Could Italy’s Banking Crisis Drag Down Mario Draghi?

Just don’t mention “Antonveneta.”

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

A blame game has begun in Italy that risks casting a bright light on the leadership of both the Bank of Italy and Italy’s financial markets regulator Consob. The controversial decision to award the central bank’s current Chairman Ignazio Visco a fresh six-year mandate despite presiding over one of the worst banking crises in living memory has ignited a tug-of-war between political parties and the president, who makes the ultimate decision on who to appoint as central bank chief.

The first to cast aspersions was Italy’s former premier Matteo Renzi, who, no doubt in an effort to distract from his own party’s part in the collapse of Monte dei Paschi di Siena (MPS), called into question the supervisory role of both the Bank of Italy and Consob during Italy’s banking crisis.

Silvio Berlusconi, a key player in the center-right coalition whose party came out on top in recent elections in Sicily, was next to join the fray. “The Bank of Italy did not exercise the control that was expected of it,” he told reporters in Brussels in response to a pointed question about Visco.

As the controversy grows, it risks drawing the role of Visco’s predecessor, current ECB President Mario Draghi, into the spotlight. Many of the key events that helped pave the way to Italy’s current crisis took place during his mandate as governor of Italy’s central bank. And now the skeletons are beginning to crawl out of the closet.

It was recently revealed in a Milan court case that in 2010 Italy’s central bank, run by Draghi, knew that MPS’ management had papered over a loss of almost $500 million in 2010 and failed to report it. It’s not the magnitude of the loss that matters, but how it was done and who knew what and when. Bloomberg:

A 2010 report from the Bank of Italy … shows inspectors were aware that a 2008 trade struck with Deutsche Bank AG was the mirror image of an earlier deal Monte dei Paschi had with the German lender. The Italian bank was losing about €370 million ($431 million) on the earlier transaction, dubbed Santorini, as of December 2008. The new trade posted a gain of roughly the same amount and allowed losses to be spread out over a longer period, the document shows.

The newly revealed report — dated Sept. 17, 2010, and marked “private” — shows the Bank of Italy was aware that by choosing not to book the trade at fair value, Monte Paschi avoided showing a loss at the time. If the bank had used a mark-to-market valuation in the fourth quarter of 2008, it would have been included in its year-end report as the credit crisis was cresting, with potentially grave consequences on the bank’s finances.

One of the main reasons was to hide the losses racked up from MPS’s purchase in late 2007 of Banca Antonveneta, a mid-sized Padova-based bank. This still-opaque deal is arguably the most important banking scandal in Italy of the last ten years, and it directly paved the way to the collapse of MPS.

In its quest for growth at any price, MPS paid €10 billion for Antonveneta, over 50% more than the €6.6 billion Spanish lender Banco Santander had paid just months prior as part of its joint acquisition (with Royal Bank Scotland and Belgian bank Fortis) of Dutch giant ABN Amro. Santander was happy to hold on to the Brazilian side of ABN Amro’s business while hastily disposing of the Italian “assets.”

For Monte dei Paschi it was an ill-timed disaster, just as the purchase of ABM Amro’s disparate other parts had been for Royal Bank of Scotland and Fortis, both of which would end up receiving taxpayer-funded bailouts to stay alive once the post-Lehman hangover hit Europe.

Clearly, there was a chronic lack of due diligence conducted by the banks’ respective boards as well as by the respective national financial market regulators and central banks. In Italy’s case, that meant the Bank of Italy whose chairman at the time was Mario Draghi. Despite serious misgivings expressed by the director of the Bank of Italy’s office in Padova, A. Minnella, in a letter to the Bank of Italy’s head office in Rome, Draghi signed off on the Antonveneta deal in early 2008.

Minella warned of significant “critical issues” in the bank’s technical profiles and competitive positioning, as well as “accentuated problems” that require immediate action by company managers. Antonveneta suffered from serious “financial imbalances” and its sustainability was “at risk,” he added. Yet those warnings were ignored.

In recent years the plot surrounding Antonveneta has thickened further. In 2013 an article in the Italian newspaper ‘Corriere della Sera’ alleged that Monte dei Paschi had signed a secret agreement with Santander and JP Morgan Chase to divvy up the profits from the sale and route them through private banks in Switzerland. So serious was the charge that members of Italy’s fraud squad visited Madrid in 2013 to question Santander’s then CEO Emilio Botin over the deal.

