Death by socialism: Demise of the world's oldest bank

You could only get on in Italy's MPS bank if you were a socialist. Founded in 1472, it was owned by a socialist foundation, and if your family were something in local lefty politics you could get a job in the bank. It is rather as if Alitalia had decreed all its pilots should be short-sighted. Shockingly, now it's going under

Banca Monte dei Paschi di Siena (MPS)
Tim Hedges
On 13 June 2017 07:10

To my delight there was a honey festival locally. The Italians like this sort of thing, celebrating local produce whether it be lake fish, lentils or wild asparagus.

Tasting honey is a civilised way to live. The leaflet for the event, though, contained what for me was a bit of a surprise: it was sponsored, in part, by Banca Monte dei Paschi di Siena (MPS).

There is nothing wrong in principle with a bank funding local events. Mussolini passed a law that a percentage of a bank’s turnover should go to public good works, and it seems to be something the old boy got right. It’s just that MPS doesn’t have any money. Not even for a honey festival.

MPS, founded in 1472, is to banking what Alitalia is to airline management, and it is a tragedy that two such dreadfully managed companies should come from the same country. Whilst Alitalia decreed that all its staff should live in Rome, bussing them up daily to Milan and Venice, MPS went one step further.

You could only get on in MPS if you were a socialist. It was owned by a socialist foundation, and if your family were something in local lefty politics you could get a job in the bank. It is rather as if Alitalia had decreed all its pilots should be short-sighted.

I have an account at MPS, I should declare. Probably as a result of their entitlement, the staff were, by and large, rude and ignorant. Some of the ones higher up were corrupt as well. The organisation was not being run for the benefit of the customers, at least, and if it was for the shareholders they had a funny way of going about it.

Things had been going wrong for many years but it was not until the 2008/9 crash that they came to a head. It was the time, you will recall, that Natwest was getting itself into trouble buying ABN/AMRO. Banco Santander, one of its consortium, received as part of the deal an almost worthless Italian bank called Antonveneta.

Santander officials admit privately they were staggered when MPS offered €8 billion for Antonveneta. Staggered and delighted. And so the long decline began.

It is not as if MPS had been investing in sophisticated debt instruments: it hadn’t yet got around to looking at this new stuff. MPS’s problem was the traditional one of lending money to people who didn’t have a hope of paying it back.

Amongst the bad debtors were friends of directors, socialist worthies and of course the Government of Italy whose debt collapsed in value after the crash. The socialist foundation which owned MPS refused to raise capital because its stake in the bank would be diluted.

So, without Collateralised Debt Obligations or anything like that, just through bad banking, the oldest bank in the world proceeded towards insolvency. Following a €2 billion bailout in 2009, by my calculations MPS got through around €8 billion in the period up to the present day. It is now of course bust again.

The late Christopher Fildes used to say that giving capital to a bank is like giving beer to a drunk. You know what he will do with it, you just don’t know which wall he will choose.

Even five years ago MPS shares were at €900; today they are €15. Ten thousand euros invested in July 2012 would now be worth €170. But people did invest, many of them poor savers, persuaded into subordinated bonds which paid a bit more than the deposit rate. Even I was invited to buy this stuff; fortunately I knew what it was, a local farmer would not have.

Now the EU has allowed the Italian Government to make a final bailout, but only as part of a general resolution of the bank. Shareholders and junior debt holders will be wiped out. If the poor farmer has the wit he will claim he was mis-sold the investment and hope the government reimburses him.

MPS should have been wound up years ago. Italy has too many banks and those banks have too many branches. The foundation that owned it has learned that 95 percent of zero is worth the same as 0 percent of zero.

Italy will be better without Monte dei Paschi. The honey was good, though.

Tim Hedges, The Commentator's Italy Correspondent, had a career in corporate finance before moving to Rome where he works as a freelancewriter, novelist, and farmer. You can read more of his articles about Italy here

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