Unlike in the US, where President Trump relies on older Americans for his base of support, more than half (53%) of Italians under 35 voted for one of the two anti-establishment parties that triumphed in Italy’s March election. Their enthusiastic support explains the outpouring of anger directed at technocratic Italian President Sergio Mattarella, who called for new elections as he seemingly reached for every conceivable excuse to try and stop the two parties from forming a government, before finally acquiescing.
Young Italians have grown disillusioned with the center-left – which has clung to a status quo that deliberately favors older workers – even as their counterparts in Greece and Spain have moved even further to the left, with 40% of Spaniards under 35 saying in a recent poll that they favor the far-left Podemos and its allies, while in Greece, 41% of people aged 18 to 24 voted for Syriza in the 2015 election that brought the far-left party to power, according to the Wall Street Journal, which recently published a long-winded feature about the political plight of restive Italian youth.
Giada Gramanzini, a 29-year-old Italian university graduate who has struggled to find permanent work
Young Italians, like young people in much of the Western developed nations that comprise the EU, are convinced that they will lead lives fraught with economic turbulence, and that few in their generation will manage to achieve the same standard of living that their parents enjoyed. The marriage rate in Italy has fallen by a fifth over the past decade, according to Istat. In 2016, the last year for which data are available, Italian men got married on average at age 35 and women at 32 – two years later than in 2008. Meanwhile, the birth rate in a country that’s viewed as the cradle of conserative Catholicism has fallen to an all-time low.
Of the many statistics that point to an intractable economic malaise, the youth unemployment rate is particularly troubling: Nearly 30% of Italians aged 20 to 34 aren’t working, studying or enrolled in a training program, according to Eurostat. This comes after the employment rate for Italians under 40 fell every year between 2007 and 2014, before flatlining for three years. That’s higher than any other EU member state – including Greece, which is sporting youth unemployment of 29% – the second highest – as well as Spain’s 21%.
“Italy is collapsing and yet nothing has changed in this country for at least 30 years,” said Carlo Gaetani, a self-employed engineer in Puglia. Ten years ago, when he was in his early 20s, he voted for a center-left party that he hoped would push for economic development in southern Italy. When Italy descended into a crippling recession, he felt betrayed by the traditional Italian left-wing parties. He has seen friends struggle to find jobs, and said his own business opportunities are limited to the stagnant private sector, because commissions for the public sector are usually awarded to people with connections he doesn’t have.
Mr. Gaetani, now 33, voted for 5 Star in the 2013 election, a choice he repeated in March with more conviction. “5 Star is our last hope. If they also fail, I think I’ll stop voting,” he said.
Luckily, the older generation is well-equipped to step in and provide a modicum of financial support, thanks to generous pension benefits that have accrued to older workers. Yet this has done little to assuage the anger of young Italians, as the number of Italians under 34 living in dire poverty (aka those who can’t afford even basic goods and services) has more than doubled in the aftermath of the crisis.
The pain in southern Europe reflects a feeling across much of the Western world that the younger generation will struggle to surpass their parents in wealth and security. Half of Italians who responded last year to an online survey on jobs site Monster.com said they thought they will earn less over their careers than their parents.
Young Italians, who bore the brunt of the country’s protracted, triple-dip recession, still bear the scars that will affect their career prospects, homeownership and birthrates for decades to come.
While they share many similar characteristics, the problems in Italy are fundamentally different than in the US. Perhaps the biggest issue for young people is a labor system where people with open-ended employment contracts enjoy unassailable job security and access to benefits. Meanwhile, younger employees are getting stuck with short-term contracts generally lasting from one month to one year that carry few benefits and make it impossible to plan for the future.
The Italian government introduced these short-term contracts in the 1990s to help young people enter the labor force. Italy recently adopted a revamp of its labor laws, using tax breaks to coax companies into using more open-ended contracts – which allow firms to avoid the great hassle and cost involved in firing employees. But these policies generally haven’t worked, and both the Five Star Movement and the League have capitalized on the anger at existing labor policies by promising to undo the government’s reforms, while Five Star has also advocated giving the poor and unemployed a UBI of 780 euros (roughly $900) a month.
The 5 Star Movement has lured millions of young voters with promises to roll back new labor rules, give the unemployed and poor a so-called universal basic income of €780 ($905) a month, and abolish unpaid apprenticeship contracts. Its leader, Luigi Di Maio, was a 26-year-old university dropout who lived with his parents when he was elected to parliament in 2013. Today, he is a deputy prime minister.
The League attracted a sizable portion of the youth vote by advocating for many of the same anti-establishment policies that Five Star embraced – such as canceling the country’s recent labor reforms – while also calling for deportations of African migrants who have overwhelmed Italy’s borders in recent years.
