Former Monte Paschi management convicted as crisis mounts

By Stefano Bernabei and Stephen Jewkes

ROME/MILAN (Reuters) - The former top managers of Monte dei Paschi di Siena were sentenced to three-and-a-half years in jail on Friday over a 2009 derivatives scandal from which the bank is still struggling to recover.

Former Chairman Giuseppe Mussari, former Chief Executive Antonio Vigni and former finance chief Gianluca Baldassari were all found guilty of misleading regulators over risky derivative trades meant to conceal mounting losses.

Five years after the scandal, Italy's third-largest bank is looking for 2.1 billion euros in fresh capital after it failed European Central Bank checks tests designed to test the solidity of the financial system.

 

The future of the bank, founded in 1472, remains in the balance as it seeks a solution which could ultimately end in its losing its independence.

The conviction of the former three top executives underlines the scale of the crisis at the historic Tuscan institution, going back to its disastrous 9-billion-euro acquisition of regional lender Antonveneta in 2007, only months before the outbreak of the global financial crisis.

The acquisition stretched Monte dei Paschi's finances badly, leaving it dangerously exposed to the years-long slump that has hit the Italian economy and banking sector.

On Friday, Bank of Italy Governor Ignazio Visco pointed explictly to the bad past management of the bank, which has long been deeply embedded in local political power structures, as the root of its latest problems.

All three executives have denied wrongdoing in the case and said they would appeal and will not go to jail until the appeals process is exhausted.

The three were accused of hiding vital information from regulators about a transaction with Japanese bank Nomura dubbed Alexandria that ended up forcing Monte dei Paschi to restate its accounts and book a loss of 730 million euros on its 2012 results.

Monte dei Paschi, which has run up losses of 9.3 billion euros over the past three years, has never properly recovered from the Antonveneta acquisition and a series of risky derivatives deals that followed.

The bank, which raised 5 billion euros as recently as June to strengthen its finances, has seen its share price fall by some 40 percent since the result of the ECB stress tests were announced at the weekend.

It eventually closed at 0.608 euros, down 10.5 percent and close to a more than 10-year low of 0.6005 euros hit in the previous session.

HOPES DASHED

The bank has hired UBS and Citigroup to assess strategic options, which are expected to include further asset sales and, in the longer term, a merger.

However hopes of a quick deal have been dashed with the chief executive of Intesa San Paolo , Italy's second-biggest bank, refusing to step in.

"It is in no way possible," Intesa CEO Carlo Messina told reporters at a banking conference in Rome. He also denied a report in daily La Repubblica that the Bank of Italy had asked his opinion on a potential tie-up with Monte dei Paschi.

Economy Minister Pier Carlo Padoan also dampened hopes of government aid, reiterating that Monte dei Paschi's capital shortfall and a separate 814 million euro deficit at Genoa-based savings bank Carige would be filled by private sector funds.

With options narrowing, attention has focused on the 1.1 billion euros in state aid still to be repaid for a previous bailout. The bank, struggling to recover from its disastrous Antonveneta acquisition, received 4.1 billion euros in 2013 in so-called "Monti bonds", named after a former prime minister.

It has repaid 3 billion euros and is due to pay the remainder in three tranches by 2017, though it could potentially win some breathing space by rearranging the payment schedule.

The head of ACRI, the association of Italian banking shareholder foundations, said the foundations could consider acquiring at least part of the Monti bonds from the government to help Monte dei Paschi. But he ruled out any direct intervention to prop up the bank.

"The market had been looking for some kind of integration with Intesa, but now that's gone out of the window another capital increase is looking increasingly likely," said Vincenzo Longo, a banking analyst at brokerage IG.

If it cannot raise the funds from the market, bondholders would have to take a hit before the state steps in, based on new European Union rules on state aid.

Moody's flagged this risk on Thursday when it downgraded the bank's subordinated debt and said Monte dei Paschi would find it hard to cover the capital gap within the timeframe requested by the ECB without further government support.

(1 US dollar = 0.7961 euro)

(Additional reporting by Gianluca Semeraro, Valentina Za, Alberto Sisto, Alessandra Galloni, Giselda Vagnoni, James Mackenzie and Silvia Ognibene in Siena; Editing by David Goodman and Tom Heneghan)