Who’s Raking in the Money off the Italian Banking Crisis?

Fee nirvana for the biggest on Wall Street.

By Wolf Richter of WOLF STREET

Bank bailouts are a big profitable business. And the collapsing Italian bank Monte dei Paschi di Siena – whose stock is nearly worthless (€0.25), and which was “rescued” twice by investors since 2014, and which now must get an even larger “rescue” or else – has turned into fee nirvana for investment banks, particularly JP Morgan.

Monte dei Paschi was the worst performer in the EBA’s stress test. Under the adverse scenario, its Tier 1 capital ratio plunged into the negative (-2.4%), meaning that its capital would be more than wiped out.

Now there’s another rescue deal in the works, this one far larger than the prior two that have failed so elegantly to solve the bank’s problems. It involves a consortium of banks, led by JP Morgan, according to CEO Jamie Dimon, and in a secondary role, by Italian investment bank Mediobanca. Monte dei Paschi seeks to raise €5 billion in new capital and sell €9.2 billion in bad loans at a deep discount to get them off its books. And the underwriting fees are going to be extraordinarily juicy.

“Three sources involved in the deal” told Reuters that the banks would extract €250 million in underwriting fees from the equity portion of the deal (raising €5 billion).

And there’s more. The deal would also set up a special purpose vehicle (SPV) that would purchase Monte dei Paschi’s bad loans. Funding the SPV would require a €6-billion syndicated bridge loan. JP Morgan is trying to arrange that bridge loan, for which the investment banks could be paid up to €300 million in fees.

Participants in the bridge loan would be stuck with Monte dei Paschi’s nonperforming loans (“toxic” doesn’t even describe them) if they can’t find investors for the SPV. But Dimon, always focused on other people’s welfare,told CNBC that his bank was willing to take that risk: “If we could pull something like that off, that would be great for Italy,” he said.

So combined, €550 million in investment banking fees for the current rescue…

Continue reading the article in WOLF STREET

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