Wednesday, February 6, 2013

Surprise! Derivatives involved in Monte Paschi's ill-fated acquisition

In an attempt to escape blame for not taking prompt action on the Monte Paschi derivatives it knew about, the Bank of Italy is trying to change the topic by saying they were lied to about a derivative involved in Monte Paschi's ill-fated acquisition.

This latest disclosure reaffirms why all banks must be required to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

Had this been the case, the counter-parties for the acquisition derivative would have noticed the Monte Paschi had not disclosed the derivative and would have alerted everyone to the omission.


Because the counter-parties want the derivative disclosed so they can get the benefit of the derivative.

As reported by Reuters,

Monte dei Paschi misled the Bank of Italy over a 1-billion euro hybrid instrument it used to partly fund its acquisition of rival bank Antonveneta, Siena prosecutors alleged in a document reviewed by Reuters on Wednesday. 
As part of their ongoing probe, prosecutors alleged in the document, dated February 1, that the Tuscan bank struck a deal which violated requirements set by the central bank over the hybrid financial instrument, known as FRESH 2008. 
Monte dei Paschi is being investigated for alleged wrongdoing relating to its 2008 acquisition of Antonveneta, a smaller rival. If proved correct, the allegations by prosecutors that Monte dei Paschi misled the Bank of Italy over the true nature of part of the financing it raised would undermine the basis on which the deal was approved....

Prosecutors alleged that the indemnity documents violated requirements set by the Bank of Italy by making the FRESH 2008 work like a bond rather than an hybrid equity instrument. Monte dei Paschi needed to show the Bank of Italy that it had sufficient equity capital in place to win approval for Antonveneta takeover. 
Based on the information officially received from the bank, the regulator allowed Monte dei Paschi to calculate those notes as core Tier 1 capital, a measure of a bank's financial strength which is closely monitored by regulators, boosting its financial base and allowing it to demonstrate it had sufficient capital to absorb the Antonveneta deal.
At best, this seems to confirm that Tier 1 capital is doesn't say much about a bank's financial strength.  At worse, this seems to confirm that Tier 1 capital is meaningless.

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