Top Monte Paschi investor piled on debt under Treasury's eye
The charitable foundation that controls Italy's scandal-hit Monte dei Paschi bank took on excessive debt and entered into risky derivative trades with the tacit consent of the Treasury, sources with direct knowledge of the situation said.
Not-for-profit foundations like Monte dei Paschi's are major stakeholders in all of Italy's main banks and are meant to use their dividends for social and cultural projects.
In 2011, Italy's Treasury allowed the already indebted Monte dei Paschi foundation to take part in a cash call by the bank, more than doubling its exposure to a lender whose capital base had been hit by a costly acquisition and the financial crisis.
A source close to the foundation said it was under pressure to join the capital increase after the Treasury had made it clear during a March meeting with the main banks that the foundations ought to help Italian lenders weakened by the euro zone debt crisis.
"We found it hard to say no, also because we ran the risk that the cash call could fail, thus greatly damaging the bank," the source told Reuters.
The foundation, run by a group of centre-left politicians from the city of Siena and the surrounding province, also wanted to join the large cash call to avoid losing control of the bank, a major source of political and economic power in the area.
"The foundation took on loans to take part in a costly capital increase and the Treasury approved all of these operations," a banker with direct knowledge of the situation said.
Under Italian law, banking foundations are banned from taking on excessive debt, above 20 percent of net assets, but Monte dei Paschi foundation won permission to go above this level, one of the sources explained.
A third senior source with direct knowledge of the situation said, however, that the Treasury had limited powers to impose any veto on the foundation's decision and said the institution had initially sufficient capital strength to join the cash call.
Neither Monte dei Paschi nor its foundation would comment. The Treasury also declined to comment.
A SORT OF HEDGE FUND
From its medieval headquarters overlooking Siena's famous Piazza del Campo, the Monte dei Paschi foundation has spent close to two billion euros funding everything from a biotech facility to the building of roads to the training of horses for the town's historic Palio horse race.
But as the fortunes of the Monte dei Paschi bank turned so also have those of the foundation.
In the past four years it has invested 4.5 billion euros or about 90 percent of its assets in the bank and reaped just 165 million euros in dividends. It had also run up over 1 billion euros in debt.
The foundation denied media reports on Friday that it could face liquidity problems. The bank, meanwhile, is set to tap taxpayers for a 3.9 billion euros bailout.
Until 2012, the foundation controlled nearly half of the bank's shares but was forced to cut that to just under 35 percent to repay creditors.
Run by allies of Italy's main centre left party, the PD, the Monte dei Paschi foundation picks half of the bank's 12-member board, including the chairman.
These close links to the PD have made a bribery and fraud scandal at the Monte dei Paschi bank a political liability for Prime Minister Mario Monti ahead of parliamentary elections on Feb 24-25.
Giuseppe Mussari, the former chairman of the bank, had also been a chairman of the foundation. A lawyer with no financial background, Mussari left the bank in April after the Bank of Italy demanded a management overhaul in light of the lender's precarious finances.
Documents seen by Reuters show that internal auditors and other board members had raised concerns with top management about the sort of risks Monte dei Paschi was taking. Mussari resigned last week as head of the Italian banking lobby when it emerged Monte dei Paschi could lose $1 billion from derivative trades.
The foundation's current chairman, Gabriello Mancini, has a high-school diploma in book-keeping and worked as a local healthcare administrator before entering politics.
"The Monte dei Paschi foundation became a sort of hedge fund. It bet on a single asset - the bank - and became highly leveraged," said Andrea Resti, a professor of finance at Italy's Bocconi University.
"In order to do this, they got the green light from the Treasury."
SYMBIOTIC RELATIONSHIP
With total assets of more than 50 billion euros, Italy's banking foundations are collectively the largest investors in the country's banks with large stakes in major players such as UniCredit and IntesaSanpaolo .
Critics, including the International Monetary Fund, have said the foundations' opaque governance and the power they give local politicians have deterred investment in the sector.
"Foundations and banks held an idyllic and symbiotic relationship," Mediobanca analysts Andrea Filtri and Antonio Guglielmi said in an extensive report on the foundations.
"The former supported banks; in exchange, the latter enhanced profitability and paid growing dividends, which foundations used to increase grants and improve their status."
In 2008, when Monte dei Paschi sealed a 9 billion euros cash deal for the Antonveneta bank, its top investor decided to underwrite the lion's share of a complex, 1 billion euro convertible bond known as FRESH that was meant to boost the bank's balance sheet.
The foundation bought 490 million euros of this instrument and financed it through derivatives, an investment that led it to book a loss of 376 million euros in its 2011 accounts.
In 2011, the Siena-based bank had to again tap investors for capital. The foundation, already heavily indebted, needed an extra 600 million euros to take part.
But one year later, it found itself unable to repay the more than 1 billion euros of debt accumulated with a dozen national and international investment banks.
"Nothing is said about the way in which the foundation got the capital, by borrowing in the markets. Nobody asked Giulio Tremonti and Vittorio Grilli - the former and current Treasury ministers - why they agreed that the foundation borrowed money to increase its stake," said Tito Boeri, an economist who also teaches at Bocconi University.
"It's the Treasury which has the task to supervise the foundations."
(Additional reporting by Gavin Jones in Rome and Jennifer Clark in Milan; Editing by Carmel Crimmins and Giles Elgood)