REUTER - On the morning of
July 29, former Italian Industry Minister Corrado Passera was traveling in a
high-speed train towards the medieval city of Siena, racing
to meet the
directors of the world's oldest bank to present them with a rescue plan.
Monte dei Paschi di
Siena, Italy's third-largest lender, was destined to be wound down within
months unless it could raise billions of euros and pull itself out of a swamp
of bad loans that threatened to swallow up its five centuries of banking.
Passera's
recapitalization plan was supported by Swiss investment bank UBS - Monte dei
Paschi's long-time adviser - but the former minister was running out of time.
The Tuscan lender
had already changed advisory horses - turning away from UBS and Citi, and
instead engaging JPMorgan to engineer a survival strategy, according to bankers
close to the matter. Its board was meeting that day at its HQ in a 13th-century
fortress to decide whether to formally commit to the Wall Street player's plan,
they said.
Veteran banker
Passera felt he would at least have a chance to make his case. He didn't. As
the train reached Florence, about 70 km from Siena, his phone rang. Monte dei
Paschi's chairman told him the board would not hear him, according to a source
familiar with the events.
The bank had instead
pinned its fate on JPMorgan's plan to clear out 28 billion euros ($29 billion)
in bad debts and raise 5 billion euros in equity - one that ended in failure in
the early hours of Friday when the Tuscan lender said it could not find enough
investors and asked the government to bail it out.
For the plan's
skeptics, the failure to rescue the bank privately was testament to a misplaced
belief in government circles that Italy could find a solution to its banking
problem child without the need for a politically unpopular state bailout.
Passera's proposal -
never made public - had involved a 2.5-billion-euro capital increase reserved
for private equity funds and a 1-billion-euro share sale to existing Monte dei
Paschi investors, according to the source familiar with events.
Bankers say that was
unlikely to have met with any more success than JPMorgan's, given the lack of
investor appetite for Monte dei Paschi and the wider banking sector. Italian
banks are creaking under the weight of 360 billion euros of bad loans - a third
of the euro zone's total - following the financial crisis.
But the fact the
bank laid its entire trust in JPMorgan, and a plan that European regulators in
Brussels and Frankfurt said from the outset was destined for failure,
nevertheless underscores the government's mismanagement of a problem that
continues to cast a shadow over the country and its economy.
Unlike Spain, Rome
refused an EU-funded bailout for its banks when European rules for doing so
were more lenient, and for too long failed to take decisive action to deal with
its lenders' bad loans. Monte dei Paschi, which had already received state aid twice
before, has become a symbol of the government's inefficiency in tackling the
problems of its banking industry.
RENZI LUNCH
Three weeks before
Passera's wasted train journey, the idea of a privately funded bailout of Monte
dei Paschi was born over lunch in Rome between JPMorgan's global chief, Jamie
Dimon, and then Prime Minister Matteo Renzi, according to banking and political
sources.
Renzi thought he had
finally found the man who would fix one of his biggest political headaches,
despite the fact that JPMorgan's plan would involve raising 10 times the market
value of Monte dei Paschi, a feat virtually unheard of in Europe.
Renzi, who hails
from the bank's home region of Tuscany, wanted to avoid a state rescue at all
costs, because new European rules would require investors to bear losses in the
event of a tax-payer funded bailout.
The bank's
bondholders include tens of thousands of Italians, many of them part of his
political power base.
A spokesman for
Renzi did not respond to requests for comment.
JPMorgan in turn
hoped to break into big Italian deal-making, a sphere where this year it lagged
behind U.S. rival Goldman Sachs with its investment banking fees more than
halving since 2014, according to Thomson Reuters data.
If the plan
succeeded, JPMorgan and its co-adviser Mediobanca, alongside 10 other
investment banks and state-sponsored banking fund Atlante, stood to share in
fees worth 558 million euros, roughly equal to Monte dei Paschi's market
capitalization, publicly available documents show.
By winning over the
board of the Tuscan bank, JPMorgan and Mediobanca elbowed out rivals UBS and
Citi, all battling to earn a jackpot of fees in a sector that could need 40
billion euros in capital over the next few years.
Monte dei Paschi
said on Thursday the banks involved in the failed rescue plan would receive no
fees.
ALARM BELLS
Alarm bells began
ringing loudly over the feasibility of the plan in early September, when Monte
dei Paschi abruptly announced its chief executive, Fabrizio Viola, was quitting.
Viola had received a
phone call from Economy Minister Pier Carlo Padoan who told him he needed to
go, according to a source close to the matter.
Speaking about the
episode on TV in October, Padoan said that given the Treasury was the bank's
top shareholder following a previous bailout in 2013, it had to have a
relationship with its top management. "With Viola, we assessed together
what was best for the bank," he said.
After sounding out
hundreds of investors during the summer, JPMorgan and other banks involved in
the deal believed that a change of management was necessary to pull off the
plan, because under Viola the bank had burnt through 8 billion euros of new
capital, according to sources close to the consortium of banks.
Monte dei Paschi
replaced him with Marco Morelli, head of Bank of America Merrill Lynch in
Italy, who rushed through a new business plan. He then launched an
international roadshow, meeting 280 investors in Europe, the United States and
Asia to seek their backing.
The response was
muted. One official at a hedge fund who took part in a meeting held at
JPMorgan's New York offices described the atmosphere as antagonistic and said
the audience was confused by the complexity of the plan.
Desperate to find
investors and meet regulatory demands, the bank's board held marathon meetings
that often dragged on late into the night as they adjusted their plans and
prospectuses, with pizzas and crates of mineral water being brought in.
It was not uncommon
for statements to come out in the early hours of the morning. Morelli only
managed to grab three hours sleep a night, according to an aide.
The death knell for
JPMorgan's rescue sounded on Dec. 4 when Italians effectively cast a vote of no
confidence in Renzi, rejecting his constitutional reforms in a referendum. He
quit, setting the stage for months of political instability and scaring off
potential investors in Monte dei Paschi.
The government
crisis effectively sunk the bank's final hope: a 1-billion-euro investment by
Qatar's sovereign wealth fund never materialized.
Sources close to the
consortium of investment banks said they worked very hard to salvage the deal,
but the referendum was the final nail in the coffin.
($1 = 0.9574 euros)
REUTERS
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