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October 24, 2013 @ Bloomberg
How Many Advisers Does It Take to Beat Up the World's Oldest Bank?
by Mark Gimein
Here is a basic principle of great structures: they take longer to build than to dismantle. So it is with Banca Monte dei Paschi di Siena SpA: a bank with more than 500 years of history was largely wrecked in a matter of about two years.
Bloomberg's Elisa Martinuzzi & Vernon Silver today give a guided tour of the mistakes that forced Monte Paschi to seek a bailout and destroyed 93 percent of its value. The key takeaway from their story is that Monte Paschi, though mismanaged by political appointees, didn't get on the road to ruin alone. It had help from top bankers at many of the world's leading institutions, from Deutsche Bank to Merrill Lynch. And while Monte Paschi has fallen, some of the bankers who helped put together the deals that brought it down have prospered--notably Andrea Orcel, a star banker at Merrill Lynch & Co. who worked on the 9 billion euro acquisition that sealed Monte Paschi's fate. Orcel now heads investment banking at UBS AG.
Capital, Liquidity
Mussari pressed for an answer.
“It depends,” Pirondini told his boss, according to his account. “If it’s 9 billion euros of liquidity,” he said, “it shouldn’t be a problem to get it.”
“On the other hand, if it’s an issue of capital, objectively, we have a problem,” Pirondini said.
The CFO then pointed out the difference between liquidity, the amount of cash or cash-like assets on hand, and capital, which is the firm’s shareholder equity. To buy Antonveneta, the bank would need to replenish its capital by raising new money from investors.
“I try to explain, to make him understand the difference,” Pirondini testified.
He said he met with Mussari again, the next day, to give him an estimate of how much capital they’d need to raise.
“We’ll take a more in-depth look at it,” Mussari said, according to Pirondini.
From that moment until the deal went public, nobody asked him to take a closer look at the funding needs and no meetings were held about the matter inside the bank, Pirondini said.
Due Diligence
On Nov. 7, 2007, Botin sealed the deal on his terms in a phone call with Mussari.
“‘If you want to buy Antonveneta, I want 9 billion euros, period,’” Botin said, according to Mussari’s 2013 deposition. “Botin wanted 9 billion, not 8 billion 999 million 999 euros point 99.”
Botin confirmed that account in his deposition, saying he told Mussari he had 48 hours to agree. While Mussari tried to get a lower price, Botin said he held firm, knowing “the enormous interest the buyer had.”
He also argued that Monte Paschi shouldn’t examine Antonveneta’s finances, according to Mussari.
“Botin was against due diligence, and he justified it in a logical manner,” Mussari testified, saying Botin told him, “‘I bought an asset on the market and have never managed it. I’ll sell it to you like I bought it.’”
Safeguard Clause
The agreement didn’t contain a safeguard clause to alter the price if conditions changed, Mussari said. It lacked clauses that international contracts normally have for deals of this kind, Angelo Benessia, an outside lawyer for Monte Paschi who had taken the lead handling the deal, said in a deposition given to Italy’s finance police in July 2012.
As the deal progressed, “I had the impression that the disparity in their contractual negotiating powers hadn’t changed since the opening salvos,” Benessia said. Benessia, reached on his mobile phone, declined to comment.
It was a terrible time to be locked into a deal. When the Antonveneta purchase was announced on Nov. 8, 2007, Italian stocks were down 13 percent from their May peak and a credit-market squeeze had triggered the collapse of U.K. mortgage lender Northern Rock Plc.
While Mussari said he didn’t hire a financial adviser to avoid leaks, the talks weren’t a secret, even outside Monte Paschi’s inner circle. Investment banks were competing to secure a slice of the business before the deal was made public.
‘Evil Genius’
Enrico Maria Bombieri, then JPMorgan’s head of investment banking for Europe, the Middle East and Africa, e-mailed Mussari from Lisbon at 9:51 a.m. on Nov. 8, a few hours before the deal was announced, according to a March 2013 deposition.
“I hear there’s important news in sight,” he wrote in Italian on his BlackBerry. “You are an evil genius!”
“I hope you will want us at your side,” Bombieri wrote, without mentioning Antonveneta or Santander. He signed off with “un abbraccio” -- a hug.
The two men later spoke.
“Have you seen this beautiful deal?” Mussari asked, according to Bombieri’s deposition.
