Three European banks in terrible financial condition this fall, Monte dei Paschi and Carige in Italy and Britain’s Co-Op Bank have something in common: a history of being controlled by charitable trusts. Monte dei Paschi is government-controlled now after a series of bailouts, while Co-Op gave over control to Wall Street hedge funds as part of a rescue plan this fall. Carige looked to be in better shape until its latest financial report, when the erasure of €2 billion in phantom assets left it holding an embarrassingly weak balance sheet. In truth, Carige has broken even this year aside from its accounting corrections, so it has a fair chance of raising capital in the securities markets. With Co-Op Bank, by contrast, no one can say whether it will be viable next year its new form. It seems just as easy to imagine its customers abandoning it. As for Monte dei Paschi, it doesn’t have a way forward and faces liquidation in about a year if nothing is done.
Is there a governance problem with banks organized as charitable trusts? Trusts can stagnate, but that is a risk shared with every form of business. Looking more closely, there is no question that Monte dei Paschi and Co-Op were ruined by recession acquisitions. These were huge and arguably worthless asset purchases that the respective banks paid handsomely for, almost as if the recession did not exist. Carige is a different story, but its problem loan portfolio also may reflect a history of being oblivious to economic risks. It doesn’t quite add up to a pattern that explains anything, but I will keep looking for any neglected principle that this set of troubled banks might point to.
