Insight: Monte dei Paschi harbored bank within a bank

Wed Jan 30, 2013 3:27pm EST
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By Silvia Aloisi and Stefano Bernabei

SIENA, Italy (Reuters) - The secret document at the heart of the Monte dei Paschi banking scandal lay for months in a concealed safe in a 14th century Tuscan palace.

Chief Executive Fabrizio Viola said he learnt about the safe's contents only last October, a full 10 months after he had been called in to sort out Italy's third biggest bank.

The 2009 document revealing derivatives deals that have run up huge losses for Banca Monte dei Paschi BMPS.MI came to light in the office of Viola's predecessor at the bank's headquarters in Siena.

"The document was in a safe, moreover in an office that was no longer mine," said Viola. "I don't think that the person who put it there had been trying to hide it. But there is no doubt that the document had not been used in the bank's accounting."

The document found at the 540-year-old bank's head offices - which are appropriately in a restored ancient fortress - was a contract mandating Japanese bank Nomura 8604.T to carry out deals on behalf of Monte dei Paschi.

It revealed that, unbeknown to the new management under Viola, two derivatives transactions known as "Alexandria" which had looked separate were in fact linked. This meant they should have received different accounting treatment, leading to heavy losses.

This discovery prompted an internal inquiry that has, so far, revealed losses of up to 720 million euros ($977 million).

Monte dei Paschi is the only major Italian bank to have turned to the state for help, and revelations about the deals have also made its 3.9 billion-euro bailout an issue in campaigning for national elections next month.   Continued...

Banca Monte Paschi di Siena CEO Fabrizio Viola talks on his mobile phone during a news conference in downtown Milan January 28, 2013. REUTERS/Alessandro Garofalo