Italy’s economic problems played into young voters’ sentiments about immigration during the campaign as well, one of the animating drivers of support for the League. “We can’t host all of Africa,” said Gianluca Taburchi, a 23-year old supermarket employee from Perugia who voted for the League. “We already have our own problems. We have lots of unemployment and unsecure jobs.”
Matteo Salvini, the leader of the League who became a deputy prime minister and interior minister in the new government, promised to return hundreds of thousands of migrants to their countries of origin. 5 Star, which straddles the line on many issues, spoke of stemming illegal immigration, but stopped short of calling for mass deportations.
Now that they’ve found their way into power, the future of these euroskeptic parties will depend on whether they keep their promises. Instituting labor-market, welfare and immigration reforms is only one part of the problem. Many younger Italians are deeply distrustful of both the European Union and the euro currency – while many older Italians still view both projects as integral to maintaining a sense of European Unity and lasting peace on the continent.
Italian Prime Minister Giuseppe Conte, flanked by Five Star Leader Luigi Di Maio and The League leader Matteo Salvini
Both The League and Five Star’s controversial flirtations with abolishing the euro (League leader Matteo Salvini was reportedly photographed wearing a T-shirt reading “Basta euro” – or “enough with the euro – to the chagrin of many older voters) have been popular with their base. But when directly confronted about their stance on leaving the euro, they’ve been noncommittal. The question now is: Will the Five Star and the League allow voters a chance to speak on the possibility of an “Italexit”, as the analysts on Wall Street have taken to calling an Italian departure from the European Union? Or will they stop short of threatening an orthodoxy that a growing number of Italian young people view as the root cause for their economic suffering?
Migration crisis was one of the main topics on the pre-election agenda of political parties in Italy, as the heavy inflow of newcomers has stirred discontent among the country’s population. Radio Sputnik discussed the issue with independent political scientist Mario Sommossa.
Italian residents are unhappy about the ongoing influx of migrants, especially due to the fact that they have to pay for their living costs, political analyst Mario Sommossa told Sputnik.
“The annual cost for each migrant residing in Italy reaches 11,000 euros. If we compare this figure with the monthly social benefits paid by the state to Italian citizens, it becomes clear that this cannot last for long. Dissatisfaction of society with regard to the situation with migrants continues to grow,” the analyst stated.
In 2017, Italy spent over 4.3 billion euros on tackling the migration crisis, while the aid from Brussels was slightly less than 77 million euros, the expert noted.
Another problem is that even when the applications from asylum seekers are refused, only a few of them actually leave the country.
“The difference between Italy and Germany is that migrants in Germany usually come from countries with which it has agreements on repatriation, while in the case of Italy, most migrants come from Africa and states where there are no such agreements, or they are not being respected,” Sommossa said.
He also added that the number of illegal immigrants who are unable to find a job in Italy and instead become part of criminal structures has been constantly growing.
The migration crisis has led to the rising popularity of right-wing parties, something that was especially evident during the parliamentary elections held on March 4. The election resulted in the Five Star Movement (M5S) securing over 32 percent of the vote.
Earlier it was reported that the M5S and another right-wing party, the Italian Lega, are engaged in talks on forming a governing formation and completed work on a joint program that provides for a toughening of migration regulations, among other things.The move comes after Italy has been struggling to accommodate hundreds of thousands of migrants arriving in the country since 2015. Hundreds of thousands of asylum seekers have arrived to the EU, including by sea, with Italy and Greece bearing the brunt of the burden of the crisis.
Yesterday, in the aftermath of the latest Italian political drama, in which president Mattarella openly mocked democracy, and under pressure from Europe vetoed the choice of the euroskeptic economy minister, Paolo Savona, we warned that this outcome was even worse for markets than the one which most had dreaded, namely Mattarella folding and greenlighting the 82-year-old professor for reasons we laid out article from Sunday.
What happened next was a full court press by so-called experts and momentum reversal algos to spin yesterday’s outcome as good news, and sure enough in early trading the EUR bounced sharply, rising above 1.17, Bunds slumped, and Italian bonds and stocks gapped higher at the open.
… And then all hell broke loose when, just as we predicted, Mattarella’s decision simply reinforced the League’s hard line position, when shortly after the open League leader Matteo Salvini reiterated his support for Savona, and in a Facebook video said that “either EU rules will change or it makes no sense for Italy to remain in the European Union.” Worse, dragging Italy to the verge of the constitutional crisis we warned about yesterday, Salvini turned the nation against the Brussels-lackey president and said that Mattarella “chose EU rules over Italians’ vote” which “is an issue for democracy.”
