Monte Paschi greased wheels for buyout: police

A deepening fraud and bribery scandal at the country's third largest bank has caused a political outcry ahead of a parliamentary election on Feb. 24-25, with the Bank of Italy under fire over suspected financial irregularities at the Tuscan institution.

Monte dei Paschi's 9-billion euro purchase of Antonveneta in 2008 precipitated an eventual state bailout and prosecutors in its home city of Siena are probing whether it deliberately overpaid and whether bribery was involved.

Monte dei Paschi's current management have said they have found no evidence of bribery.

In a report by Italy's financial police provided to prosecutors for their investigation and reviewed by Reuters, the police say that Monte dei Paschi granted Bank of New York an indemnity in return for investor approval to change the terms of a 1-billion euro hybrid financial instrument.

It did not disclose the indemnity to the Bank of Italy. Reuters has not seen the indemnity agreement given to Bank of New York.

The Bank of New York did not want to be liable for coupon payments if some of the noteholders refused to agree to the change in the terms of the notes.

There is no suggestion in the police documents of any wrongdoing on the part of Bank of New York. But the success of Monte dei Paschi's bid for Antonveneta rested partly on the deal, known as FRESH 2008, raising the money it needed to acquire Antonveneta.

Convertible into Monte dei Paschi shares, the FRESH 2008 notes were sold by U.S. bank JP Morgan to a number of investors, with Bank of New York acting as an intermediary.

The Bank of Italy had initially raised objections about the FRESH operation, saying that in its original form it was too similar to a bond, rather than a hybrid equity instrument and could therefore not be counted as core capital, according to Bank of Italy documents seen by Reuters.

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