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.
Germany’s largest bank loaned Monte Paschi about $2 bn in December 2008 through the transaction, dubbed Project Santorini, according to more than 70 pages of documents outlining the deal and obtained by Bloomberg News.
The trade helped Monte Paschi mitigate a $488m loss from an older derivative contract with Deutsche Bank. As part of the arrangement, the Italian lender made a losing bet on the value of the country’s government bonds, said six derivatives specialists who reviewed the files.
'I can’t understand why any financial institution would engage in a trade like this for legitimate objectives', said Frank Partnoy, a former derivatives trader at Morgan Stanley (MS) and now a professor of law and finance at the University of San Diego who read the files. 'They shouldn’t ever be doing that'.
The transaction shows how investment banks devised opaque products that years later are leaving companies and taxpayers with losses. From the Greek government to the Italian town of Cassino, borrowers have lost money on bets that were skewed in banks’ favor. In December, an Italian judge convicted bankers at four firms, including Deutsche Bank, of fraud in arranging an interest-rate swap for the city of Milan.
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