And the punchline: the League would still seek to form a government with people rejected by Sergio Mattarella.
In effect, Salvini confirmed what we said yesterday that the stakes in the upcoming Italian elections were just raised exponentially, and are now an outright referendum on euro membership.
Meanwhile, shortly after noon local time, in purely symbolic gesture, the Italian president gave the mandate to form a government to ex-IMF official Carlo Cottarelli, 63, whose task to form a technocratic government has zero chance of success. Cottarelli said that if he is successful in forming a government – which he won’t be – the next Italian elections would take place early 2019. If he isn’t, and he won’t be as all the top parties have already rejected his attempt, the next elections will be in August or shortly thereafter.
“The President has asked me to go before parliament with a program that will bring the country to new elections,” Cottarelli said after meeting President Sergio Mattarella.
By this point the market, however, couldn’t care less what this meaningless figurehead had to say, as both Italian bonds and stocks were plunging, having realized just why this was the worst possible outcome, and that it was indeed unfolding especially since as Goldman noted last night, if the elections were held today, the 5-Star and the Lega would win over 55% of the vote, a 10% gain to their showing in the March elections.
The result was a painful and furious reversal for the Italian bulls who naively bought into the “bullish” narrative as Italian yields staged a dramatic reversal, with 2y yields surging after being down as much as 20bps, then exploding as high as 0.972%, while the curve continues to aggressively flatten with the 5Y higher, in no small part due to lack of liquidity as not only is London on holiday, but suddenly the ECB seems all too absent from the bid-side: is a repeat of the 2011 Berlusconi ouster, in which the “apolitical” ECB sent a clear message to the market, taking place?
This sent the yield on 2Y paper to the highest level since 2014, rapidly approaching Draghi’s “whatever it takes” threshold.
Meanwhile, 10Y yields also soared, rising as high as 2.70% and now rapidly approaching the nominal level of 10Y US TSYs which closed Friday at 2.93%.
Adding to the rout, the Italian-German spread exploded to 230bps, the highest since January 2014, and now well beyond the 200bps level which Goldman predicted last week would lead to contagion across Europe, but first in Portugal.
Meanwhile, Italian stocks were similarly hammered, and after spiking higher at the open have since tumbled…
… while the Italian bank index, the FTSE Italia All-Share Bank Index, entered into bear market territory this morning, from its April highs, plunging as much as 4.2% today over concerns about the country’s financial future.
Finally, and most ominously, after an initial attempt to “celebrate” the Italian news, the EURUSD has since reversed all gains and in an indication that traders are now openly worried about Italian contagion, has tumbled to the lowest level since November 2017.
But the clearest sign that the European crisis is back, came not from Italy but from Spain, which is also suffering its own political drama with the imminent vote of no confidence in prime minister Rajoy, a process which was started this morning and is now scheduled for Friday assuring a week of non-stop European drama, not to mention a sharp move higher in Spanish yields which however are well below their Italian peers…for now.
But what really sealed it was a comment from BBVA’s analysts Pablo Zaragoza and Jaime Costero who in a note this morning said that “Spain is not Italy.” The last time we heard this, Europe was about to implode and only drastic action from the ECB saved it. This time, Draghi’s bazooka is all but spent, unless of course the world’s biggest hedge fund starts openly buying ETFs and single name stocks, which it eventually will anyway.
The worm might have finally turned this week on the pending Syrian attack due to a number of factors, some visible and some behind the scenes.
Germany, who was quick to jump on board the “bomb Syria” train early on without the slightest bit of proof of Damascus involvement, has now been followed by Italy in backing out.
The Brits of course would never pass on an chance to relive the thrill of being an aggressive colonial power so Brits can enjoy their growing poverty better.
General Mattis’ comment below about concern for the deaths of innocent Syrians is of course a complete fraud, because he certainly is intimately aware of the US coalition’s chemical weapons assistance to the Syrian jihadis, something that is a serious felony requiring imprisonment for everyone involved.
And even worse, Mattis has had nothing to say about the IDF murdering unarmed Gazan protesters, when the IDF deserved to be bombed by the US military for crimes against humanity, skipping the UN vote, which they US now does whenever it wants to attack someone.
We do not know if Assad played his captured US Coalition chemical weapon’s officers card, meaning that if an attack went through he would make their photos, IDs and interrogation reports public. The only feasible reason that VT felt he had to not already exposed them would be to use them as a threat to forestall a missile attack.
While VT’s reporting on these captured people did get wide reader exposure, corporate media, as usual, would not touch it.
The OPCW people getting into Syria yesterday also changed the dynamic. If the US bombed, and then their report came out debunking the US “unverified” claims, the hoax would be exposed.
