MILAN/SIENA Feb 1 The charitable foundation
that controls Italy's scandal-hit Monte dei Paschi
bank took on excessive debt and entered into risky derivative
trades with the tacit consent of the Treasury, sources with
direct knowledge of the situation said.
Not-for-profit foundations like Monte dei Paschi's are major
stakeholders in all of Italy's main banks and are meant to use
their dividends for social and cultural projects.
In 2011, Italy's Treasury allowed the already indebted Monte
dei Paschi foundation to take part in a cash call by the bank,
more than doubling its exposure to a lender whose capital base
had been hit by a costly acquisition and the financial crisis.
A source close to the foundation said it was under pressure
to join the capital increase after the Treasury had made it
clear during a March meeting with the main banks that the
foundations ought to help Italian lenders weakened by the euro
zone debt crisis.
"We found it hard to say no, also because we ran the risk
that the cash call could fail, thus greatly damaging the bank,"
the source told Reuters.
The foundation, run by a group of centre-left politicians
from the city of Siena and the surrounding province, also wanted
to join the large cash call to avoid losing control of the bank,
a major source of political and economic power in the area.
"The foundation took on loans to take part in a costly
capital increase and the Treasury approved all of these
operations," a banker with direct knowledge of the situation
Under Italian law, banking foundations are banned from
taking on excessive debt, above 20 percent of net assets, but
Monte dei Paschi foundation won permission to go above this
level, one of the sources explained.
A third senior source with direct knowledge of the situation
said, however, that the Treasury had limited powers to impose
any veto on the foundation's decision and said the institution
had initially sufficient capital strength to join the cash call.
Neither Monte dei Paschi nor its foundation would comment.
The Treasury also declined to comment.
A SORT OF HEDGE FUND
From its medieval headquarters overlooking Siena's famous
Piazza del Campo, the Monte dei Paschi foundation has spent
close to two billion euros funding everything from a biotech
facility to the building of roads to the training of horses for
the town's historic Palio horse race.
But as the fortunes of the Monte dei Paschi bank turned so
also have those of the foundation.
In the past four years it has invested 4.5 billion euros or
about 90 percent of its assets in the bank and reaped just 165
million euros in dividends. It had also run up over 1 billion
euros in debt.
The foundation denied media reports on Friday that it could
face liquidity problems. The bank, meanwhile, is set to tap
taxpayers for a 3.9 billion euros bailout.
Until 2012, the foundation controlled nearly half of the
bank's shares but was forced to cut that to just under 35
percent to repay creditors.
Run by allies of Italy's main centre left party, the PD, the
Monte dei Paschi foundation picks half of the bank's 12-member
board, including the chairman.
These close links to the PD have made a bribery and fraud
scandal at the Monte dei Paschi bank a political liability for
Prime Minister Mario Monti ahead of parliamentary elections on
Giuseppe Mussari, the former chairman of the bank, had also
been a chairman of the foundation. A lawyer with no financial
background, Mussari left the bank in April after the Bank of
Italy demanded a management overhaul in light of the lender's
Documents seen by Reuters show that internal auditors and
other board members had raised concerns with top management
about the sort of risks Monte dei Paschi was taking. Mussari
resigned last week as head of the Italian banking lobby when it
emerged Monte dei Paschi could lose $1 billion from derivative
The foundation's current chairman, Gabriello Mancini, has a
high-school diploma in book-keeping and worked as a local
healthcare administrator before entering politics.
"The Monte dei Paschi foundation became a sort of hedge
fund. It bet on a single asset - the bank - and became highly
leveraged," said Andrea Resti, a professor of finance at Italy's
"In order to do this, they got the green light from the
With total assets of more than 50 billion euros, Italy's
banking foundations are collectively the largest investors in
the country's banks with large stakes in major players such as
UniCredit and IntesaSanpaolo.
Critics, including the International Monetary Fund, have
said the foundations' opaque governance and the power they give
local politicians have deterred investment in the sector.
"Foundations and banks held an idyllic and symbiotic
relationship," Mediobanca analysts Andrea Filtri and Antonio
Guglielmi said in an extensive report on the foundations.
"The former supported banks; in exchange, the latter
enhanced profitability and paid growing dividends, which
foundations used to increase grants and improve their status."
In 2008, when Monte dei Paschi sealed a 9 billion euros cash
deal for the Antonveneta bank, its top investor decided to
underwrite the lion's share of a complex, 1 billion euro
convertible bond known as FRESH that was meant to boost the
bank's balance sheet.
The foundation bought 490 million euros of this instrument
and financed it through derivatives, an investment that led it
to book a loss of 376 million euros in its 2011 accounts.
In 2011, the Siena-based bank had to again tap investors for
capital. The foundation, already heavily indebted, needed an
extra 600 million euros to take part.
But one year later, it found itself unable to repay the more
than 1 billion euros of debt accumulated with a dozen national
and international investment banks.
"Nothing is said about the way in which the foundation got
the capital, by borrowing in the markets. Nobody asked Giulio
Tremonti and Vittorio Grilli - the former and current Treasury
ministers - why they agreed that the foundation borrowed money
to increase its stake," said Tito Boeri, an economist who also
teaches at Bocconi University.
"It's the Treasury which has the task to supervise the