In North America we were reasonably lucky for the great banking crisis of 2008 was essentially over by 2010 and with the new rules came in the banking system has been stable. The economy has been growing and we are basically with the same institutions as prior to 2008. In Europe, the world is much different, the banking system moves from one crisis to another and the reality is the ultimate solution is the senior government with access to lots of credit. Many private sector banks were largely nationalized but slowly have come to be reprivatized. Writing for Reuters Silvia Aloisi, Paola Arosio and Pamela Barbaglia wrote about How JPMorgan was unable to save Monte dei Paschi.

In Italy, the third largest bank is called Monte die Paschi di Siena. Similar to the largest banks given the slow recovery of the economy and the billions in bad debts, the bank needed greater capitalization. The board decided to try a private sector solution lead by JPMorgan, the advantage for JPMorgan was the lead in the fees in the range of E558 million. The idea was to raise write off the bad debts of $40 billion and raise E5 billion in equity. This was promoted as a private sector arrangement for the general public were skeptical of more government arrangements (although needed it has not worked as well as it expected). The fact that state aid has not changed the economy has allowed the critics to suggest one more round of Euro funding was not going to change much. If a government takes Euro Bank financing, it takes their rules.

With all banking financing, the ultimate decision rest in the President or Prime Minister office, in Italy Prime Minister Matteo Renzi who has a political base of support around Siena was in full backing of JPMorgan and other banks going forth with their solution. For the bank, if this one was successful, more of these types of deals would be coming in the future. JPMorgan called on investors throughout the world, however although government guarantees were not part of the program, the support of the Prime Minister was touted and when he resigned over another issue, fewer people were willing to sign on to buying the debt and equity which lead to the deal falling apart.

Since the deal fell apart, the board went to the European Central Bank (ECB) which has decided the capital shortfall is not E5 billion but E8.8 billion. The government of Italy or ECB has to put money into the bank to save it. More subordinated bondholders will be forced into owning shares of the company or a debt for equity solution. The bank will be saved, but not before the government owns 70% of the bank.

Linking to dividend paying stocks, while banks that need bailouts do not pay dividends, when they come out of restructuring and begin to generate profits can be an excellent investment, at least it was in the US banking world. The US banks were restructured, paid back the US government and helped ensure the US economy can grow.

There are more questions than answers, till the next time – to raising questions.