It would include the part media played, and how both military and civilian US Intel obviously knew it was a hoax but went along with it anyway. Guilty people tend to not want to be exposed, especially for aiding and abetting terrorism.
Congress would be in a tight spot not to investigate (even the usual make believe kind) how a “mistake” like this could have happened, as that would put on display who all the “influencers” were. It would be better to lose this current hoax battle and live to fight for another day.
And lastly, the Republicans are back on their heels with their political fortunes. The rash of announced retirements from their ranks, many not wanting to go down to defeat in November was a political earthquake, along with the Democrats recently picking off some elected positions in states Trump won.
Add to that the possibility that Congress might have Mueller sending a report requiring Trump impeachment proceedings and you begin to see their concern for not wanting to get into a “cup runneth over” scenario.
As always, saving their own hides long term is more important that one more false flag attack, which can always be done later. As Gordon does so love to say, “Welcome to the way the world really works … Jim W. Dean ]
– First published … April 13, 2018 –
The US president has refused to act on his ostensibly earnest threats of a militant action against Syria in response to an alleged chemical attack there as major European powers say they will not be joining Washington.
Donald Trump recently issued multiple threats of an imminent military action against Syria over the alleged attack against the town of Douma in the countryside of the Syrian capital, Damascus.
Reporting on Thursday, Italy’s Agenzia Nova said Italian Prime Minister Paolo Gentiloni had noted in a series of Syria-related phone talks that Rome would not take part in military action against Syrian President Bashar Assad’s government.
Also on Thursday, German Chancellor Angela Merkel told reporters in Berlin that “Germany will not take part in military action.”
Trump’s threats likewise prompted warnings of retaliation from Moscow, with Russian Ambassador to the United Nations Vassily Nebenzia saying he “cannot exclude” the possibility of direct Russo-American military confrontation in case the Arab country was attacked
AFP reported on Friday that Western powers were hesitant whether to launch a wholesale joint offensive in response to the alleged gas attack.
“No final decision has been made,” White House Press Secretary Sarah Sanders said after Nebenzia cautioned “the immediate priority is to avert the danger of war.”
Sanders added that Trump would confer with French President Emmanuel Macron and British Prime Minister Theresa May.
US Defense Secretary Jim Mattis also struck a cautious note, telling lawmakers that the need to “stop the murder of innocent people” had to be weighed up against the risk of things “escalating out of control.” He also said that Washington was committed to an on-again-off-again UN-brokered dialog between the Syrian government and opposition in Geneva.
Despite siding with Trump on the matter, Macron, meanwhile, said France would “in no way allow an escalation.”
Britain has also refused to act on Prime Minister Theresa May’s earlier threat that strikes could begin as early as Thursday.
Following an invitation from Damascus, inspectors from the Organization for the Prohibition of Chemical Weapons (OPCW) are expected to arrive in Syria over the weekend to investigate the reported attack.
The Syrian government surrendered its stockpiles of chemical weapons during a process monitored by the OPCW in 2014.
This footage, compiled by the geopolitical analysis news outlet GEFIRA, shows evidence of how NGO operated naval vessels smuggle African illegal Immigrants to Italy by picking them up at their own coast and transporting them all the way to Italy, essentially providing an all-inclusive shuttle service for Illegals. The criminal activity and deliberate violation of national and EU immigration law by the so-called “humanitarian” organizations is not only tolerated, but encouraged and ratified by the European Union. In the “rescue” operations, the NGO ships pick up African males at their own coast and ship them to Italy where they file fraudulent asylum claims to stay in the country illegally.
They subsequently plunge the European continent into chaos due to importing crime, drugs, diseases, violence and racial tensions – which seems to be the precise goal of the globalists funding the artificial refugee crisis.
This grave crime against national sovereignty is nothing less than high treason and of such huge magnitude that it is yet to be matched.
Since 2015 more and more private NGOs are involved in the illegal migrant ferrying from Libya to Italy. They all claim to be on a rescuing mission, but are they? “We can now confirm that at least 3,800 people have died, making 2016 the deadliest ever,” William Spindler, a spokesman for the UN High Commissioner for Refugees (UNHCR), declared last week. The previous record, 3,771 lives lost, was set in 2015. Despite a sharp drop in the number of refugees fleeing across the Mediterranean, from 1.01 million last year to 327,800 so far this year, more and more people drown at sea or die as a result of other causes1).
This dramatic loss of life comes as no surprise now that private NGOs in coordination with the Italian coast guard shuttle migrants from the Libyan to the Italian coast. People smugglers are today using lower-quality vessels, flimsy inflatable rafts that last a couple of nautical miles, just enough for the passengers to be picked up by one of the 11 vessels operated by the numerous NGOs that are waiting 8 to 12 nautical miles off the Libyan coast. They collect people in the Libyan territorial waters (i.e. within 12 nautical miles of land), and rather than bring them to Zarzis, Tunisia, which is 60 nautical miles away they ferry the migrants 275 nautical miles all the way to Italy.
