Santorini, Alexandria, Nota Italia… What a beautiful Italian story this is of the operation in derivatives di Monte dei Paschi, for friends MPS. Bank founded in 1472: let's see how long its (less and less) glorious history will last.
What happened? These days of MPS there's been a lot of talk everywhere, but I'm not sure it's clear to everyone. I'll try to put it simply, in a few lines, forgive the simplifications.
MPS had been carrying out financial transactions on the "Property Portfolio" for years. Which means that the bank used a part of its capital for operations of trading on the market, trying to make money. A good portion of banks of a certain size does it and it's not a scandal: a bank needs it "stay on the markets" to acquire information, to know how supply and demand moves around the world and it is legitimate that he can use his own skills to gain from "speculative" positions. After all, it is no different from when an investor buys a car with his own money risky financial product hoping to get one profit.
Such operations can be carried out both in instruments “vanilla” like construction sector o actions, both with operations in derivatives like CDO and similar, much less liquid and transparent.
The problem arises when the Bank, which has a service function to citizens and businesses through credit, is jeopardizing its key function in the credit mechanism with these operations. In the case of MPS many of these operations have gone badly, generating losses, and we are talking about pretty big losses. And what did they do? They tried to cover it up, masking balance sheets with other operations in derivatives, built precisely for the purpose of making what is clear opaque. That is, hide losses.
As? Here, I who have haunted all kinds of slums and known corsairs of all kinds, get help from a couple of characters from the world ofinvestment banking who, it is known, speak the language of us pirates, and who have done many of these operations. My "banker" friends, under the promise of anonymity (we'll call them Mr K and Mr Y) agree to briefly have their say on this matter.
Jack Sparrow: “So, what do you think of this story?”
Mr k: "Strange that these operations make so much news."
Mr Y: “Yes, that's right, operations like this are the norm for banks, insurance e pension funds (horror!), I've personally done a lot. If you dig a little into the various balance sheets, do you know how many there are?”
Jack Sparrow: "Can you explain to me in simple terms how these operations take place?"
Mr k: “Start for example with a bank that has some big losses deriving from financial transactions and which he does not want to appear in the financial statements. What does he do? Call one merchant bank like mine and asks her to put up a remodel, which usually takes the form of a swap contract. A swap is a contract in which two parties exchange cash flows or, to simplify, exchange two securities: think of a security with coupons linked to a floating rate exchanged for another at a fixed rate, for example.
Jack Sparrow: “How do you use swap to mask a loss?”
Mr Y: “ Simple: essentially the swap consists in the transfer of the operation that went wrong, receiving in exchange another security that pays a coupon lower than the market levels, whose objective is to "spread" the loss that you want to hide on the entire life of the contract. In practice, the market tells me that the coupon should be X, but I accept X reduced by a slice of the loss. But there are other variations.”
Mr k: “Another popular variant of the swap is that the security you receive has a much longer maturity, or is much riskier, or has a large initial coupon that just happens to compensate for the loss, while the subsequent coupons will be much lower. There are several variants resulting from financial, accounting and legal engineering, but the result does not change: the bank covers the loss.”
Jack Sparrow: “And in the case of Monte Paschi?”
Mr k: "Probably, through the operation of modifying the coupon flows, a very large coupon was paid in the year in which the loss was to be covered which compensated for the loss and then the subsequent coupons were lowered by a corresponding amount."
Jack Sparrow: "And you say that these operations are very frequent, but is it possible?"
Mr Y: “Yes. Usually these operations are carried out before the half-yearly reports, when the financial statements are presented. It is budgetary cosmetics.”
Mr k: “It's like sweeping the dust and stuffing it under a nice oriental rug when guests arrive. It's difficult for them to notice, but the dust is there, it would be enough to lift the carpet… ”
From the short but interesting interview I hope it is clear that this is not speculation. This is budget cosmetics, cover-up nice and good.
The problem here is not the derivatives themselves, they are just a "tool". It is better that a private individual does not try his hand at derivatives (instruments that are too complex), but it is normal for an institution to use them, but it must do it "well"! The problem with these banks, let's face it, is the management, who uses all the tools at his disposal (in this case derivatives) to make good and bad weather, to maintain power even when he is not capable of running a company, harming savers, employees e Taxpayers. Management that he hardly pays for his mistakes. Controls should also be more efficient.
This is a widespread evil because, apparently, there are many skeletons of this type in the closets of banks, insurance companies and various cash registers. Just dig well and the big skeleton pops out.
Nomura, counterparty bank of MPS for AlexandriaSaid:
“The transaction has been reviewed and approved prior to execution at the highest levels within Monte Paschi, including the board of directors and the chairman Mussari, and had been reviewed by reviewers of KPMG".
Similar statements have come from Deutsche Bank about Santorini. Here is the governance and management of Italian banks.
Don't think that MPS is the only disaster. I believe that Consob e Bank of Italy they should deal less with form, more with substance and go and catch these situations that are, to say the least, pornographic.
Mussari's declaration sounds so offensive to the ears of citizens, taxpayers and savers:
“I take this decision convinced to have always operated in compliance with our legal system".
He must have done a lot of autogenic training to convince himself of it, well done.
