With 138 billion Euros of assets and 1 300 branches Monte De Paski is one of the largest banks in Italy. It is also the oldest bank in the world that's still operating today, having been founded more than 500 years ago in 1472.. it has stood the test of time, having survived the Napoleonic Wars, two, World Wars, The Great Depression and many other trying times during its half Millennium of continuous operation. In the 2000s, the bank expanded rapidly by acquiring other Italian Banks.

Their stock price was surging and they soon became one of the most successful and well-respected Banks not just in Italy, but in all of Europe. But as it turned out, the bank's rapid growth was built on top of a House of Cards. After peaking in 2007, its share price has declined by 99.9986 percent. That means that if you invested 175 000 Euros in its stock in 2007, you'd have 2.46 Euros Today, its former president had been convicted of orchestrating a massive fraud.

The Italian government has been forced to bail out the bay multiple times, costing taxpayers more than 14 billion Euros. Despite numerous government bailouts, Monte De Paski continues to struggle. It has chronic problems with non-performing loans and has consistently struggled to maintain adequate Capital reserves as required by the European Central Bank. And no matter how many bailouts the government gives it, the bank's share price continues to decline.

The Monte De Paski situation has raised wider questions about so-called zombie banks. In Europe, the idea is Banks like Monte De, Paski are structurally unprofitable and only survive because the government does not allow them to fail. This puts an undue strain on taxpayers and soaks up Capital that could otherwise be used for more productive. Endeavors In this video, we'll look at the rise and fall of the world's oldest bank and what this can tell us about the European banking industry.

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Foreign was founded in 1472 as a non-profit organization with close connections to the Catholic Church. They lent out money to people in need at low interest rates with no intention of making a profit. Eventually, it transitioned into a for-profit institution. Pursuing regular banking activities over the centuries, they gradually grew by opening up new branches, ultimately becoming one of the largest banks in Italy.

Even after Monte De Paski became a for-profit entity, 51 percent of its shares were allocated to a charitable. Foundation This Foundation existed with the sole purpose of providing charity in Siena the city where the bank was founded. The bank became incredibly popular among the local population because they provide hundreds of millions of Euros to upgrade the city's infrastructure, fund cultural events, and even sponsor the city's soccer team throughout the 2000s. Monte De Paski did quite well.

They aggressively expanded by opening up new branches and acquiring smaller Italian Banks booming real estate prices kept the default rates on their mortgages very low. This allowed the bank to make more than one billion Euros in annual net income every year from 2004 through 2007. in 2006, Monte De Paskey hired a former lawyer named Gyosepi Masari as their new president. Musari had plans to turbocharge the company's growth even further.

Foreign Veneta was the sixth largest thing in Italy in 2007, with about 1 000 branches that made it about half the size of Monty De Paski, which had two thousand branches in 2005. Anton Vanetta was acquired by the Spanish Bank Santander for 6.6 billion Euros in 2007. Monte De Paskey offered to buy Anton Vanetta from Santander for 9 billion Euros 36 percent higher than what they paid for it just two years prior. This is also the largest acquisition that Monte De Paski made in its history.

Santander was shocked that Monte De Pesky was willing to pay them such a high price and immediately accepted. In their own words, the offer was so good that they simply could not refuse. Anton Veneta had been steadily losing market share over the prior years. In the 9 billion Euro purchase price was more than 26 times its annual earnings.

they were paying a premium price for a low quality asset. Remember that this deal happened at the height of the housing bubble in 2007. default rates were low and Monte De Paski was making record profits. They seem to think that the good times would continue indefinitely.

The Anton Veneta deal was very expensive. Not only did they have to pay the 9 billion Euro purchase price, but they were also on the hook to inject a further 10 billion Euros into Anton Vanetta to meet regulatory Capital requirements. This massive Capital commitment stretched the bank extremely thin at the worst possible time. Right before the 2008 Global financial crisis, The 2008 financial crisis was a disaster for the financial industry, and especially Monte De passkey.

The bank disproportionately lent to the real estate and hotel Industries which were hit especially hard by the crisis as real estate values plummeted as many of their borrowers defaulted. Monte De Paskey was on the hook for a multi-billion Euro loss in 2008. this was a major disaster for multiple reasons. First of all, reporting such a large loss would be bad for the bank's stock price, but more importantly, their Capital position was already stretched thin as a result of the Anton Vanetta deal.

