The Motive Behind The ECB’s Handling Of Banca Carige

Andy’s Notes: Loans to equity. It’s the ultimate form of extortion really. “Hey, we’ll give you a loan and then if you satisfy this ridiculous list of ‘requirements’ we’ll allow you to convert the debt to equity.” In other words, the debt will be forgiven and a boost in equity will result. Sounds great, right? Wrong. The international central bank cartel does not give out gifts. The devil is always in the details and that’s where it is with these subordinated loans, which I’m going to go out on a limb and say are going to become much more popular in the next 5 years or so. It is theft. The ECB doles out the money initially as a loan, so now the ECB is a creditor of said bank. After the bank does whatever dirty deeds are required, then the debt turns magically to equity and the ECB becomes an owner of said bank. And an owner of all the deposits of said bank. The above constitutes motive for encouraging banks to over-leverage and engage in all manner of other irresponsible behavior. Notice Banca Carige is a mid-sized bank. Not a G-SIFI by any stretch. If they went sour, it would barely register as a blip on the global financial radar. So why is the ECB treating it as too big to fail? Because they want to steal it and set a rather important precedent.

Italy’s populist administration ended 2018 with a remarkable U-turn in its debut budget. The New Year has presented another awkward choice to the governing League and Five Star parties — this time on banks.

On Wednesday, the European Central Bank put in special administration at Banca Carige SpA, a mid-sized lender, after its shareholders rejected a plan to raise capital, prompting some board members to resign. The move could buy the bank some time but is unlikely to solve its deeper problems. These include a mountain of bad loans and a lackluster outlook, compounded by Italy’s stuttering economy.

The first act of the administrators will be to execute the botched fund-raising to appease the supervisors. The bank can’t raise fresh capital from the market, but it can rely on 320 million euros ($366 million) of subordinated loans from a special industry fund, which can be turned into equity.

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