For Deutsche Bank, when it rains, it pours, even when everyone tries to come to its rescue.
One day after its stock soared from all time lows, following what so far appears to have been a fabricated report sourced by AFP which relied on Twitter as a source that the DOJ would reduce its RMBS settlement amount with Deutsche Bank from $14 billion to below $6 billion (and which neither the DOJ nor Deutsche Bank have confirmed for obvious reasons), moments ago Bloomberg reported that six current and former managers of Deutsche Bank, including Michele Faissola, Michele Foresti and Ivor Dunbar, were charged in Milan for colluding to falsify the accounts of Italy’s third-biggest bank, Monte Paschi (which itself is so insolvent it is currently scrambling to finalize a private sector bailout) and manipulate the market. Two former executives at Nomura Holdings Inc. and five at Banca Monte dei Paschi di Siena were also charged.
The news comes in a time of heated relations between Italy and Germany, when the former has been pushing to get German “permission” for a state bailout of its insolvent banks only to be met by stiff resistance by the latter as Merkel and Schauble have demanded a bail-in of private investors instead, even as – ironically – it has been Deutsche Bank’s woeful financial state that has been in the Wall Street spotlight this past week.
The charges culminate a three-year investigation by prosecutors that showed Monte Paschi used the transactions to hide losses, leading to a misrepresentation of its accounts between 2008 and 2012. The deals came to light in January 2013, when Bloomberg News reported that Monte Paschi used derivatives to hide losses.
As BBG adds, “the charges deal another blow to Deutsche Bank, which is seeking to reassure investors and clients that it will be able to withstand pending U.S. penalties over the bank’s sale of mortgage-backed securities and its dealings with some Russian clients.”
In what appears to be another case of Wells Fargo-esque scapegoating of junior employees to keep senior execs off the hook, just weeks after Milan prosecutors shelved a probe against Monte Paschi’s former chairman and CEO for alleged market manipulation and false accounting as it “risked undermining investor sentiment”, a judge approved a request by Milan prosecutors to try the bankers on charges involving two separate derivative transactions arranged with Nomura and Deutsche Bank, said a lawyer involved in the case who was in the courtroom Saturday as the decision was announced.
DB’s Faissola, whose roles included overseeing rates and commodities, was put in charge of Deutsche Bank’s combined asset and wealth management division in 2012 when Anshu Jain and Juergen Fitschen took over as co-chief executive officers of the Frankfurt-based lender. Deutsche Bank last October said Faissola would leave after a transition period, and John Cryan has replaced Jain and Fitschen as CEO.
Just as importantly, the firms are also named as defendants in the indictment, as the Italian law provides for a direct liability of legal entities for certain crimes committed by their representatives. Which means even more legal charges, fines and settlements are looking likely in DB’s future.
A trial is scheduled for Dec. 15.
Both DB and Nomura have denied any guilt: “We will put forward our defense in court and have no further comment to make today,” Deutsche Bank said in an e-mailed statement. “I’m convinced that the debate will definitely show that Nomura has no responsibility over Monte Paschi’s false accounting,” said Guido Alleva, a lawyer for Nomura. A spokeswoman for the Japanese bank and a Paschi spokesman declined to comment.
As Bloomberg adds, Monte Paschi’s former executives Giuseppe Mussari, Antonio Vigni and Gianluca Baldassarri, and Nomura’s former bankers Sadeq Sayeed and Raffaele Ricci also will face trial for allegedly obstructing regulators after the investigation revealed that the 2009 deal, dubbed Alexandria, was designed to disguise losses from a previous investment.
The basis for the legal action are two deals conducted by Deutsche Bank and Nomura which took place at the height of the financial crisis, meant to mask Monte Paschi’s financial woes. Prosecutors have been reconstructing how Monte Paschi’s former managers misrepresented the lender’s finances in the years through the two deals signed with Deutsche Bank in 2008 and Nomura in 2009. The investigation revealed Monte Paschi arranged the transactions to hide billions in losses that led to false accounting between 2008 and 2012, according to a prosecutors’ statement released Jan. 14, when they completed the investigation.
The fraud first came to light in January 2013, when Bloomberg News reported that Monte Paschi used the transaction with Deutsche Bank, dubbed Santorini, to mask losses from an earlier derivative contract. The world’s oldest bank restated its accounts and has since been forced to tap investors to replenish capital amid a slump in its shares. It’s now attempting to convince investors to buy billions of bad loans before a fresh stock sale.