If their net loss is too large, they could lose compliance with their regulatory Capital ratios. The European Central Bank could force them to perform an extremely dilutive Equity raise at the same time, their stock was tanking. For these reasons: Monte De Paskey's senior leadership team needed some way to reduce the size of their reported loss. To do this, they would have to get creative with their accounting.

Foreign 2002 Monte De Paskey Owned a minority stake in another Italian bank called in Tessa San Paulo As a regulated Bank Monte De Paski is required to have a certain percentage of his deposits in safe assets such as cash or government bonds. because Banks practice fractional Reserve lending. They need to have an adequate amount of cash to cover customer withdrawals. As Monte Di Passkey opened up more branches and took on more deposits, they needed more cash to meet their regulatory Capital requirements.

One way to get more cash was to sell their stake in Tesla San Paulo. But they thought that in Tesla San Paulo stock was undervalued and still wanted to participate in the upside if it increased in value. So they set up a deal with the German Bank Deutsche Bank to sell their Intessa shares without actually selling their Intessa shares. Here's how it worked: They created a Shell company called Santorini Investment Limited.

Deutsche Bank put 329 million Euros into Santorini Santorini Used that money to buy the Intensive shares from Monte De passkey Monte De Paskey would pay Deutsche Bank a 4.8 eight percent per year interest rate in return Monte De Paski would receive all the dividends paid from the Intezza shares that were held in the Santorini Shell company. The deal was signed in 2002 and had an expiration date. Six years later in 2008, At the expiration date, Santorini would liquidate its shares and pay Deutsche Bank back the 329 million Euros that they originally played in. If the shares appreciated in value during the time, Monte De Patsy could keep the gains.

Both the shares decreased in value. Monte De Pasqui would have to cover the losses. The net result was to give Monte De Paski economic exposure exactly equal to if they had just owned the Intessa shares outright. But by engaging in this convoluted scheme, they were able to hold the shares off balance sheet, which helped them to meet their regulatory Capital requirements.

The timing couldn't have been worse with the contract expiring in 2008 during the height of the financial crisis. In Tesla San Paulo's share price declined by more than 70 percent. This means that Monte De Paskey would have to pay Deutsche Bank more than 300 million euros. Monte De Paskey Went to Georgia Bank and asked if there was any way they could help them out.

They really didn't want to recognize the 362 million Euro loss in 2008, so they entered into a new Arrangement whereby the 362 million Euros that Monte De Paski owed to Deutsche Bank would not be paid up front. It would instead be paid in installments. Over the course of the next few years, they entered into a complicated derivatives contract to make these payments without reporting it on their income statements. Of course, Deutsche Bank wasn't providing this service for free.

Under the new scheme, the total amount of money that they had to pay Deutsche Bank increased from 362 million Euros to 429 Million by kicking the can down the road. Monte De Paskey was digging itself deeper into debt. thank you! While the Santorini transaction let them hide the 300 million of losses, Monte De Paski was not out of the woods yet. not even close.

Almost all the banks in the U.S and Europe faced losses during the 2008 financial crisis, but the pain was not distributed evenly. The epicenter of the crisis was a Residential Mortgage Market. Banks with greater exposure to subprime mortgages suffered larger losses than banks with less exposure. Unfortunately for Monte De Paski, their exposure to U.S subprime mortgages was far greater than what their shareholders and Regulators believed it to be.

In 2005, a German bank called Dresner created a shell company called Alexandria Monte De Paskey bought 400 million Euros worth of bonds issued by Alexandria Alexandria used the 400 million euros to invest in a special purpose vehicle called Skylark Skylark. In turn bought a bunch of mortgage-backed Securities and credit default swaps from the U.S In addition to lending the money to Alexandria Monte De Paski entered into complicated derivatives contracts with Alexandria. These contracts effectively gave them 100 economic exposure to the U.S mortgage-backed Securities and credit default swaps owned by Skylark. It would have been a lot simpler for Monte De passkey to just buy the US mortgage-backed Securities themselves.

But just like with the Santorini transaction, they engaged in this convoluted scheme to keep the exposure off of their balance sheet. This allowed them to deceive their regulators and shareholders about how much risk they are taking on in 2008. Default rates on U.S mortgages skyrocketed. The mortgage-backed Securities owned by Skylark decreased in value by 55.

