Thursday, December 22, 2016

This Week in Bank Failures

Ukraine took over its largest bank, ironically named PrivatBank, which was suffering from a $5 billion capital shortfall. Other insolvent banks in Ukraine have been liquidated, but PrivatBank was considered too big to fail.

We were waiting most of the week for news of the fate of Italy’s oldest and third largest bank, Monte dei Paschi. There was no further progress in the final days of the stock sale. A sovereign wealth fund that the bank had hoped would be its anchor investor decided early in the week, perhaps actually last week, that the whole deal was too risky. There did not seem a way to structure a capital arrangement that properly protected the interests of the new investors. Around the same time, the bank acknowledged that it was not as liquid as previously thought, and it could run out of money as soon as April. The bank’s future was in doubt for a few days. The bank faced a December 31 regulatory deadline to raise capital, but the clock ran out on its stock offering at 2 p.m. today. According to published reports, the bank raised a small fraction of the money it needed, between one tenth and one fourth of the €5 billion it was seeking. The board met this afternoon and formally requested government assistance. Then the cabinet met late in the evening and around midnight, approved a state rescue of the bank. Exact terms of the rescue have not been spelled out and it seems that some decisions will be postponed until a new audit of the bank is underway in January. There is a plan to convert the junior bonds held by bank customers into senior bonds in order to protect those investors from large losses at this stage. Government officials have said, though, that all investors would have to take some kind of loss in any government rescue of a bank.

In New York, law enforcement officials say two Platinum Partners hedge funds worth more than $1 billion had been run like a Ponzi scheme since 2012, with secret accounting, phantom assets, and exaggerated earnings. The scheme was uncovered after an officer of the company tried to bribe a government official. Weeks later, Cayman Islands regulators ordered the funds liquidated. Six executives have been arrested and charged after an investigation that included the FBI, the SEC, and others.

Update, Friday: Deutsche Bank will pay $7 billion, and Credit Suisse, $5 billion to settle charges of misrepresenting mortgage-backed securities sold in the United States between 2005 and 2007. For Deutsche Bank, the settlement is larger than the amount the bank had set aside, but the bank has assured investors that it will not need to seek government support as a result of the penalty. A similar case pending against Barclays will apparently be decided in court.