I had seen in the past complex deals, but I’d never seen anything like this. And it involved two of Europe’s leading financial institutions. On the one hand, the world’s oldest bank and Italy’s third largest
lender Monte Paschi. And on the other hand, Deutsche Bank, once the world’s largest
financial institution. The idea that these two had got together to cook the books was just astonishing. I thought it was clever but illegal. And a few of them should
actually go to jail, in my view. This was clearly a huge scandal that made 450 million dollars disappear
from Monte Paschi’s books. If it wasn’t for our reporting, the public may never have found out. My name is Elisa Martinuzzi. I’m a columnist with Bloomberg Opinion.A presidential address to the nation.This is an extraordinary
period for America’s economy.Over the past few weeksmany Americans have felt anxietyabout their finances and their future.So it’s December 2008, and we are right in the depth
of the financial crisis.The Dow tumbled more than 500 pointsafter two pillars of the Street
tumbled over the weekend.Financial institutions are
really fighting for survival and these two in particular, Monte Paschi and Deutsche Bank.We’re seeing the stock fallingby more than 7% as we speak right now.On the one hand, you have Deutsche Bank with a massive balance sheet. 2.5 trillion euros, it’s a size of a large economy. Trust that the bank is solid and sound is what it needs to attain every day to keep ticking along. So showing that it’s able to do a deal like the one it was
trying to do with Paschi is absolutely critical. And you have Monte dei Paschi which just recently bought a big rival at the peak of the market in cash, already stretching its finances. Suddenly, it was facing another
450 million dollars potentially in a single loss, in a single investment, that it would have to book at 2008. They couldn’t admit the loss that they actually had faced and so this deal was to cover that loss. The risk they were facing
was nationalization by the Italian government or control by the bank of Italy, direct. It was a prospect that management was trying
everything it possibly could to avert. They’d come up with this complex, multi-layered transaction
which, like magic, takes the loss that they
would have to crystalize at the end of 2008 and spreads it out over many years in a fashion that they decide doesn’t have to be
disclosed to investors. And of course it’s structured in such a way that Deutsche Bank would in the long run make a great deal of money from this. So something in the
order of 60 million euros just on that trade. The whole point of it was to violate the accounting
requirements of Italy and fool the accounting structure. Stop them having, essentially,
to account for a loss. Simple as that. It wasn’t long after they struck the deal that Monte Paschi started
hurting from the transaction.Monte dei Paschi’s just revealedit could run out of cash
in just four months.It needs to offload a
mountain of bad loansor risk being wound down.Yet Paschi limped along, propped up by government bailout after losses on bad loans also piled up. Astonishingly, it took
more than four years for the chicanery to come to light. Well after, regulators
from the U.S. to Italy had been alerted to it. A tipster reached out and said, “I have something for you that’s going to be of great interest.” And there started my
reporting on Monte Paschi. Little by little the
source got comfortable in sharing more and more details about this transaction that to be honest with you, looked really too good to be true. The material, when looked
at it in its completeness, spoke quite clearly of what was going on. This transaction, that had
allowed the world’s oldest bank to basically cook its books. So what I endeavoured to do was to find experts in the field who would help stand up what these transactions were trying to do, help substantiate what
the source was telling me and one of these was
Professor Michael Dempster from Cambridge. I had seen in past complex deals, but I’d never seen anything like this where basically it was shifting
cash back and forth in time. So, a simple version of how the deal worked goes something like this. You had two parts, one was sure to win for Monte dei Paschi and one was sure to lose
for Monte dei Paschi. The part that was sure to win would generate a gain for Monte dei Paschi which it would use to
cover up the existing loss. The part that was sure to
lose for Monte dei Paschi, the Italian bank would keep, but it wouldn’t crystallize that loss right at 2008, it would spread out the
loss over many years. What was striking was the fact that the client was being
given a huge amount of money. Half a billion euros roughly speaking. We’d never seen a deal like this in which the client received
a large amount of cash at the beginning and paid it back and then some afterward. When I saw it and when Elisa Martinuzzi saw it, I mean it’s obvious. It’s an illegal accounting device. So initially it was the Siena prosecutors that started looking
at these transactions and it went to trial
about three years ago and the verdict came in November. A Milan court convicted 13 individuals for helping Monte Paschi hide losses from its accounts. Individuals included Monte
Paschi’s former chairman, Giuseppe Mussari, and Deutsche Bank’s former
head of global rates, Michele Faissola. The judges also ordered the banks to pay fines and set aside amounts that totalled 160 million. And it ordered further inquiries into some of the individuals
who had testified. These are by a number of measures the most significant convictions relating to the financial crisis. You haven’t had chairmen of institutions, let alone 13 senior managers across three institutions
face jail sentences for their wrongdoing. But of course this is
convicted in Italian court. They don’t have to go to jail unless they have a second trial in which they essentially can put them in jail. So whilst they’ve been
besmirched, so to speak, their reputations, it’s not terribly huge punishment. My initial response to the verdicts was that they were not stiff enough and they should of gone another layer up to in fact the head of
the investment bank. I’m not so sure that the public can really be confident that we’re not gonna see
another Monte Paschi. The situation is
essentially the same today as it was before. A lot more complicated because the regulators have
tried to make it better, but they’ve failed basically. Having spoken to regulators about the lessons from
the financial crisis, it’s pretty clear where
the weaknesses still lie. Generally, on all the
reforms that have been done since the financial crisis, we’ve made them better, but we probably haven’t
made them good enough. So there’s really not
been fundamental changes. We’ve kind of made these improvements around the edges. I think people should still be concerned. I think there’s this kind of assumption that it’s yesterday’s news and I think that’s probably ill-advised because I think there’s
still some real fragility in the system. As a senior investment banking executive recently told me, his chief financial officer would not be able to challenge him on what’s in his books. You’d need a PhD to understand
a lot of these transactions and the people in charge are often – don’t have those PhDs. It is not an awful lot
to be confident about what’s really lurking inside financial
institutions’ balance sheets. And it remains just as difficult for the outside world to get into them. Yes, it’s true, the higher management often doesn’t understand much at all actually. Which of course is a serious problem when there is a crisis. Not unlike what we saw in the lead up to the global financial crisis where it was mortgage
debt that had ballooned, this time it’s corporate debt. The market has grown enormously and I believe that
there’s a recession coming or a market crash coming and it’s a government matter, it’s a political matter, and whether or not the politicians will be able to sort something out, I’m very pessimistic about that.