US, UK Banks Sue Italian City Councils Over Swap ‘Fraud’

Inquiring minds are across The Pond where Italian towns are being sued by multi-national banks because of their threat to stop payments:

JPMorgan Chase UBS AG and Bank of America are among banks bringing more than a half dozen Italian municipalities to London’s courts over swaps that are turning sour for both sides.

The banks are suing towns and regions across Italy, from Florence, a city of about 370,000 people, to Piedmont, the northern region with a population of 4.5 million, as some local governments threaten to stop making payments on contracts and others seek to recover fees they allege were hidden.

Italian municipalities, emboldened by Milan’s criminal trial of Deutsche Bank AG, Depfa Bank Plc, JPMorgan and UBS over allegedly fraudulent selling practices on swaps, are increasingly filing complaints at home to avoid losses on derivatives contracts. The banks are turning to U.K. courts, where they expect to get swifter and fairer judgments.

“Banks have sensed that the wind has turned against them and think they can get a better settlement in a U.K. court,” said Piero Burragato, a former derivatives banker and founder of Concordia Advisory Solutions Srl who isn’t involved in the cases. “The U.K. suits are a sign of concern among the banks.”

The pace of the U.K. lawsuits increased in the past month. Deutsche Bank, UBS and Bank of America’s Merrill Lynch unit in London are suing Lazio, a central Italian region made up of five provinces including Rome. Deutsche Bank and Merrill have also filed suits against Tuscany, and Merrill is suing Piedmont. At least four more suits were filed in London in December against other Italian regions over swap agreements.

It seems like just yesterday when, during the good times, business people forgot that trialism prevails during bad times. They forgot that business must be conservative because during bad times revenues fall more than expected.

The loses are staggering for the Italian region:

Italian municipalities face derivatives losses of at least 1.2 billion euros (1.6 billion dollas ), Bank of Italy data from June 30 show. At least two cities have halted payments on their derivatives deals, stoking tension between banks and clients.

Thousands of public authorities across Europe tried to cut borrowing costs in recent years through derivatives deals whose risks they couldn’t measure. In the U.S., governments and nonprofit organizations have paid more than 4 billion dollars to Wall Street firms to end such agreements since 2008, according to data compiled by Bloomberg.

“Nobody really knows how much of this is out there,” said Michael Dempster, founder of the University of Cambridge’s Centre for Financial Research in the U.K. “It’s indicative of the potential problem in the interaction between banks and local authorities.”

Past losses on derivatives have led some European governments to ban local authorities or state-owned companies from investing in such products. A U.K. court ruled in the 1980s that about 3.2 billion pounds (5.1 billion dollars) of swap contracts entered into by Hammersmith and Fulham Council were unenforceable. In 1997, the U.K. banned local governments from investing in derivatives. Italy banned local governments from signing new contracts in mid-2008 pending new rules.

That last sentence says it all about any government, anywhere…”Italy banned local governments from signing new contracts in mid-2008 pending new rules.”

Talk about locking the barn door after the horses escaped!

There is much more in the article worth taking the time to read.


One Response

  1. i hope that robert will indulge me this OT comment.
    i simply amazes myself that people come into my store and blame bush for the financial crisis.
    my store is a blue magnet.
    as if bush was so omnipotent that he could influence the elected officials of certain italian municipalities to act in the manner in which these have.
    can it be limited to the italians?
    the french?
    oh my, don’t forget the PIGS acronym, recently updated to PIIGS.
    my heavens, that bush guy must have really been powerful to have caused such far reaching effects.
    whichever country you are in, greed may be spelled differently, but the effects are the same wherever you are.
    and irresponsible elected officals are not too far behind.

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