I had seen in the past complex deals,
but I'd never seen anything like this.
And it involved two of Europe's
leading financial institutions.
On the one hand,
the world's oldest bank
and Italy's third largest lender Monte Paschi.
And on the other hand, Deutsche Bank,
once the world's largest financial institution.
The idea that these two had got together
to cook the books was just astonishing.
I thought it was clever but illegal.
And a few of them should actually go to jail, in my view.
This was clearly a huge scandal
that made 450 million dollars disappear from Monte Paschi's books.
If it wasn't for our reporting,
the public may never have found out.
My name is Elisa Martinuzzi.
I'm a columnist with Bloomberg Opinion.
A presidential address to the nation.
This is an extraordinary period for America's economy.
Over the past few weeks
many Americans have felt anxiety
about their finances and their future.
So it's December 2008,
and we are right in the depth of the financial crisis.
The Dow tumbled more than 500 points
after two pillars of the Street tumbled over the weekend.
Financial institutions are really fighting for survival
and these two in particular,
Monte Paschi and Deutsche Bank.
We're seeing the stock falling
by more than 7% as we speak right now.
On the one hand, you have Deutsche Bank
with a massive balance sheet.
2.5 trillion euros,
it's a size of a large economy.
Trust that the bank is solid and sound
is what it needs to attain every day
to keep ticking along.
So showing that it's able to do a deal
like the one it was trying to do with Paschi
is absolutely critical.
And you have Monte dei Paschi
which just recently bought a big rival
at the peak of the market in cash,
already stretching its finances.
Suddenly, it was facing another 450 million dollars potentially
in a single loss, in a single investment,
that it would have to book at 2008.
They couldn't admit the loss
that they actually had faced
and so this deal was to cover that loss.
The risk they were facing was nationalization
by the Italian government
or control by the bank of Italy, direct.
It was a prospect
that management was trying everything it possibly could
to avert.
They'd come up with this complex,
multi-layered transaction which, like magic,
takes the loss that they would have to crystalize
at the end of 2008
and spreads it out over many years
in a fashion that they decide
doesn't have to be disclosed to investors.
And of course it's structured in such a way
that Deutsche Bank would in the long run
make a great deal of money from this.
So something in the order of 60 million euros
just on that trade.
The whole point of it was
to violate the accounting requirements of Italy
and fool the accounting structure.
Stop them having, essentially, to account for a loss.
Simple as that.
It wasn't long after they struck the deal
that Monte Paschi started hurting from the transaction.
Monte dei Paschi's just revealed
it could run out of cash in just four months.
It needs to offload a mountain of bad loans
or risk being wound down.
Yet Paschi limped along,
propped up by government bailout
after losses on bad loans also piled up.
Astonishingly, it took more than four years
for the chicanery to come to light.
Well after, regulators from the U.S. to Italy
had been alerted to it.
A tipster reached out and said,
"I have something for you
that's going to be of great interest."
And there started my reporting on Monte Paschi.
Little by little the source got comfortable
in sharing more and more details
about this transaction
that to be honest with you,
looked really too good to be true.
The material, when looked at it in its completeness,
spoke quite clearly of what was going on.
This transaction, that had allowed the world's oldest bank
to basically cook its books.
So what I endeavoured to do
was to find experts in the field
who would help stand up
what these transactions were trying to do,
help substantiate what the source was telling me
and one of these was Professor Michael Dempster
from Cambridge.
I had seen in past complex deals,
but I'd never seen anything like this
where basically it was shifting cash back and forth in time.
So, a simple version of how the deal worked
goes something like this.
You had two parts,
one was sure to win for Monte dei Paschi
and one was sure to lose for Monte dei Paschi.
The part that was sure to win
would generate a gain for Monte dei Paschi
which it would use to cover up the existing loss.
The part that was sure to lose for Monte dei Paschi,
the Italian bank would keep,
but it wouldn't crystallize that loss
right at 2008,
it would spread out the loss over many years.
What was striking was the fact
that the client was being given a huge amount of money.
Half a billion euros roughly speaking.
We'd never seen a deal like this
in which the client received a large amount of cash
at the beginning and paid it back
and then some afterward.
When I saw it
and when Elisa Martinuzzi saw it,
I mean it's obvious.
It's an illegal accounting device.
So initially it was the Siena prosecutors
that started looking at these transactions
and it went to trial about three years ago
and the verdict came in November.
A Milan court convicted 13 individuals
for helping Monte Paschi hide losses
from its accounts.
Individuals included Monte Paschi's former chairman,
Giuseppe Mussari,
and Deutsche Bank's former head of global rates,
Michele Faissola.
The judges also ordered the banks
to pay fines and set aside amounts
that totalled 160 million.
And it ordered further inquiries
into some of the individuals who had testified.
These are by a number of measures
the most significant convictions
relating to the financial crisis.
You haven't had chairmen of institutions,
let alone 13 senior managers
across three institutions face jail sentences
for their wrongdoing.
But of course this is convicted in Italian court.
They don't have to go to jail
unless they have a second trial
in which they essentially
can put them in jail.
So whilst they've been besmirched, so to speak,
their reputations,
it's not terribly huge punishment.
My initial response to the verdicts
was that they were not stiff enough
and they should of gone another layer up
to in fact the head of the investment bank.
I'm not so sure
that the public can really be confident
that we're not gonna see another Monte Paschi.
The situation is essentially the same today
as it was before.
A lot more complicated
because the regulators have tried to make it better,
but they've failed basically.
Having spoken to regulators
about the lessons from the financial crisis,
it's pretty clear where the weaknesses still lie.
Generally, on all the reforms that have been done
since the financial crisis,
we've made them better,
but we probably haven't made them good enough.
So there's really not been fundamental changes.
We've kind of made these improvements
around the edges.
I think people should still be concerned.
I think there's this kind of assumption
that it's yesterday's news
and I think that's probably ill-advised
because I think there's still some real fragility
in the system.
As a senior investment banking executive
recently told me,
his chief financial officer
would not be able to challenge him
on what's in his books.
You'd need a PhD to understand a lot of these transactions
and the people in charge
are often - don't have those PhDs.
It is not an awful lot to be confident about
what's really lurking
inside financial institutions' balance sheets.
And it remains just as difficult
for the outside world to get into them.
Yes, it's true,
the higher management often
doesn't understand much at all actually.
Which of course is a serious problem
when there is a crisis.
Not unlike what we saw in the lead up
to the global financial crisis
where it was mortgage debt that had ballooned,
this time it's corporate debt.
The market has grown enormously
and I believe that there's a recession coming
or a market crash coming
and it's a government matter,
it's a political matter,
and whether or not the politicians
will be able to sort something out,
I'm very pessimistic about that.