debt that it owes to creditors.

    Isn’t it time that this unsustainable game of cards was stopped ?
    This financial & economic system in play has proven itself a failure.
    Kill the bloody thing off .. before it devours the well being of the planet.
    Isn’t .. the hanging on to the current system actually .. the power brokers .. the family dynasties .. the aristocracy .. not wanting to fall from their heavenly & hoity heights of global power & unimaginable wealth.
    Maintaining the status quo.
    Boys & girls .. the unimaginable wealth has dwindled away over time .. you have fall from riches in no uncertain terms & you ways are old fashioned in the face of today’s technological brilliance.
    Quit while you are still able to.

    • Wolf Richter says:

      At this point, there is still no legal way for a country to file for bankruptcy protection. Instead, it has to negotiate with creditors, as Argentina has done, or as Greece has done. Even US states cannot file for bankruptcy. In the US, it would be relatively easy to change the bankruptcy law to allow states (and Puerto Rico!) to file for bankruptcy in federal court.

      But what law and court would you use for country bankruptcies? It would have to be some kind of international law and court. So at the UN? I can just see the hue and cry…

      Bankruptcy and negotiating with creditors is essentially the same thing, but one happens under the supervision of the courts and follows some rules, while the other is the Wild West.

  11. R Davis says:

    Buckingham Palace is in a dreadful state of repairs .. it is crumbling from the bottom up.
    Queen Liz & her ageing husband HRH Prince Phillip have had to move out.

    Q: Why did no one spend monies to repair the historic building.
    A: Because they were & still are BROKE.

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