(Bloomberg) -- An ex-Deutsche Bank AG banker told a Milan court that the controversial Santorini transaction signed with Banca Monte dei Paschi di Siena SpA was a risky deal for the German bank and was properly accounted for by the Italian lender, challenging the prosecution’s case.
Marco Veroni, the first Deutsche Bank defendant questioned by prosecutors at the Milan trial, disputed the accusation that the deal had no real risk and was constructed to disguise an ongoing loss at the Siena bank with a temporary gain.
“Deutsche Bank could only sign a deal that implied an economic risk, and this wasn’t an exception,” he said at a hearing in Milan Thursday. "The two legs of the structure were based on different variables, they were logically linked but separate and different.”
Veroni, 50, a Deutsche Bank account manager in charge of relations with Monte Paschi at the time of the deal, is among six former bankers at the German lender accused of colluding with Paschi to cover up losses through a deal known as Santorini. He left the bank in 2012.
Prosecutors say that the complex transaction Deutsche Bank helped put in place in 2008 hid more than 360 million euros ($419 million) of losses that Paschi was facing on a previous deal. They built up a winner-loser construction that was split in two parts: each prong of the bet simply wagered on an index that was the exact inverse of the other.
On one half of the deal, Paschi would make a certain, moneymaking bet with Deutsche Bank and use those winnings to extinguish its 2008 trading losses. For the second half, the Italians would make a losing bet of at least 429 million euros, to neutralize the derivative losses and include fees due to Deutsche Bank, whose effects would play out slowly, over many years.
Veroni disputed the prosecution’s characterization of the deal, saying that there were four possible outcomes for the two bets. Furthermore, to add riskiness to the deal and avoid a mirroring of the two parts of the transaction, Deutsche Bank added an additional element of uncertainty: a “swap basis” that further reduced the negative correlations between the two bets.
The manager also said that according to Deutsche Bank, Monte Paschi should have accounted for the transaction as a repurchase agreement. The banker showed an email of his colleague Stefano Dova to Monte Paschi, dated Nov. 5, 2008, in which Dova said that even if Deutsche Bank didn’t do formal advisory on accounting, the deal could be accounted as a RePo because the derivative was on the coupon and it was closely related to the underlying instrument.
Deutsche Bank’s risk committee signed off on the Santorini project in Dec. 2008, after first securing a concession that Paschi would sign a “representation letter” pledging it understood the terms of the transaction.
The accounting of the deal was first reviewed by the Bank of Italy in 2010, when the central bank said that it didn’t have “powers as regards accounting” and that the matter needed further study. Italy’s markets watchdog Consob on Wednesday imposed combined fines of 2.3 million euros against the two banks and Nomura Holdings Inc., which signed with Monte Paschi another controversial derivative dubbed Alexandria. The regulator said the banks’ managers colluded to misrepresent Paschi’s accounts and give false information through Alexandria and Santorini.
Deutsche Bank and Nomura went on trial in Milan in December 2016, accused of colluding with Monte Paschi to hide losses at the Italian lender using complex derivatives trades, leading to a misrepresentation of its finances between 2008 and 2012. Thirteen former managers of Monte Paschi and the two banks -- including Veroni -- were charged for alleged false accounting and market manipulation.
Veroni, whose questioning will resume June 28, defined Santorini as “the most successful deal Monte Paschi has never done,” because, as it was conceived in 2008, the bank was betting on lower interest rates for the following years, an event that happened. Deutsche Bank was typically hedging these kind of transactions, he said.
Prosecutors used internal Deutsche Bank documents and emails to persuade a three-judge panel to consider whether there were additional, aggravating circumstances to the charges the German lender already faces related to derivatives transactions.
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