Interest rate swap derivatives have not only turned sour for local governments and agencies across the United States. London-based banks are accused of massive mis-selling to dozens of Italian cities and regions.
In 2009, Alfredo Robledo, the prosecutor in Milan, suspected the banks made $130 million in illicit profits, so the Guardia di Finanza in Milan, the financial police of Italy, took over real estate properties, bank accounts and stock holdings for four banks. In 2010, Deutsche Bank, JPMorgan, and UBS were charged With fraud in Italy (YT, also available on Bloomberg TV). Also in 2010, L’Espresso reported that Nomura Holdings Inc. paid two financial advisers for the region of Sicily 18.5 million euros ($22.3 million) in alleged kickbacks, and there are even allegations that former Governor of Sicily, Salvatore Cuffaro, taking kickbacks from Nomura (Google auto-translation of an Italian article on Il Sole 24 Ore).
In March of this year, four banks charged with defrauding Milan with derivatives offered to unwind the swap at a discount and pay the city its profit from the transaction under a proposed settlement with the municipality. Alfredo Robledo asked for a court to ban four banks from doing business with Italian local governments for a year for mis-selling swaps to the city, and told a court hearing that nine bank officials should be jailed for up to 12 months. Around the same time, Sicily, Italy’s poorest region, faced increasing losses on about 860 million euros ($1.1 billion) of derivatives that are weighing on its debt as the local administration faces a liquidity crisis. The banks finally settled with Milan, paying the city almost 500m euros (~655m USD) and terminating the swap contracts, though there are a number of outstanding civil and criminal proceedings by other Italian municipalities.
Recently, Nomura sued Sicily in London, though neither representatives from Nomura nor Sicily provided comments to elaborate on the potential outcome of that lawsuit.