Then there are the reports that MPS’ acquisition of Antonveneta had a total cost of €17 billion, including a €7 billion loan that Antonveneta owed to ABN Amro, while MPS’ total operating capital was just €4.8 billion. Hence the need for so many complex derivatives trades cooked up by the likes of Deutsche Bank, Nomura and JP Morgan Chase to hide the full scale of MPS’ losses.

Some of the bankers responsible are being tried in Italian courts. As has happened in just about every Western jurisdiction since the Global Financial Crisis (bar Iceland), probably no one will be held to account for acts that paved the way to Italy’s existential banking crisis.

And that will almost certainly include Mario Draghi, whose name also popped up recently in a banking commission investigating the Bank of Italy’s chronic mismanagement of the crisis that brought down the two Veneto-based banks. Beppe Grillo’s Five Star Movement has even called for Draghi to be questioned by the commission, but every possible effort will be made by Italy’s financial and political establishment to ensure that does not happen.

Berlusconi, one of the first people to begin piling pressure on the Bank of Italy, described the attempt to drag Draghi into the morass as reckless. “Involving Draghi is really irresponsible — this is the man whose policies helped stabilize the Italian economy and probably saved the euro too,” he said.

The ultimate irony: during his time as governor of the Bank of Italy, Mario Draghi may have played a key role in facilitating the M&A deal that would eventually contribute to breaking Italy’s banking system, but now as ECB president, he has done whatever it might take to keep the Italian economy and its banks afloat, including buying up large amounts of Italian government debt. The ECB is now holding €310 billion of Italian bonds, an amount that exceeds the €246 billion increase of Italy’s national debt since 2012. These aggressive purchases have pushed even the two-year yield below zero (meaning the government gets paid to borrow money). For that alone he can rest assured that Italy’s political establishment has got his back. By Don Quijones.

A sharp dose of Deja Vu for Italy’s teetering banks. Read…  The Next Italian Bank Threatens to Topple

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  14 comments for “Could Italy’s Banking Crisis Drag Down Mario Draghi?

  1. Joan of Arc says:

    No, Italy’s banking crises won’t drag Draghi hi, and it won’t drag Draghi low. With QE, he can buy up all the banks if he wishes to, just like he has bought up most of the bonds.

    • James Levy says:

      I’m curious: if these zombie banks simply use central bank money to pay off other banks, does it ever leach into the “real” economy to cause generalized inflation or economic stimulus? I just am not sure. Seems like a monetary black hole.

      • John Taylor says:

        In Post 1989 Japan this happened and their economy went between very low inflation to deflation in following decades.

        That doesn’t mean there was no cost of course, many academics at the time were arguing about Japanese “zombie” banks and businesses being a drag on growth. Their measured GDP hasn’t grown much since then.

        Also, many of us intrinsically feel the problem of combining asset inflation with stagnant wages. This combination tends to push these assets further out of reach for the middle class and concentrate the gains among the asset-rich leading to an ever-increasing wealth divide. It’s arguable whether this results directly from the central bank propping defunct banks, but it’s tough to envision a way to prop them without excess cheap or free money creation at the top.

      • cdr says:

        Yes, it’s a monetary black hole.

        For some reason, Central Banks feel (or claim to feel) that expansive lending will automatically happen if rates remain low and inflation will bloom from that effort. This is extremely wrong for very obvious reasons.

        Lending for investment that creates employment (as opposed to lending that supports paper flipping of assets) requires spending to precede lending. If people buy enough stuff then plant, equipment, and employment expand to support the creation of more stuff. Nobody borrows to build just to make more stuff available in case demand might show up someday. Low rates do not magically create demand (except for paper flipping of financial assets).

        The ability to spend creates demand and income is needed to create the ability to spend. Interest income creates discretionary income, which is the fuel for spending. Abnormally low interest rates decrease income which decreases spending which causes prices to fall just to move stuff off the shelves.

        So – low rates accompanied by reserves that generate bank income just sitting at a central bank on deposit, create no demand for anything except paper flipping. Central banks and QE create and make worse the problems they claim they are trying to solve.

        Also, the claim that inflation is needed for a healthy economy is another scam, or a part of the overall QE scam, and completely untrue.

    • Rates says:

      Who wants to bet that Angela Merkel will go down before Draghi? I’ll take that bet for sure.

      Super Mario has plenty of 1 Life Power Ups.

    • Christoph Weise says:

      It is irrelevant in this context whether Draghi can create credit but it is very relevant if he committed crimes for which he may be held accountable.

  2. OutLookingIn says:

    One must remember that Mario Draghi came out of Goldman Sachs and as one of their illustrious alumni, is held as ‘untouchable’ by the C suite against any retribution by the common plebes.

