Italy’s Blame Game

Banking and politics often mix in insidious ways. Paola Sapienza, a professor of finance at the Kellogg School of Management, has shown that politics can influence the lending practices of state-owned banks:  Italian banks where top executives are affiliated with a political party actually charge lower interest rates to borrowers from politically hospitable regions than to other borrowers.

Given the nation’s less-than-stellar track record when it comes to making nonpolitical financial decisions, then, a banking scandal like the one currently embroiling Monte dei Paschi di Siena (MPS)—the third largest bank in Italy, and the oldest in the world—should perhaps have come as no surprise.

Recent years have not been kind to MPS. According to the Telegraph, the bank has lost 6.4 billion euros (8.7 US dollars) in the past two years, in no small part due to its 2007 purchase of another Italian bank, Antonveneta, for a price nearly everyone agrees was outrageously high. Now the bank’s already unfortunate position has taken a turn for the worse: MPS is under investigation for engaging in fishy transactions, perhaps with the intent of covering up years of deep hits.

Italy’s center-left coalition seems to have taken the brunt of the political fallout—just in time for next month’s national elections—because the bank has strong ties to the province Siena, a Democratic stronghold. But according to Sapienza, also a former research economist at the Bank of Italy, politicians across the spectrum share the blame. Her insights (lightly edited for length and clarity) appear below:

The Monti Government

Paola Sapienza, Merrill Lynch Capital Markets Research Professor of Finance

The government under Mario Monti, Italy’s current prime minister, provided MPS with 3.9 billion euros of rescue money without first demanding that the government receive any shares of the bank; this is essentially equivalent to the US treasury giving money to AIG without demanding ownership or a say in the running of the company. Why? To avoid disturbing the web of powerful interests that have been governing the bank for centuries. This move was so irresponsible that the European Central Bank (ECB), which rarely criticizes the practices of its member countries, came out against the funding and suggested last December that the government should have consulted the ECB before proceeding with the rescue.

In addition, the Monti government also lists among its candidates for the coming election a powerful local politician who happened to be a board member of MPS at the time of the derivative transactions. He tried unsuccessfully to become the new president of the bank, losing the position to the newly appointed management who uncovered the scandal.

The Berlusconi Government
The Berlusconi government, and especially Berlusconi’s Treasury Minister, allowed the main shareholders—a supposedly not-for-profit foundation that distributes dividends to local constituencies—to fund a secondary equity issue with debt. In other words, the company was able to issue additional shares without diluting the value of existing shares, which allowed the foundation to remain the main shareholder (and possibly continue to cover up the questionable transactions). Additionally, Berlusconi has recently stated that he loves MPS, probably because he received large funding for his own business from the bank.

And, Yes, the Center-Left Coalition Government
The center-left government that rules in the region has historically appointed the politicians who run the foundation who in turn appoint the majority of the bank’s board members and managers. This bank has functioned for decades as a mechanism for political patronage. Indeed, it has done such a good job of providing resources for everyone (internally and externally) that it was really hard to find anyone who wanted to dismantle the system.

The foundation, which owns 35% of the bank, has called the arrangement “social banking,” claiming that a bank should not always maximize profits. It is a well-known scheme in Europe, used by banks like Bankia in Spain or the Landerbanks in Germany. But in Italy it has taken on a whole new dimension.

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