SIENA, Italy Enraged shareholders of Monte Paschi bank lashed out at its management on Friday as questions grew about central bank oversight of the 540-year-old lender following the uncovering of nearly $1 billion of losses in complex derivatives deals.
The turmoil surrounding Italy's third-largest bank has rocked the country's financial establishment and exposed both the government and the Bank of Italy to difficult questions over how the risky deals could have been hidden from regulators.
It has also become a potentially explosive political issue ahead of national elections on February 24-25.
The Tuscan bank, which is already seeking a 3.9 billion euro ($5.2 billion) government bailout, this week revealed loss-making derivatives and structured finance trades that could cost it as much as 720 million euros.
Prime Minister Mario Monti, appointed in 2011 at the height of the euro zone debt crisis, promised "maximum clarity and transparency" but denied his government shared responsibility for the crisis at the bank, which bills itself as the world's oldest.
He said the problems affected only Monte Paschi and expressed "full and total confidence" in the Bank of Italy, which was headed by European Central Bank President Mario Draghi at the time the deals were made.
"Italian savers should know, and I think they know, that Italian banks have been among the most solid during the crisis," he said, adding that the problems at Monte Paschi did not affect the rest of the Italian banking sector.
Asked later on a TV talk show if Monte Paschi could be nationalised, he said it was possible but would be a "remote hypothesis".
Economy Minister Vittorio Grilli is due to appear before the parliamentary finance committee next Tuesday to answer questions on the case and also endorsed the central bank's supervision.
Known as "Daddy Monte" because of its huge influence and patronage, the bank plays a dominant role in Siena, known to tourists as the venue for the traditional Palio horse race. Monte Paschi, based in a magnificent palazzo, has an art collection that spans six centuries.
However there was stinging criticism from furious shareholders at a special meeting in the picturesque Tuscan town, where Monte dei Paschi was founded in 1472.
"It's as if they were playing poker at the casino, and the more money they were losing, the more they kept gambling," said Pietro Rizzo, a pensioner and former employee of the bank, who was awarded shares as part of his severance payment.
"They were sinking and kept trying to find a way to stay afloat to hide the losses. They should have told the truth," he told Reuters.
Bank of Italy Governor Ignazio Visco rejected criticism of the central bank's oversight, and said the deals in question, apparently aimed at covering up losses, had been deliberately concealed from authorities. He put the blame squarely on the Monte dei Paschi management at the time.
But Visco said there was no threat to the stability of Monte dei Paschi, which is already under investigation for the 9-billion-euro cash acquisition of smaller rival Antonveneta in 2007 - a deal that stretched its finances to the limit months before the global financial crisis.
"There is no question that the bank is stable," he said.
In Siena, where Monte Paschi held the special shareholders' meeting on Friday, shareholders approved two capital increases of up to 6.5 billion euros to be carried out if needed in the next five years, which was a condition of the state bailout.
The capital increase would allow the bank to issue shares to the Treasury if it cannot repay so-called "Monti bonds" it is selling to the government as part of the plan.
The bank's management faced the wrath of shareholders angered by a scandal that has raised the spectre of nationalisation and recalled some of the darkest financial scandals in recent Italian history.
According to judicial sources, magistrates are already looking into one of the three main deals at the heart of the case on suspicion of fraud and embezzlement by bank officials.
The issue has also forced its way into the election campaign because of the close links between the bank and the centre-left Democratic Party (PD), which is leading in the opinion polls.
The left has run Siena, in one of the so-called "red regions" of Italy, for decades and although PD leader Pier Luigi Bersani has dismissed any suggestion of a link with the crisis, the bank's main shareholder is a charitable foundation controlled by local authorities.
The town hall and the province of Siena, both run by the PD, name 13 out of the 16 board members at the foundation, which in turns picks the majority of the Monte Paschi board.
"What they did to Monte dei Paschi is worse than Bribesville and Parmalat put together," said Beppe Grillo, head of the anti-establishment 5 Star Movement, who attended the meeting. He was referring to Italy's two most notorious modern scandals.
"That's the scale of the damage they've done. They've turned the party into a bank and the bank into a party," he said.
Monte Paschi shares, which had fallen 20 percent this week, rebounded strongly on Friday, rising more than 11 percent as prices recovered after the recent losses.
However the cost of insuring against a default on the bank's debt kept climbing with credit default swaps on its two year paper widening to over 950 basis points from 750 basis points on Wednesday.
The crisis broke out over an opaque series of deals, involving Japanese bank Nomura, Deutsche Bank as well as a trade which several sources said was structured by JP Morgan. JP Morgan declined to comment.
Doubts were raised about the Bank of Italy's assertion that it was unaware of the trades at the centre of the scandal by reports in the Corriere della Sera daily on Friday.
It quoted central bank documents saying inspectors had expressed misgivings about the supervision of two of the deals in question as long ago as 2010. No immediate comment on the reports was available from the Bank of Italy.
A Deutsche Bank spokeswoman said: "In 2008 we entered into a transaction with our client Monte Paschi, the transaction was subject to our rigorous internal approval processes, and also received the requisite approvals of the client who was independently advised."
Nomura has also said that the deal it was associated with was fully reviewed by Monte dei Paschi management and auditors.
The management team in charge at the time of the losses has been replaced following Monte Paschi's failure to meet European capital adequacy tests.
Visco said the central bank had pushed for a change of management as soon as became aware of the problems at the bank, one of the most undercapitalised in Europe.
(Additional reporting by Lisa Jucca in Davos; Edward Taylor in Frankfurt and Laura Noonan in London; Writing by James Mackenzie; Editing by Barry Moody, Giles Elgood and Peter Graff)