Much More Beneath the Surface of the Italian Bank Scandal; How Big Are the Derivative Losses?

January 25, 2013

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Courtesy of Mish.

Yesterday I commented on how Italy’s 3rd largest bank hid derivative losses,how it might affect the upcoming Italian elections, and why ECB president Mario Draghi should be under fire as well.

For details, please see Italian PM Under Fire; Italy’s 3rd Largest Bank Hid Derivative Losses: ECB Says “Matter for the Italian Authorities” (To Sweep Under the Rug).

As is typically the case, there is more going on than mainstream media reports. I bounced my article off reader Andrea who is from Italy but now lives in France. Andrea writes ….

The article you reported is very well done and describes almost all the facts of the situation.

What is not reported is that Giuseppe Mussari, the recently resigned head of ABI (Italian Bank Association) was the CEO of Banca Monte dei Paschi di Siena at the time of the derivative losses. He resigned following the scandal, but this casts a very negative shadow on the overall banking system. It also makes open a discussion about the widespread belief (repeated as a mantra by the whole political class) that the Italian banks were wiser than foreign counterparts, not involved in toxic things and therefore not needing huge bailouts or supports like anywhere else in the world.

This scandal blasted like a bomb in the campaign. Monti is most likely the one who will be hurt. However, It’s unclear who can take advantage. The center-left was at the government only 2 years (2006-2007), so it is quite hard to find evidence to give the blame just to them.

The Economy Ministry and Bank of Italy are blaming each other about the lack of supervision, for different reasons. The probable truth is that both lacked of supervision for their respective parts.

Most likely prosecutors will open an investigation (they are obliged by law to do so in Italy if they are informed of a possible crime) and this could lead to further discoveries.

I think that for Monti to appear in the Parliament to speak about this in the middle of the campaign and with his image of “friend of the finance world” could be a very painful and delicate exercise

So, to summarize, I think we are at the beginning of the story. In an Italy under a bombing of taxes, huge recession and lack of credit from the banks to the real economy, this will be hard to be swept under the rug. The message “the taxes you pay are used to help banks getting out of their toxic speculations” is very easy to deliver in such circumstances.

Best regards,

Andrea