Bombieri would soon learn that Merrill had won the lead-adviser role. Mussari’s pre-announcement communications about the transaction are part of a probe in Siena of alleged abuse of privileged information, court documents show. Bombieri, who declined to comment for this story when reached on his mobile phone, isn’t a target.
Victory Lap
At 11:15 a.m. on Nov. 8, Monte Paschi’s board began the meeting at which Mussari presented the deal, according to the board’s minutes. He won unanimous approval by 1:35 p.m. Botin sent back the signed contracts about an hour later.
When the press releases went out that afternoon, they said that Merrill, along with Milan-basedMediobanca SpA (MB), would be Monte Paschi’s advisers and that Merrill would also arrange funding. A spokesman for Mediobanca declined to comment.
The foundation later brought in JPMorgan as an adviser, and the U.S. bank also helped arrange a securities sale for the Siena lender, the offering for which it is being investigated.
On the day the deal was announced, Merrill analysts questioned Monte Paschi executives about whether the price was too high.
“Did you have competitors in your pricing?” Merrill’s Antonio Guglielmi asked on a conference call. “Did you negotiate? Did you actually mean to pay this bank so dear?”
The executives defended the price. They didn’t say anything about negotiations.
Botin took a victory lap. He wrote an open letter to shareholders that day saying the 9 billion-euro price tag was “significantly higher than the 6.6 billion euros that we had valued the Antonveneta group at in the takeover of ABN Amro.”
Orcel’s Pay
As a consequence, Botin called off a 4 billion-euro capital increase that Santander had planned to finance the ABN Amro purchase, he wrote. He didn’t need the money anymore.
Four days later, the Merrill analysts cut their rating on Monte Paschi’s stock to “Sell” from “Neutral.”
“We find it hard to justify the price paid,” Guglielmi and a colleague, Andrea Filtri, wrote in a Nov. 12, 2007, note.
Over the six months it took for the sale to close, the global financial crisis deepened and bank stocks plummeted. On April 25, 2008, ABN Amro’s shares were delisted in the Netherlands and New York. A month later, on May 30, Monte Paschi closed its deal.
Santander wasn’t the only winner. Orcel was paid about $36 million in 2007, including a $12 million bonus for advising the buyers of ABN Amro, the Wall Street Journal reported in March 2009. Orcel made $33.8 million for his work at Merrill in 2008, before the bank was sold that December to Bank of America, the Journal reported. Merrill didn’t disclose what Orcel was paid.
Derivatives Backfired
The fortunes of Monte Paschi worsened after the Lehman bankruptcy. The 6 billion euros of securities Merrill advised the bank sell to existing investors to fund the Antonveneta purchase left the lender short of capital when losses mounted.
Facing 2008 trading losses of about 400 million euros on an earlier deal with Deutsche Bank and as profit plummeted, Monte Paschi hid the losses by entering into new derivatives contracts with Germany’s largest lender. It hired Nomura in 2009 to restructure an investment, which masked an additional 300 million euros of losses.
Monte Paschi’s derivatives backfired because they included money-losing bets on Italian government bonds. In all, the bank has piled up losses of 8.4 billion euros in the past two years.
Italian Elections
Mussari, who left Monte Paschi in April 2012, was forced out as head of Italy’s banking association five days after Bloomberg News’s account of the derivatives deals prompted the company to say it would restate its accounts. The former chairman and two other executives went on trial last month for allegedly obstructing regulators by hiding a document related to the Nomura deal. No testimony has been offered yet, and a verdict could be months away.
Prosecutors also are seeking charges against Mussari and other former Monte Paschi managers for obstructing regulators, market manipulation and falsifying filings related to funding the Antonveneta purchase.
The revelations about Monte Paschi’s secret derivatives deals dominated the front pages of Italy’s newspapers in February as voters prepared to elect their next leader. The Democratic Party saw its lead eroded because of its ties to the bank, according to SWG Institute, a polling company. Mussari had been the single biggest contributor to the party’s local branch, giving 284,000 euros in the three years through 2011, according to the Democratic Party’s website.