Zero Hedge previously posted an in depth look of the incestuous relationship between Deutsche Bank and Monte Paschi represented by the”Santorini” deal, which we repost below for those unfamiliar with the nuances of the deal which will likely see renewed media interest in the coming days.
At Deutsche Bank, the job title “risk manager” might be more appropriately characterized as “campaign manager.” That is, Deutsche Bank is no more concerned with the active mitigation of risk than the unscrupulous politician is with actively avoiding extra marital affairs. Like campaign mangers then, risk managers at Deutsche Bank must accept the fact that occasionally (or perhaps quite often) messes will be made and spin campaigns will need to be devised and deployed in order to keep public opinion from turning sour and in order to keep the few regulators who aren’t on the payroll from stirring up any trouble. In short, risk management at the firm seems to be more reactive than proactive and the combination of pliable mathematical models, questionable ethical standards, and a clueless public makes it possible for the firm’s quant spin doctors to disappear vast amounts of risk from the books without anyone getting wise.
Apparently however, even the mainstream media has gotten wise to the act. Recently, CNBC’s John Carney and DealBreaker’s Matt Levine observed that Deutsche Bank was able to report a higher Tier 1 capital ratio in its most recent quarter not by reducing the loans on its books or by increasing its earnings, but by changing the way it calculates its risk weighted assets. In other words, it manipulated its mathematical models to achieve more favorable results.
It is ironic that these commentators should be the ones calling out Deutsche Bank for crimes against mathematics. After all, a little over a month ago, these same two journalists (and many of their peers) trivialized the whistleblower claim filed against Deutsche Bank by a Mr. Eric Ben-Artzi, a PhD mathematician from the most prestigious school of applied mathematics in the country, NYU’s Courant Institute.
In any case, on January 17, Bloomberg reported that “Deutsche Bank designed a derivative for Banca Monte dei Paschi di Siena SpA at the height of the financial crisis that obscured losses at the world’s oldest lender before it sought a taxpayer bailout.” The Bloomberg story set-off a wave of investigations which ultimately revealed that the world’s oldest bank made a series of bad derivatives bets that will ultimately cost it three quarters of a billion euros. The Bank of Italy has since approved a 3.9 billion euro taxpayer-sponsored bailout. The story has taken several decisive (albeit hilarious) turns for worst over the past two weeks and the whole thing now reads like a lost chapter of The Da Vinci Code, complete with treacherous characters, scandalous deal-making, and a secret contract locked away “in a concealed safe in a 14th century Tuscan palace.”
As intriguing as all of that is, it is the Deutsche Bank connection which is of particular interest. The firm’s role in helping Monet Paschi conceal losses speaks to the depravity of Deutsche’s corporate culture and to the firm’s willingness to share its expertise in the art of obfuscation with its clients. Here is Bloomberg’s description of what happened:
Monte Paschi was facing a 367 million-euro loss on a… Deutsche Bank derivative linked to its stake in Intesa Sanpaolo SpA (ISP), Italy’s second-biggest bank, according to two documents drafted by executives at the German lender in November and December 2008… Monte Paschi, which originally took the stake in one of Intesa’s predecessor companies more than a decade earlier, had entered into a swap with the German bank in 2002 to raise cash from the holding to bolster capital while retaining exposure to Intesa’s stock-price moves, the documents show.
Intesa shares fell more than 50 percent in the 11 months through November 2008, and the decline would have forced Monte Paschi to post a fair-value loss on the swap at the end of the quarter, threatening the bank’s capital and earnings, the derivatives specialists who examined the documents said.
“Monte Paschi was facing a loss on its equity position and may have needed to find a way around it,” Satyajit Das, a former Citigroup Inc. (C) banker and author of half a dozen books on risk management and derivatives, said after reviewing the files.
This is the first part of what would eventually become a multi-legged trade that spanned the better part of a decade. Although the mainstream media has done a decent job of describing the mechanics of the transaction, I wanted to know the details, so I contacted Bloomberg to see if they would be interested in sharing the 70 some odd pages of documents on which they based their original story. Not surprisingly, they informed me that they are not currently able to share the evidence. While they promised that I would be the first to know if the situation changed, I thought I might take a stab at explaining, in detail, what exactly went on between Deutsche and Monte Paschi in lieu of Bloomberg’s top-secret document stash.
I cannot, of course, be sure that this is entirely accurate without access to primary sources, but this should serve as a decent outline for those interested in learning how the largest bank in the world conspired with the oldest bank in the world to effectively hide hundreds of millions in losses from shareholders.
