By Don Quijones, of Spain & Mexico, editor at Wolf Street. Originally published 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.
“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?