Former Lehman derivatives banker helps Paschi unravel contracts

Helped Paschi uncover $955 million of losses

Lehman Career

Banchetti’s shaping of Lehman’s fixed-income business meant he was one of the top dozen bankers who helped build the U.S. firm’s European activities, according to a person familiar with company. By the bank’s peak years of 2006 and 2007, his unit was generating about $3 billion in sales out of a total of just less than $7 billion for Europe, said the person, who asked not to be identified because the information was never publicly disclosed.

Banchetti has filed to recover $26 million in compensation he forfeited when the firm filed for bankruptcy in September 2008, filings show.

He is now taking advantage of a dearth in local specialist advice in tackling complex derivatives, say lawyers and consultants who have advised clients on swaps. Customers often don’t have the expertise internally and external advisers lack the market knowledge that gives securities firms an advantage in negotiations.

International independent risk advisers, common in the U.K. and the U.S., “simply don’t exist” in Italy, according to Paolo Esposito of Chatham Financial, a U.S. firm that advises clients on interest-rate and currency hedging and worked with the city of Milan on its 455 million-euro swaps settlement with four banks a year ago.

‘Grave Asymmetry’

It was a “grave asymmetry of information” that laid at the heart of the fraud four banks committed when they sold interest-rate swaps to the municipality, judge Oscar Magi wrote on Feb. 4. Magi convicted the firms, including Banchetti’s client JPMorgan and Deutsche Bank, in December for their role in overseeing the fraud by their bankers.

Over the two-and-a-half-year trial that often saw Banchetti attending the weekly hearings as one of the banks’ cluster of advisers, the judge heard from the securities firms that university professors who acted as expert witnesses for the prosecution couldn’t challenge their superior market knowledge. What is standard market practice isn’t what professors teach in textbooks, the banks’ lawyers argued. The banks didn’t admit to any wrongdoing as part of their settlement agreement.

Don’t Demonize

Italians need independent financial advice and markets mustn’t be “demonized,” Banchetti told Radio24 in an interview in November 2011.

Banchetti’s business is poised to benefit as municipalities across Italy review their derivatives contracts following the Milan case. Local governments are losing more than 1.3 billion euros, according to June data released by the country’s central bank.

“What’s the choice?” said Simon Maughan, a banking analyst at Olivetree Securities Ltd. in London. “If there is an issue here, then the solution is in preventing banks engaging in such complicated financial transactions in future. The answer is not in denying Monte Paschi the chance to clean house.”

Bloomberg News

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