    Goldman Sachs has profited hugely over the years because of Mario’s actions. Besides, he knows where all the really important skeletons are buried and will be protected to the extent of “whatever it takes”.

    Expecting ANY of the global financial figureheads to be prosecuted for financial malfeasance, is nothing more than a pipe dream. However, this does not rule out lawless retribution. This is what frightens the elites the most and as such, all means at their disposal will be employed to ensure that the common plebe is kept in their subservience places.

    • Mily says:

      It’s not just about GS. Don’t forget about Draghi’s son, Giacomo was an interest rate swap trader with executive director title at Morgan Stanley in London for 13 years. He left MS earlier on this year. But Mario’s nephew, Carlo (named after Mario’s father) also has worked at Morgan Stanley for 16 years now. No conflict of interest there.

  3. cdr says:

    “Could Italy’s Banking Crisis Drag Down Mario Draghi?”

    No, assuming the status quo continues … which is extremely likely.

    The only way any crisis – real, imagined, or contrived – could do that is if a new and improved replacement was waiting in the wings and ready to go to replace Draghi. He would need to be considered damaged goods in the eyes of those he really works for. A Draghi V2 would be a bureaucrat, stooge, and front man (woman) for whatever it took to keep the Euro-plate spinning a while longer. PS – the end would be near at that point.

  4. MC01 says:

    It’s really curious how the only people in Italy speaking openly about how little, if anything, has changed in the Italian banking system are members of the much hated M5S. Not a word from the media, which are busy filling whole pages with the main ingredient of politics: irrelevancies.

    Mario Draghi has been not so stealthly campaigning for re-election this year, albeit probably not even him believe it’s possible. He may, however, aim at selecting and presenting to the ECB member banks his successor, without a doubt somebody cast from his same mold and Mr Trichet’s.
    That patience with him and his policies has run out in certain powerful quarters in Germany and The Netherlands is well known but the choice of his successor, and hence of the future of monetary policies in the EMU, is wholly political.
    Hence theoretically speaking Draghi should have no problem either getting re-elected or naming his successor: he would be backed by France, Italy, Spain and the rest of those governments in Europe benefiting from his policies, including Greece.
    But the big problem is Angela Merkel. Her biggest strength is having a very simple core value: strengthening her own political position. As a periodic I saw in a shop in Germany a couple months ago wrote (if my pathetic German can be trusted), her biggest talent is understanding what political ideas have the maximum appeal at the moment and frame them in terms appealing to the largest majority, even if this means watering them down to the point these ideas become barely recognizable.
    If Angela Merkel feels German voters are ready to back her on tighter monetary issues (and hence supporting her coalition), she will happily throw Draghi out of the window for a monetary hawk without too much thought being given for Italian banks. A bailout for them can always be arranged at a later date… again if politically convenient.

    • Maximus Minimus says:

      Well, as you know that coalition is over. I am not going to predict the outcome of the coming elections, but to say that the next coalition creation will be more difficult.
      The important point is that neither of the parties cared to address the ECB negative interest rate policies, and their impact on German savers, but the party that is waiting in the shadows. Well, not quite any more.

  5. Paul Morphy says:

    You can be certain in absolute terms that the Draghi’s legacy as Governor of the Italian Central Bank, will be the same legacy for his tenure as Governor of the European Central Bank.

    The man is a fraud.

  6. Rates says:

    No crisis.

    What does Singapore have anything to do with anything you might wonder? They are export based i.e. they are the canary in the coalmine. Strong demands overseas.

    Don’t believe all this crises. Europeans, Americans, etc have more money than they’ve disclosed.

  7. d says:

    I dont call him the Mafiosi at the ECB, for nothing.

    He is a member of P 2, just like bouncing back, Berlousconi.

    Di Draggi do it

    Of course.

    Will he be brought to account for it, or his policy’s at the ECB that deliberately favour the southern banks and Italy, so the Mafia (who are at the root of the majority of Italian NPL ‘s), at the expense of northern taxpayers and savers.

    Highly unlikely.

    With Germany diverted. The possibility of the mobster getting a second term, rises considerably.

    If he does, it is highly unlikely you will see he testify or questioned in Italy. As even Italians, are not stupid enough, the bite the hand that can consign them to utter national ruin, with the flick of a pen.

    If he dosent get a second term. I would no be surprised to see him come to a similar end to 1 Salvatore Luciana. who after an important meeting about his soon to be made into a movie life story, drank a provided cup of coffee, and had a Heart attack.

    As he just like Lucky, knows to much.

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