This represented a 220 million Euro loss for Monte De Paski. They needed to hide these losses, so they set up a deal with the Japanese Investment Bank Nomira. The deal with Nomira was very similar to the deal they did with Deutsche Bank Monte De Paski and Nomira entered into a convoluted derivatives transaction, with the net result being that Nomira gives Monte De Paski 220 million Euros to cover their laws. but Monte De Paskey would effectively have to pay this back to Nomira over the following years with interest.

Similar to the Santorini transaction, Monte De Patsy was able to kick the Canton down the road by digging itself deeper into debt. Monte De Paski never reported this transaction to their Auditors or regulators Hi, In addition to suffering huge losses on their risky derivatives positions Monte De Paski was also just not very good at being a bank. There are notoriously liberal with their lending policies, giving large loans to people in companies with poor credit worthiness. The 2008 financial crisis caused significant strain on the Italian economy.

In 2012, things got even worse with the European Sovereign Debt crisis. The deteriorating economic situation along with the low quality of Monte De Paskey's loan book caused a percentage of non-performing loans to Skyrocket surpassing 10 percent of total loans by 2012 and peaking at almost 35 in 2016.. a non-performing loan means a borrower has defaulted For a bank to have 35 percent of its loans. Defaulting is catastrophic.

Also, in 2012, a new employee at Monte De Paskey opened a Secret Safe at the company's headquarters which contained a document detailing the Alexandria transaction. The employee was shocked by what he had seen and immediately handed it over to the Italian authorities see: Yogi Usepe Musari was arrested along with other high-ranking Executives and given a three and a half year prison sentence for accounting fraud and misleading Regulators. But there was another problem even according to their fudge numbers Monte De Paskey was already on Shaky Ground due to the increase of non-performing loans. After adding on the 700 million dollars of hidden losses from the Santorini and Alexandria transactions, the bank was insolvent given its size.

Monte De Pasqui was a systemically important financial institution with the Italian economy already under severe stress due to the Eurozone Sovereign Debt crisis. The last thing they needed was the failure of a systemically important bank, so they gave the bank Bank of 4 billion Euro bailout. The government was able to untangle the fraudulent derivatives transactions and replace the entire senior management team, but this did not solve the problem of Monte De Paskey's poor lending practices, extensive job cuts, and restructurings were not able to offset the losses from the bank's massive number of non-performing loans. Since 2007, Monte De Paski has reported a net loss every single year.

In 2016, the Italian government was forced to inject another 3.8 billion euros. In 2017, they put in yet another 6.6 billion to keep the bank afloat. This brings the Italian taxpayers investment into Monte De Passkey up to 14 billion after receiving so many bailouts. Monte De Paski has effectively become the state-owned Enterprise with the Italian Ministry of Finance owning 68 of the outstanding shares.

But this has been a disastrous investment for the taxpayers. Based on the current share price, the Italian government's take is now worth 2 billion euros. This represents an 85 percent loss in their 14 billion Euros of bailouts. Over the past few years, the Italian government has been trying to get this mess off their hands by selling Monte De Paski to another Italian bank.

but thus far all these attempts have failed. Nobody is interested in buying a money losing bank with such a troubled history. Foreign debacle has raised criticisms of so-called zombie banks. In the Eurozone A zombie bank is a bank that is not viable as an ongoing business.

It is only kept afloat by continuous government support. Monte De Paski is likely structurally unprofitable. The government bailed them out to avoid Financial contagion that would have resulted from its collapse. But the bailouts are not free.

The government has already burned through 12 billion euros keeping the bank on life support. Had they let Montague Passy collapse, they could have spent this money on infrastructure, education, or other. Investments. At some point, the bailouts become an infinite money saying.

With no Prospect of the bank ever becoming self-sufficient the Italian Ministry of Finance seems to have finally come to this realization. Having been unable to find any buyers, they're gradually winding down the troubled Bank. It may take many years for this liquidation to play out, but at this point there doesn't seem to be any other options. This concludes the story of Monte De Passkey.

Through a combination of overly aggressive growth, risky derivatives positions, accounting fraud, and general incompetence, the world's oldest bank has been condemned to a slowed death. All right guys, that wraps it up for this video. What do you think about? Monte De Paski let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one! Wall Street Millennial Signing out.