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Monte Paschi's Cover-Ups Have Damaged Italy

Elisa Martinuzzi
·3 mins read

(Bloomberg Opinion) -- Another year, another conviction for yet another set of former managers of the world’s oldest bank. From afar, the Byzantine tale of Banca Monte dei Paschi di Siena SpA’s repeated failings — shameful as they are — might look like the company’s problem alone. But that isn’t the case.

It’s bad enough that the executives who ran Paschi for years, and those brought in subsequently to clean it up, have been so embroiled by scandal. Equally troubling is that regulators, the courts and Italy’s government missed multiple chances to set the lender straight.

Consider the latest case. On Thursday, Paschi’s former chairman Alessandro Profumo and ex-Chief Executive Officer Fabrizio Viola were convicted for false accounting and market manipulation. The two executives carried out “ambiguous and incomplete” accounting between 2012 and the first half of 2015, according to the indictment. Profumo, currently CEO of Italy’s state-owned aerospace conglomerate Leonardo SpA, and Viola were each ordered to serve jail sentences of six years. Their lawyer said they plan to appeal.

The previous management team at Paschi was convicted in November 2019 for hiding the bank’s losses through a complicated derivatives trade dating back to 2008. Profumo and Viola have now been accused of misrepresenting what they found when they took over in 2012 and of continuing to make the bank appear safer than it was.

Instead of representing the transactions they discovered as credit default swaps, a form of derivative, the two men booked them as government bond holdings, the court said. As a result, Monte Paschi continued to mask the fact that it probably had an enormous trading position — a hugely risky proposition.

It’s not just the executives at question here, though. What has emerged since a colleague and I first revealed the hidden transactions in January 2013 is how far regulators and politicians were aware of the problems and yet continued to support Paschi with multiple taxpayer rescues.

The Bank of Italy spotted accounting irregularities at Paschi as early as 2010, when former European Central Bank president Mario Draghi was its governor. Profumo’s and Viola’s accounting after they took charge had been questioned publicly since 2013.

As recently as 2016, Paschi was probably insolvent, suffocating under a pile of bad loans. Yet that didn’t stop the ECB in 2017 giving its blessing to the lender’s third round of state aid in less than a decade. Italy has handed 8 billion euros ($9.4 billion) to Paschi, and its current market value is 1.4 billion euros.

The latest trial also raises questions about the credibility of Italy's courts. Judges had to force the same prosecutors who won the convictions last year to take Profumo and Viola to court.

For Monte Paschi, facing legal claims on the order of 10 billion euros, the verdict on Thursday could force it to set aside more funds which could further erode capital. Should it need to bolster its reserves, the cost could be extortionate, wiping out the meager profit it’s expected to earn next year.

Italy and the European authorities will no doubt claim their priority was the need to maintain financial stability during the depths of the euro zone’s sovereign debt crises. But the cost of the Paschi fiasco is a loss of confidence in the governance of Italy’s and Europe’s banking industry.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.

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