For our purposes, the story begins on page 310 of Monte Paschi’s 2002 annual report. Under “Acquisitions, Incorporations, and Sales,” the following passage appears:
Sale to Deutsche Bank AG London Branch of a 4.99-percent holding in San Paolo-IMI S.p.A. Along with this sale, the Bank invested EUR 329 million to purchase a 49-percent interest in the newly incorporated Santorini Investment Ltd. Partnership, a Scottish company that is 51- percent owned by Deutsche Bank AG. The aggregate price of the sale was EUR 785.4 million; the difference (EUR 425.3 million) between the sale price and the carrying value (EUR 1,210.7 million) was charged to the revaluation reserve set up in accordance with Law 342/2000. The residual amount was allocated to shareholders’ equity through a bonus share capital increase authorized by a resolution of the extraordinary shareholders’ meeting of 30 November 2002. (emphasis mine)
This is the genesis of the Deutsche Bank deal and while it may sound convoluted, the bank’s motives seem relatively clear in retrospect. First, consider the effect the transaction above had on Monte Paschi’s statement of shareholders’ equity:
First, the bank had to account for the 425 million-euro difference between the carrying value of its stake in San Paolo bank and the amount Deutsche Bank paid for those shares. This was effectively a loss, and as it turned out, Monte Paschi had held what it called an “extraordinary meeting” on November 30 of 2002 to get shareholder approval to use its entire 715 million-euro revaluation reserve (green arrow above) for an increase in the par value of the ordinary and savings shares and to absorb the loss on the sale of the San Paolo stake to Deutsche Bank (this is outlined on page 383 of the 2002 annual report).
Because revaluation reserves didn’t generally count towards Tier 1 capital, the bank was able to absorb the loss on the sale without affecting the area it was really concerned about: core capital. As an added benefit, Monte Paschi was able to use the remainder of the revaluation reserve (the 209 million left over after it absorbed the loss on the sale of the shares) to raise the par value of its own shares, resulting in an increase in its share capital (yellow arrow above). This of course, led to a concurrent increase in the bank’s Tier 1 capital ratio. Effectively then, Monte Paschi turned a 425 million euro loss on the sale of an equity stake into a .2% increase in its Tier 1 capital ratio (there were other components which contributed to the increase, but the point stands). This is likely what Bloomberg was referring to when it said Monte Paschi was seeking “to bolster capital” by using its equity stake in San Paolo.
As noted above, Monte Paschi and Deutsche set up “Santorini Investment Ltd” after the completion of the equity sale. This is where the “equity swap” referenced by Bloomberg comes into play. From what I can tell, this was some derivation of a “total return equity swap.” Here, the deal began with the sale of the San Paolo stake to Deutsche Bank. “Santorini Investment Ltd” (the ”partnership” Deutsche and Monte Paschi set up after the sale) was essentially a special purpose vehicle (SPV) through which the swap was effectuated.
Santorini was majority owned (51%) by Deutsche Bank – Monte Paschi controlled 49%. A portion of the cash from the original sale of the San Paolo stake to Deutsche was effectively used to finance Monte Paschi’s stake in Santorini. Through the SPV, Monte Paschi was able to retain exposure to the share price fluctuations of its San Paolo stake. Typically in such a deal, there is either a floating rate or a fixed rate of interest paid over the life of the swap to the entity to which the shares were sold (in this case Deutsche) based on the notional amount of the shares traded (so 785 million euros here). When the swap matures, the original seller of the shares (Monte Paschi here) will receive the difference between the price of the shares when the swap was originated and the price of the shares at maturity.
Obviously, if the shares rise over time the original seller makes a profit on the swap (minus any interest payments made along the way). Of course the stock could go up or down over the life of the transaction so there is a very real possibility that the original seller of the shares will have to make a payment at maturity in addition to the interest payments made along the way. Note also that if the stock drops over the course of the deal, the original seller may be forced to post collateral to the buyer of the shares. Through Santorini then, Monte Paschi appears to have entered into a total return equity swap with Deutsche Bank referencing the 4.99% stake in San Paolo. Monte Paschi paid Deutsche interest on the deal and was on the hook for margin calls in the event the value of San Paolo’s shares dropped. The following graphic is a simplified diagram of the swap based on an unrelated total return swap diagram originally posted on Sober Look:
It is important to remember that one of the pitfalls of entering into such an agreement is that the seller of the shares may initially have to recognize a capital loss on the sale. By using its revaluation reserve, Monte Paschi was able not only to effectively avoid this for the purposes of core capital, but was in fact able to boost its Tier 1 capital ratio while retaining exposure to the share price movements of the sold San Paolo stake through the swap deal with Deutsche.
