Caveat Emptor? Perhaps Italy’s Lazio region does not believe in this Latin idiom. The region recently sued 11 domestic and foreign banks, claiming $108.7 million in compensation for alleged hidden costs in derivatives they purchased.
The regional government led by Prime Minister Silvio Berlusconi’s People of Freedom party said the contracts “implied a high level of risk which was not consistent with the mere need to cover interests rates and forex exchange”. Lazio is the latest of a series of Italian local authorities who have sought compensation for allegedly being misled by banks in swap deals they undertook as a means to reduce their debt.
Among the banks involved, Lazio is suing UBS (NYSE: UBS) for 28.7 million Euros, Citigroup (NYSE: C) for 11.8 million, Merrill Lynch (now part of Bank of America) (NYSE: BAC) for 11.2 million, Dexia for 8.5 million, JP Morgan (NYSE: JPM) for 3.3 million and Unicredit for 3.2 million.
On 2.7 billion Euros of derivatives deals subscribed by Lazio between 1998 and 2007, it is paying reimbursements of 270 million Euros per year, of which 143 million is interest. The Economy Ministry banned new derivatives contracts in 2008, pending new rules. Last week Italy’s financial police seized 22 million Euros from banks. They said they were looking at derivatives deals worth 1.4 billion Euros subscribed to by the Tuscany region, Florence city council and three other local municipalities, with banks including Bank of America-Merrill Lynch.
The banks have denied wrongdoing. The case seems eerily similar to lawsuits in the United States just two years ago regarding Auction Rate Securities, which investors bought, and then decried their ignorance when the portfolios incurred losses. These lawsuits are still in the beginning stages, and the outcome is far from clear. The one thing that is clear though is that the Italian government is pursuing this issue feverishly, amidst their own debt crisis and financial instability.
