How JPMor­gan could not save BMPS

Kuwait Times - - BUSINESS -

MI­LAN/LON­DON:

On the morn­ing of July 29, for­mer Ital­ian In­dus­try Min­is­ter Cor­rado Passera was trav­el­ling 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 (BMPS), 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 long­time 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 ($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 cap­i­tal in­crease re­served for private eq­uity funds and a €1-bil­lion 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 Ä360 bil­lion 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 US 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. —Reuters

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