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?
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We’re not quite there yet with our rhetoric around financial crime. While Don points to the actual wrong-doers (the bankers), he still frames the rhetoric as one about banks being above the law, and then adds bankers as an aside. The “they” in the second sentence makes clear the inconsistent rhetoric (who’s the agent?). If “they” are the banks, as institutions, then it makes sense to say “they need to be bailed out.” You can bail-out a bank. However the “they” can only refer to bank executives in the second part of the sentence, since jailing is something that happens to people, not corporate entities.
That needs to be the refrain, imho. The people gaming the system are the problem. Not “the banks” which, as institutions, are part of the system being gamed, but specific individuals. This makes it easier for less radical people to get behind. Even if you like the status quo, which “the banks” are a part of, you’re unlikely to like the guy who’s gaming the status quo system to everyone’s detriment and their own advantage.
— 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.
What about perfectly “sound” loans used to automate jobs away? Using, in essence*, the PUBLIC’S credit but for private gain?
*Since no one has any real choice but to lend (a deposit is legally a loan) to banks, credit unions and other depository institutions to lower their borrowing costs and, by extension, the borrowing costs of the rich, the most so-called creditworthy. The alternative is to be limited to unsafe, inconvenient physical fiat, aka “cash”.
A deposit is not legally a loan. It’s a deposit. The regime is different. There are similarities, such as the fact that a depositor has a receivable against the bank for the sum of the deposit – so in a way he gives his money to the bank, which the bank can use. But that’s about it. From a strictly legal point of view, they remain different notions and are governed by different sets of rules. You have to be able to pay most deposits at any given moment.
Most notably, only credit institutions, payment institutions, and electronic money entities can receive funds. The lending activity is less and less limited to credit institutions alone. As for borrowing money, anyone can do that.
It gets impossible to justify foot dragging on new banking regulations. Italy was in deep trouble like all banks just before the GFC hit. And all the willful incompetence that got us to that point has been allowed to limp along; even putting good judges in jail but not bank CEOs. A little sunshine would go a long way. What’s wrong with discussing why the system got so out of control in the first place? As Wolfgang said in a huge understatement, “We are overbanked.” This all sounds like the global catastrophe that finance is: Nomura, MPS, and Deutschebank were all caught red handed trading complex derivatives (aka fraudulent instruments) to keep from going broke when tshtf. And lesser forms of money recycling have been used since. That Wolfgang is so sanguine about Italy bailing in/out its banking system prolly means that he knows full well how ensnared Deutsche is in this mess. And Draghi knows it too. It’s unfortunate that Greece wasn’t more financially nefarious.
There are derivatives being priced 185 years out…factchecks daht comm has a person who writes them checks who runs a website which I wont directly mention, but sounds like finance colander…his father john spraos was in the uk during the junta claiming to be against it…but also spent some time at the imf…he makes his baksheesh with swaps monitoring…
sadly, I really think at the end of the day this great recession was and continues to be a grand conversion…that the “bad” sub-prime loan problems were well within the historical norms and all this mess is just a derivatives smash and grab heist that continues before our eyes…especially when in greece less than 25% of homes in greece have “any” mortgages…Greece hotels have historically run at a 40% load factor(greeks shut down most hotels outside of 3 month tourist season) leaving plenty of room for growth…
In that same vein it would be nice to have real time examples of real loans with real losses…not coversations about conversations about some mystery bad loans out there somewhere…btw…just talking outloud about real loan proofs…not suggesting anything bad with this specific article or nc coverage…
My 2¢ @ this 3 penny opera…
Icelanders just laugh when ever any one says the country “jailed its bankers” after the collapse.