The original term of the deal was 3 years but according to Monte Paschi’s 2004 annual report, the swap was extended to 2009:
“…with reference to the investments held in Santorini Investment Limited Partnership, the capital loss, due to the compliance with several accounting principle, is not deemed to be permanent in view of the assets underlying the financial contracts, which anyway increased in value in the last period; moreover, the contract was renewed for further 4 years (new expiry: 31 May 2009) while keeping the advance redemption right.”
On January 1 2007, San Paolo merged with Banka Intesa hence the following passage from the Bloomberg piece:
“Monte Paschi,… originally took the stake in one of Intesa’s predecessor companies… [and] entered into a swap with the [Deutsche] in 2002 to raise cash from [that]…while retaining exposure to Intesa’s stock-price moves.”
It appears then, that Monte Paschi effectively gained exposure to Intesa’s stock by default. Whatever the case, the collapse in the price of Intesa’s shares in 2008 resulted in a 367 million euro impairment to Monte Paschi’s Santorini investment. Desperate, the bank asked Deutsche Bank what could be done. Ultimately, it was determined that Deutsche and Monte Paschi would restructure Santorini and devise a replacement swap that would allow Monte Paschi to hide the losses on its original position.
The replacement swap will be the topic of a follow up piece. For now, consider that Deutsche Bank and Monte Paschi were able, via a stock purchase and a subsequent equity swap, to boost Monte Paschi’s 2002 Tier 1 capital (even though the stock purchase resulted in a nearly half billion euro capital loss for Monte Paschi), while ensuring that Monte Paschi retained exposure to the underlying shares. At the time, it undoubtedly seemed like a good idea – perhaps even a win-win situation. Of course, the near collapse of the worldwide financial system in 2008 would turn the deal into a nightmare for Monte Paschi, but as the Italian bank learned, when Deutsche Bank’s risk management department is involved, “losses” are just an illusion.
At least 38 suspected migrant smugglers have been arrested in Italy who are thought to belong to an international trafficking network involved in organ trafficking.
Palermo’s anti-mafia unit launched an investigation after receiving testimony from Nuredin Weharabi Atta, a people smuggler sentenced to five years in prison by an Italian court this year. According La Repubblica, apart from the flourishing illegal immigration racket operating in the Strait of Sicily, there has been evidence of organ trafficking too. Traffickers reportedly sold the organs of hundreds of migrants that had not survived the journey to Italy. Worse still, some of those unable to pay the fee were killed for their organs, which the smugglers then sold for up to $15,000, including those of children.
Atta said he had decided to cooperate with the justice system because “there had been too many deaths, especially those at Lampedusa in October 2013… and too many others,” Il Tempo reported, referring to a shipwreck in which 359 people perished.
The criminal network had its financial headquarters in a perfume shop near the Termini station in Rome. Police managed to track the money flow and seize €526,000 and $25,000 in cash last month, along with documents from hundreds of bank accounts containing the names of foreign citizens.
Many migrants make the journey to Italy by sea, according to La Repubblica. Those with more cash avoid putting their lives at risk in shabby boats by buying fake marriage certificates for €10,000 or €15,000 that allow them to come to Europe by land, or even plane, on the grounds of alleged family reunion. Once in Italy, newly arrived migrants receive phone calls from their family members, who send them additional money so that they can continue to their final destinations. The Netherlands and Sweden appear to be the two most popular countries of choice, La Repubblica reported. Money transfers were documented thanks to bugs and cameras that police planted in rooms used by the criminal network in Italy. Money made from trafficking migrants is thought to have been reinvested in illegal trade importing drugs from Ethiopia.
Europe is currently facing its worst refugee crisis since World War II. Last year alone some 1.8 million asylum-seekers entered the European Union fleeing war and poverty across the Middle East and North Africa, according to data from the EU border agency Frontex.
According to a report from Europol and Interpol, criminal networks generated $5-6 billion trafficking asylum seekers and economic migrants to the EU in 2015. The report describes migrant smuggling as a multinational business, with participants from over 100 countries, representing one of the main profit-generating activities of organized crime in Europe.
At least nine out of ten child refugees arriving in Europe via Italy this year have been unaccompanied, UNICEF says in a new report. UNICEF spokesperson Sarah Crowe told RT last month that minors are often forced to rely on human smugglers and go through “various forms of abuse and exploitation” on their perilous journey to Europe, which sometimes takes them “months and even years.”
“If you try to run they shoot you and you die. If you stop working, they beat you. It was just like the slave trade,” Aimamo, 16, told UNICEF, describing the farm in Libya where he and his twin brother worked for two months to pay the smugglers. The brothers said that when they arrived in Libya after a risky journey through Senegal, Mali, Burkina Faso, and Niger, they were arrested and beaten before one of the smugglers secured their release