Deutsche Bank AG, JPMorgan Chase & Co., UBS AG and Hypo Real Estate Holding AG's Depfa Bank Plc unit were charged with fraud linked to the sale of derivatives to the City of Milan. Judge Simone Luerti scheduled the trial of the four firms, 11 bankers and two former city officials for May 6, Prosecutor Alfredo Robledo said after a hearing in Milan today. The banks allegedly misled the city over swaps that adjusted interest payments on 1.7 billion euros ($2.3 billion) of bonds sold in 2005. Prosecutors across Italy are investigating banks as local and national government agencies face potential losses of 2.5 billion euros on derivatives, lawyers say. The Milan probe may also affect cases as far away as the U.S., where securities firms have faced charges for price-fixing and bid-rigging in the sale of derivatives to municipalities, though not for fraud, according to former regulator Christopher "Kit" Taylor. "This case could have repercussions over here if the trial showed deliberate intent," said Taylor, a former executive director of the Municipal Securities Rulemaking Board, the national regulator of the municipal-bond market. "What happened in Europe was the continuation of a pattern in the U.S."
Judge Simone Luerti scheduled the trial of the four firms, 11 bankers and two former city officials for May 6, Prosecutor Alfredo Robledo said after a hearing in Milan today. The banks allegedly misled the city over swaps that adjusted interest payments on 1.7 billion euros ($2.3 billion) of bonds sold in 2005.
Prosecutors across Italy are investigating banks as local and national government agencies face potential losses of 2.5 billion euros on derivatives, lawyers say. The Milan probe may also affect cases as far away as the U.S., where securities firms have faced charges for price-fixing and bid-rigging in the sale of derivatives to municipalities, though not for fraud, according to former regulator Christopher "Kit" Taylor.
"This case could have repercussions over here if the trial showed deliberate intent," said Taylor, a former executive director of the Municipal Securities Rulemaking Board, the national regulator of the municipal-bond market. "What happened in Europe was the continuation of a pattern in the U.S."
Shouldn't these trials be in New York, Frankfurt, and London? Do they have banking trials in Der Schweiz? "Life shrinks or expands in proportion to one's courage." - Anaďs Nin
At least the Italians can threaten to send some over some men in ugly suits.
$2.5bn in derivatives losses for (according to another source I read yesterday) 500 differentmunicipalities and regional governments? What is this, a casino?
I bet all those derivatives contracts didn't count as public debt according to accounting standards. The brainless should not be in banking -- Willem Buiter
I disagree. Municipal corporations may sue for remedy; courts may even invent formularies of damages recognized by their narrow rulings. The fraud alledged by complainants AFAIK involves a fundamental premise of contract law, consideration (1, 2), being contravened by the agent(s) who sold the insurance ("derivatives") to complainants while conspiring to affect event(s) that diminunize the specific value contracted.
But private penalties (paid by banks or their agents) do not sovereign default make.
I bet all those derivatives contracts didn't count as public debt according to accounting standards.
They don't "count" as any kind of debt because the contract value is notional until and only in the event the accounting parties realize a gain (loss) attributed to contract provisions.
GAAP, reporting standards, and acceptable compliance varies by country. The objective of Basel Accord negotiations, of which parties to are both public (government) and private entities, is of course standarizing GAAP in order to facilitate a transnational business of financial (debt) instruments.
(known) Derivatives positions held by state treasuries are reported by BIS and likely recognized in treauries' balance sheets somewhere, being engrossed by a long-term liability and asset figures or a footnote to the account as impairments. In general, exposure is neither a tangible asset nor liability (e.g. Statement No. 150); exposure denotes an unrealized (intangible or notional) obligation.
Which state treasury include municipal (or provincial) corporate obligations in its accounting of "sovereign" transactions, one would need to examine pertinent statutes and periodic financial statements to identify constituent transactions of flow of funds. Business press and tax payer advocacy literature are unreliable reporters of pertinent information such as "bad bank" special purpose vehicles established by public and private trustees to complicate disclosure of asset impairments. Diversity is the key to economic and political evolution.
