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Mucking out

11 February 2013 By Dominic Elliott

Deutsche Bank and Nomura should help clear up the mess at Monte dei Paschi. During the crisis, the investment banks arranged complicated trades for the Sienese lender that have hit the accounts with charges of 579 million euros. It is MPS’s fault that it got into this tangle. But Deutsche and Nomura could still score regulatory and reputational dividends for smoothing its escape.

The trades – structured in 2008 and 2009 – saw the investment banks loan money to MPS to buy long-term Italian government bonds. Those bonds were pledged back as collateral. MPS has been paying punitively high interest rates to service these so-called “repo” arrangements. It is also exposed to margin calls on the repos, a situation that has caused MPS difficulties.

MPS is a sophisticated investor and ought to have known what it was doing here. Either way, the derivatives led to MPS needing extra state aid. Regulators are investigating; MPS is a national scandal in Italy. This situation is uncomfortable for the investment banks. MPS has already restructured a third, less costly, derivative arranged by JPMorgan. And the obvious way forward is for MPS to unwind or restructure Deutsche and Nomura trades.

True, MPS’s long-term bet on sovereign debt might eventually pay off and a restructuring now would crystallise the current losses. But if MPS decided to close the trades, Deutsche and Nomura have good reasons to subsidise the cost, even though they have no obligation to do so. Italy is a big banking market. The current head of the European Central Bank, Mario Draghi, oversaw the Bank of Italy when these embarrassing deals were done. Sharing the burden of unwinding the deals might be offset by Italian and regulatory goodwill, in turn helping future business.

The fear would be that a pro-bono gesture could encourage other Italian institutions on the wrong side of derivatives trades to seek restitution. Still, offering assistance would send an important message to the investment banks’ clients, employees and shareholders – that they have broken with their pre-crisis past.


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