Berlusconi Blast
Former Prime Minister Silvio Berlusconi seized on the fact that a bank controlled by the Democratic Party had gotten a bailout that, at 4.1 billion euros, was exactly the amount Italian homeowners had paid in new property taxes. Berlusconi’s assertion that the tax had gone from citizens’ pockets into the bank’s vaults boosted the appeal of Italy’s Five Star Movement, the party of comedian-turned-politician Beppe Grillo.
The result was an election outcome without a clear winner. Eight months later, Monte Paschi faces nationalization if the Italian government converts its bailout funds into stock in the bank, one possible outcome if the bank’s new management can’t raise enough fresh capital to satisfy European regulators. In Rome, a frail coalition government teeters.
Rossi Suicide
Conspiracy theories surfaced about what really drove the Antonveneta deal. In February, a confidential informant told the finance police in Rome that as part of Monte Paschi’s purchase, bribes had been paid through accounts held at the Vatican bank and in San Marino, a police filing shows. He provided a list of the alleged accounts. Prosecutors in Siena told reporters in July that they didn’t find any evidence of bribery.
The death of David Rossi, Monte Paschi’s communications chief, further fueled speculation. At about 9 p.m. on March 6, a bank employee noticed that Rossi, a long-time aide to Mussari, was missing from his fourth-floor office. A window had been left open. The employee notified authorities, who found Rossi’s body in a courtyard below. Rossi, 51, whose home had been searched by police two weeks earlier, wasn’t the subject of inquiries. His death was ruled a suicide.
The Antonveneta deal is still having repercussions. As part of a restructuring agreement with the European Union, there will be job cuts, branch closings and losses for bondholders.
Profumo, Viola
Monte Paschi, under its new chairman, Alessandro Profumo, and CEO Fabrizio Viola, was fined 300,000 euros this month by Italy’s securities-market regulator for inadequate disclosure.
Meanwhile, Monte Paschi has sued Nomura and Deutsche Bank in a Florence court seeking 1.2 billion euros in damages.
“Clearly, many investment banks made a lot of money on Monte dei Paschi,” the New York Times cited Profumo as saying in February. “I would say too much money.”
A spokesman for the bank declined to comment and said Profumo didn’t want to be interviewed for this story. Deutsche Bank has said the claims “are without merit.”
The Bank of Italy, which said in January that it had known for more than two years that Monte Paschi had accounting irregularities, defended its oversight in a nine-page document published in May. The central bank said its vigilance allowed the regulator to put an end to high-risk and “unusual” dealings and to boost Monte Paschi’s internal controls.
Palio Costumes
The foundation, which used derivatives to help finance the Antonveneta purchase, had to curtail charitable contributions when the bank eliminated its dividend. That meant it couldn’t pay for the colorful costumes worn by Palio riders. The foundation’s stake in Monte Paschi has been reduced to 34 percent and may decline further if it’s forced to turn over shares to investment banks. The foundation pledged its Monte Paschi stock as collateral on about 350 million euros of derivatives deals, according to two people with direct knowledge of the agreements.
The lesson for the world’s oldest bank -- if it survives to learn from its mistakes -- is clear, according to Robert Daines, a former Goldman Sachs Group Inc. investment banker and professor of law and business at Stanford University.
“Investment banks occupy a unique position sitting at the hub of information and capital,” Daines said. “The risk is that they use the information for their own benefit and not for the client.”
Orcel’s Rise
Orcel continued to advise Santander and in September 2009 became chairman of global banking and markets at Charlotte, North Carolina-based Bank of America.
He jumped to UBS in July 2012 as co-head of its investment bank before taking over as the unit’s sole chief in November. His pay for joining the Zurich-based lender that year -- 24.9 million Swiss francs ($27.6 million) in cash and stock -- dwarfed that of his boss, CEO Sergio Ermotti, who made 8.9 million francs. Orcel’s 2012 compensation replaced what he forfeited when he left Bank of America, UBS said.
Now, after profiting from the deal that almost led Monte Paschi to ruin, Orcel stands to make money rescuing it. On Oct. 7, the bank announced plans for a capital increase that will help it repay 3 billion euros of government funds next year. The adviser on the offering: UBS.
To contact the reporters on this story: Elisa Martinuzzi in Milan at emartinuzzi@bloomberg.net; Vernon Silver in Rome at vtsilver@bloomberg.net
To contact the editors responsible for this story: Edward Evans at eevans3@bloomberg.net; Melissa Pozsgay at mpozsgay@bloomberg.net
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