Placeholder Image

Subtitles section Play video

  • I had seen in the past complex deals,

  • but I'd never seen anything like this.

  • And it involved two of Europe's

  • leading financial institutions.

  • On the one hand,

  • the world's oldest bank

  • and Italy's third largest lender Monte Paschi.

  • And on the other hand, Deutsche Bank,

  • once the world's largest financial institution.

  • The idea that these two had got together

  • to cook the books was just astonishing.

  • I thought it was clever but illegal.

  • And a few of them should actually go to jail, in my view.

  • This was clearly a huge scandal

  • that made 450 million dollars disappear from Monte Paschi's books.

  • If it wasn't for our reporting,

  • the public may never have found out.

  • My name is Elisa Martinuzzi.

  • I'm a columnist with Bloomberg Opinion.

  • A presidential address to the nation.

  • This is an extraordinary period for America's economy.

  • Over the past few weeks

  • many Americans have felt anxiety

  • about their finances and their future.

  • So it's December 2008,

  • and we are right in the depth of the financial crisis.

  • The Dow tumbled more than 500 points

  • after two pillars of the Street tumbled over the weekend.

  • Financial institutions are really fighting for survival

  • and these two in particular,

  • Monte Paschi and Deutsche Bank.

  • We're seeing the stock falling

  • by more than 7% as we speak right now.

  • On the one hand, you have Deutsche Bank

  • with a massive balance sheet.

  • 2.5 trillion euros,

  • it's a size of a large economy.

  • Trust that the bank is solid and sound

  • is what it needs to attain every day

  • to keep ticking along.

  • So showing that it's able to do a deal

  • like the one it was trying to do with Paschi

  • is absolutely critical.

  • And you have Monte dei Paschi

  • which just recently bought a big rival

  • at the peak of the market in cash,

  • already stretching its finances.

  • Suddenly, it was facing another 450 million dollars potentially

  • in a single loss, in a single investment,

  • that it would have to book at 2008.

  • They couldn't admit the loss

  • that they actually had faced

  • and so this deal was to cover that loss.

  • The risk they were facing was nationalization

  • by the Italian government

  • or control by the bank of Italy, direct.

  • It was a prospect

  • that management was trying everything it possibly could

  • to avert.

  • They'd come up with this complex,

  • multi-layered transaction which, like magic,

  • takes the loss that they would have to crystalize

  • at the end of 2008

  • and spreads it out over many years

  • in a fashion that they decide

  • doesn't have to be disclosed to investors.

  • And of course it's structured in such a way

  • that Deutsche Bank would in the long run

  • make a great deal of money from this.

  • So something in the order of 60 million euros

  • just on that trade.

  • The whole point of it was

  • to violate the accounting requirements of Italy

  • and fool the accounting structure.

  • Stop them having, essentially, to account for a loss.

  • Simple as that.

  • It wasn't long after they struck the deal

  • that Monte Paschi started hurting from the transaction.

  • Monte dei Paschi's just revealed

  • it could run out of cash in just four months.

  • It needs to offload a mountain of bad loans

  • or risk being wound down.

  • Yet Paschi limped along,

  • propped up by government bailout

  • after losses on bad loans also piled up.

  • Astonishingly, it took more than four years

  • for the chicanery to come to light.

  • Well after, regulators from the U.S. to Italy

  • had been alerted to it.

  • A tipster reached out and said,

  • "I have something for you

  • that's going to be of great interest."

  • And there started my reporting on Monte Paschi.

  • Little by little the source got comfortable

  • in sharing more and more details

  • about this transaction

  • that to be honest with you,

  • looked really too good to be true.

  • The material, when looked at it in its completeness,

  • spoke quite clearly of what was going on.

  • This transaction, that had allowed the world's oldest bank

  • to basically cook its books.

  • So what I endeavoured to do

  • was to find experts in the field

  • who would help stand up

  • what these transactions were trying to do,

  • help substantiate what the source was telling me

  • and one of these was Professor Michael Dempster

  • from Cambridge.

  • I had seen in past complex deals,

  • but I'd never seen anything like this

  • where basically it was shifting cash back and forth in time.

  • So, a simple version of how the deal worked

  • goes something like this.

  • You had two parts,

  • one was sure to win for Monte dei Paschi

  • and one was sure to lose for Monte dei Paschi.

  • The part that was sure to win

  • would generate a gain for Monte dei Paschi

  • which it would use to cover up the existing loss.

  • The part that was sure to lose for Monte dei Paschi,

  • the Italian bank would keep,

  • but it wouldn't crystallize that loss

  • right at 2008,

  • it would spread out the loss over many years.

  • What was striking was the fact

  • that the client was being given a huge amount of money.

  • Half a billion euros roughly speaking.

  • We'd never seen a deal like this

  • in which the client received a large amount of cash

  • at the beginning and paid it back

  • and then some afterward.

  • When I saw it

  • and when Elisa Martinuzzi saw it,

  • I mean it's obvious.

  • It's an illegal accounting device.

  • So initially it was the Siena prosecutors

  • that started looking at these transactions

  • and it went to trial about three years ago

  • and the verdict came in November.

  • A Milan court convicted 13 individuals

  • for helping Monte Paschi hide losses

  • from its accounts.

  • Individuals included Monte Paschi's former chairman,

  • Giuseppe Mussari,

  • and Deutsche Bank's former head of global rates,

  • Michele Faissola.

  • The judges also ordered the banks

  • to pay fines and set aside amounts

  • that totalled 160 million.

  • And it ordered further inquiries

  • into some of the individuals who had testified.

  • These are by a number of measures

  • the most significant convictions

  • relating to the financial crisis.

  • You haven't had chairmen of institutions,

  • let alone 13 senior managers

  • across three institutions face jail sentences

  • for their wrongdoing.

  • But of course this is convicted in Italian court.

  • They don't have to go to jail

  • unless they have a second trial

  • in which they essentially

  • can put them in jail.

  • So whilst they've been besmirched, so to speak,

  • their reputations,

  • it's not terribly huge punishment.

  • My initial response to the verdicts

  • was that they were not stiff enough

  • and they should of gone another layer up

  • to in fact the head of the investment bank.

  • I'm not so sure

  • that the public can really be confident

  • that we're not gonna see another Monte Paschi.

  • The situation is essentially the same today

  • as it was before.

  • A lot more complicated