Monte Paschi deception shows why banks must disclose exposure details

Bloomberg reports that Monte Paschi is seeking a sizable recovery from Nomura and Deutsche Bank for derivative securities these firms entered into that were designed to hide losses that Monte Paschi had incurred.

As your humble blogger noted at the time that the derivative transactions were first uncovered by Monte Paschi, if banks were required to provide ultra transparency, these derivatives could not have been hidden.

Yes, former management of Monte Paschi could have put them in a safe in the wall.  However, both Nomura and Deutsche would have reported these positions.

As a result, the market would have known that the positions existed and that Monte Paschi was hiding something.

Instead, because all banks hide their current global asset, liability and off-balance sheet exposure details, it appears that Nomura and Deutsche conspired with Monte Paschi's former management to use derivative transactions to hide losses at the bank.

Banca Monte dei Paschi di Siena SpA alleged Nomura Holdings Inc. (8604) and Deutsche Bank AG (DBK) colluded with former managers to devise two derivatives that hid losses and earned them at least 180 million euros ($231 million). 

The world’s oldest bank said the two firms were aware Monte Paschi’s then managers wanted to hide losses and designed with them two derivatives aimed at achieving that goal, the Italian lender said in a 74-page report to shareholders. 

Monte Paschi, which last month filed a lawsuit seeking damages from the two lenders and former executives Antonio Vigni and Giuseppe Mussari, said it will seek compensation if a court finds the behavior of Deutsche Bank and Nomura employees to be criminal. 

Monte Paschi hid as much as 557 million euros of losses from previous years through the two transactions in 2008 and 2009, the lender said. 

Deutsche Bank earned at least 92 million euros from Santorini, a deal first reported by Bloomberg News in January, while Nomura reaped at least 88 million euros from its transaction, dubbed Alexandria. 

Those deals “should never have been put together,” the Siena, Italy-based lender said in a report released on March 29. Nomura and Deutsche Bank “were perfectly aware of the context, the illicit objectives” of Monte Paschi’s former executives, the company said....

Monte Paschi is seeking 500 million euros of compensation from Deutsche Bank, Germany’s biggest bank, and 700 million euros from Nomura. The lender calculated Nomura’s and Deutsche Bank’s so-called hidden charges on the deals as the difference between fair value of the new deals at inception and the value of the original loss, the document shows. 

“The transaction was subject to our rigorous internal approval processes and also received the requisite approvals of the client who was independently advised,” Deutsche Bank said in a statement. “We will defend ourselves vigorously against any claims for damages.”...