“A clash between the management of Banca Monte dei Paschi di Siena SpA (The world’s oldest bank and Italy’s third largest financial institution) and the bank’s largest shareholder threatens to throw into chaos a plan to raise cash needed to stave off its full nationalization.” The Wall Street Journal

“Banca Monte dei Paschi’s troubles (but one example of scores of other distressed banks around the world) disprove two mainstream theories of the global financial crisis: 1) that it was caused by global finance and securitization (particularly securitization of U.S. mortgages and mortgage derivatives that were then spread around the world by Wall Street and caused distress at some foreign banks), and 2) greedy private sector bankers lent and invested recklessly in order to further their own short-term compensation. Italian banks were largely not involved in global finance and did not invest in U.S. mortgage and other securities packaged and sold by Wall Street or the GSEs. The Italian banks didn’t because most weren’t sophisticated in global finance and Italy wasn’t generating trade surpluses with the U.S. (The Germans and Chinese did buy these types of U.S. securities, because they held a lot of excess dollars from their huge trade surpluses with the U.S. that they needed to invest. Germany had a moderate banking crisis and China to-date has not.). Also, this particular bank was controlled by a charitable group who took their share of the bank’s profits and used them to support charities and other important activities of the regional community of Siena. No reckless and greedy bankers there and yet the oldest bank in the world is failing too! It’s time for the mainstream populist views in the U.S. regarding the causes of financial crisis to be discarded and replaced with more objective analysis and facts.” Mike Perry, former Chairman and CEO, IndyMac Bank

MARKETS

Financial Troubles at Italian Bank Worsen

Largest Shareholder of Banca Monte dei Paschi Threatens to Vote Against Proposal to Raise Capital by $4.1 Billion

By GIOVANNI LEGORANO

Updated Dec. 16, 2013 12:32 a.m. ET

MILAN—A clash between the management of Banca Monte dei Paschi di Siena SpA and the bank’s largest shareholder threatens to throw into chaos a plan to raise cash needed to stave off its full nationalization.

The Monte dei Paschi foundation, a charitable group that is the Siena-based bank’s biggest shareholder, with a 34% stake, is in financial straits due to the lender’s troubles, as well as the foundation’s attempts to keep control of Italy’s third-largest financial institution.

Now, it says it will vote against a €3 billion ($4.1 billion) capital increase unless the deal is delayed, a move that would upend a plan to rescue the bank. The collision raises the risk that the bank’s new management, charged with overhauling Monte dei Paschi, could resign, people familiar with the matter said.

The fates of the foundation and Monte dei Paschi—the world’s oldest bank—are intertwined. The foundation has long been the bank’s controlling shareholder, but Monte dei Paschi’s deep problems have inflicted heavy damage on the foundation. The charitable group is struggling to service €339 million in debt, the remaining portion of money it borrowed to take part in a €2.1 billion 2011 capital increase by the bank, money the lender raised in an effort to break into Europe’s big leagues.

The duo’s travails are the latest reminder of the persistence of Europe’s banking crisis and the pain involved in fixing past mistakes. Monte dei Paschi must sell €3 billion of new shares next year to pay back part of a €4.1 billion lifeline the Italian government threw it last February. It planned to do so in January.

But the foundation has slammed on the brakes. The foundation said it needs to sell all or part of its stake in the bank to address a “difficult” financial situation, and analysts and academics say it must raise cash to stay alive. The foundation says it is solvent.

The charitable group says it doesn’t have enough money to cover its share of the capital increase, so it would be left with a smaller holding in the bank if the deal goes through. And because the shares are likely to sell for far less than they are worth now, the foundation could raise less by selling them.

As a result, on Dec. 6, the foundation demanded that the transaction be put off at least until May, hoping to find a buyer for its holdings before then. The foundation has the power to stop the deal because low turnout at the bank’s shareholder meetings means it can wield a veto with its 34% stake.

“They destroyed their patrimony trying to keep their control over MPS,” said Tito Boeri, an economics professor at Bocconi University in Milan, referring to the foundation’s investment in the 2011 capital increase and an offering in 2008. “Now they are trying to destroy MPS in a desperate attempt to preserve their patrimony.”

Antonella Mansi, president of the MPS foundation, said the charitable group recognizes it made mistakes and favors recapitalizing the bank, but “can’t accept a solution that would wipe out our wealth.”

“We need to and it is our duty to protect our interests,” Ms. Mansi said.

The foundation is on the ropes. It is struggling to service its debt because its main source of income—the bank’s dividend—has dried up. Monte dei Paschi, which has lost €8.5 billion in the last three years, hasn’t paid a dividend since 2010 and has said it doesn’t expect to resume payouts before 2017.

The foundation’s situation stands in sharp contrast to the huge political and social power it once wielded in Siena, the fruit of charitable donations that totaled more than €1 billion between 2001 and 2011. It has cut its grants to the bone to hold on to its remaining reserves.

In 2008, it gave €203 million to recipients ranging from hospitals to trainers of the horses that run in Siena’s storied Palio race each summer. Last year, it gave a bit more than one-tenth of that amount and paid nothing to support the Palio, leaving the city of Siena to pick up the slack.

The foundation, which lost a total of more than €500 million in 2011 and 2012, has sold assets in a scramble to raise enough cash to pay its debts. This month, it sold its holdings of a complex bond called Fresh, issued by Monte dei Paschi, for just €95 million, a fraction of the securities’ €490 million face value. It has been trying to sell prized real estate, including Siena’s centuries-old Palazzo del Capitano, to stay afloat.

The foundation’s move has set the clock ticking, putting pressure on the bank’s management to find a solution before shareholders meet to vote on the cash call Dec. 27. The bank’s board met Thursday and said in a statement it disagreed with the foundation’s proposal, adding that delaying the transaction could cost the bank €120 million.

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Posted on December 17, 2013, in Postings. Bookmark the permalink. Leave a comment.

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