THE DIVINE COMEDY

Dante wrote the original version.  Italy and The Boys in Brussels and the ECB have been busy on the sexual.

For those who pay attention to such things Banco Populare did Vicenza and Venetia Banaca are well known; for those who do not they are a couple of busted Italian banks who have been in that shape for some time.  Kept on life support, last week the situation became impossible causing the ECB to declare the banks as having failed and requiring a dissolution under the Euro version of the "living will" as we call it  Over Here.

Simple, right?  Except that this is Italy and Italy is Over There.

Seems that there is a section in the ECB rules and refs that says if a national government determines that the survival of the bank in question is important to the region, rather than The provisions of the EU and the ECB, the government can apply its own bankruptcy laws to the resolution of the problem. OOOOOO-K.  Just what does that mean?   Well in the case of these two sterling institutions here's what happened.

Italy decided that the institutions were important to the neighborhood (Venetian and Tuscany...not exactly pockets of poverty) and as a result home rule applied.  At the end of the day, shareholders and   Sub-debt holder (more on that) got creamed, the government decided that after a "transparent decision process" (who knew?), Inter Sanpaolo would assume the assets, employees and businesses of the two institutions.  And oh, the senior debt holders would be protected.  It gets better

Taking a page from some previous operations, there would be a "good" bank and a "bad" bank.  In order to deal with the "good" bank, Inter would get about five billion bucks as a thank you for taking this on.  The "bad" bank?  Eh, we gonna guarantee you about thirteen billion so you no getta hurt.  One wonders why Italians tend not to pay taxes. Or, as one guy put it a while back, gains are privatized, losses are socialized.  Banking as it should be if you ask me, but nobody is.

Aside from the farce of it all there are a couple of serious questions that might be asked such as what the hell is the real policy Over There for dealing with failed banks?  Then there is the issue of the sub debt which is not your everyday piece of paper but a specially developed instrument which in many jurisdictions has been a prime source of newly issued bank capital.  This is there first instance where it has been REALLY treated as capital in every respect.  What is is future and how will it trade?  Finally, in a moment when Dodd/Frank is being reviewed and re-written, is it possible to square the circle with the two major regulatory systems and if not, what will be the outcome.  Got me on that one but we're going to visit a few more circles Down There before we get the answer to that.