Under the Tuscan Sun

Ah, Tuscany.

The name conjures up images of bright summer days, warm nights, a gorgeous landscape of fertile farms and rolling fields, and an artistic heritage that includes Puccini, Dante, Michelangelo, and da Vinci. The Romans began to irrigate these fields 2500 years ago, and it became a breadbasket to the Empire.

At the heart of Tuscany lies the city of Sienna, and at the heart of Sienna lies its bank, Monte dei Paschi, the oldest bank in the world. Over the course of five and a half centuries the institution financed trade, agriculture, municipal finance, and provided insurance throughout Italy and later Europe. Founded by the city Magistrate in 1472, the bank is majority-owned by city’s charitable Foundation.

Over the years the Bank’s dividends have allowed the Foundation to provide financing for men’s and women’s athletic clubs, health-care services, and summer activities for children. But the Foundation was poorly equipped to oversee the Bank’s management during the boom years in the middle of the last decade. As banks around the world consolidated, Monte dei Paschi di Sienna didn’t want to be acquired and lose its local identity—it wanted to acquire. And it overreached.

In 2007 the bank purchased Banca Antonventa—a mid-sized Padua-based bank—from Banca Santander in Spain for 9 billion Euros—well above its book price. The acquisition exposed Monte dei Pasci to shoddy lending and other problems. As the global economy turned down, bank profits did as well. MPS has had to raise capital and cut its dividend, and the Foundation has struggled, eventually selling part of its MPS holdings to raise cash.

The struggles in Sienna illustrate one of the paradoxes of finance: centuries of thrift and diligence can be undone by a brief period of exuberance and miscalculation. Sunny skies are no guarantee of sound management.

Douglas R. Tengdin, CFA
Chief Investment Officer
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