* Audit highlighted risk problems as early as 2009-documents
* Finance department acted like bank-within-a bank-sources
* Bank of Italy says raised concerns, imposed sanctions
* Prosecutors look at bribe allegation linked to Antonveneta
By Stefano Bernabei and Silvia Aloisi
SIENA, Italy, Jan 29 Monte dei Paschi's risk
control unit and its own internal audit team were alarmed about
the department responsible for a series of opaque structured
finance deals at the troubled bank as long ago as November 2009,
bank documents show.
The documents, obtained by Reuters, add to a growing picture
of a badly weakened bank pitching into crisis following its
costly 9-billion-euro acquisition of rival Antonveneta just
before the global financial meltdown of 2008.
That purchase and a complex series of loss-making
derivatives and structured finance trades have left Italy's
third-largest bank dependent on state aid and shaken the
country's financial and political establishment less than a
month before national elections.
They have also raised growing questions about how managers
at the bank were allowed to avoid action by regulators despite a
growing array of warning signs that the situation was spinning
out of control.
The bank has said that complex trades which only came to
light recently could cost it 720 million euros ($970.42
Several senior sources at the bank said the finance
department, run by an executive named Gian Luca Baldassarri
operated like a bank-within-a-bank, loading up on complex
derivative trades and risky hedges with little oversight from
The Bank of Italy and Monte Paschi's new management team
have said that at least one of the trades was deliberately
concealed from regulators and not revealed until documents were
found hidden away in a safe and discovered in October.
The documents quote a report from the bank's risk control
unit after an audit carried out between Aug. 5-Sept 30, 2009,
which uncovered "systematic overshooting of risk limits" in the
management of the group's 24-billion-euro proprietary portfolio.
The inspectors also singled out "deficiencies in controlling
the compliance of contract documents related to structured
operations and/or derivatives positions".
Some contracts were "not always in line with the best market
valuations" and the indicated value of some positions did not
reflect their mark-to-market value, the documents said.
The bank's senior management at the time was forced out last
year, with managing director Antonio Vigni leaving with a 4
million euro payoff that the Bank of Italy is now contesting.
Chairman Giuseppe Mussari stepped aside in April.
Bank sources Reuters has spoken to said neither men fully
appreciated what was happening at the finance division and
attempts by other board members and internal auditors to flag
the risks were unsuccessful.
"They could do what they wanted because no one really
understood what they were doing, neither Mussari nor Vigni,"
said a former mid-level bank official.
No comment was available from Baldassarri. Vigni declined to
comment. Mussari, who last week had to step down as chairman of
the Italian banking lobby, did not return calls.
The case is now the subject of a criminal investigation by
prosecutors in Siena, the Tuscan town where the bank has been
based since it was founded in 1472.
According to judicial sources, investigators are focusing on
allegations of bribery and fraudulent accounting and several
senior executives, including Baldassari, have been named in the
investigation, according to court documents seen by Reuters.
The head of the Siena prosecutors office, Tito Salerno,
declined to comment directly. "We cannot say anything, it is a
complex, red-hot investigation and we have a long way to go," he
As well as the criminal investigation, which is likely to
widen further, the growing scandal at Monte dei Paschi has piled
pressure on the Bank of Italy, which is responsible for
oversight of the banking sector.
On Tuesday, the central bank sought to rebut charges of lax
oversight, offering details of actions it took over the
Antonveneta acquisition as well as the derivatives deals.
It pointed to a series of inspections of the group's
worsening liquidity position from 2009 and said bank directors
were summoned for three meetings in March and April of 2010 as
well as a formal inspection between May and August.
A series of steps to improve risk controls was ordered but
the rapid worsening of market conditions as the euro zone debt
crisis flared up in the summer of 2011 worsened the bank's
It called an emergency meeting with senior management in
November "in order to make them face up to their
responsibilities" and within months the bank's top management
The Bank of Italy, which is carrying out disciplinary
actions against former management which includes fines and other
penalties, has said that Monte dei Paschi concealed vital
information connected with the loss-making derivatives trades.
Chief executive Fabrizio Viola, appointed last year after
the clear-out of the bank's former management, has acknowledged
accounting irregularities by his predecessors but said he had
seen no evidence of bribery.
Together with new chairman Alessandro Profumo, Viola is
pushing through a tough turnaround and has tried to make a break
with the past by firing over one hundred Monte dei Paschi
managers since he took office.