Editor's Note: It's one thing for a writer to explain a complex issue with his or her peers within their own discipline. But there's a certain genius among those who can translate the story into lay terms which the rest of us can grasp. We are grateful to Annibale Marsili (a 15 year veteran as manager in the Italian banking industry and now managing director of this own company) who achieves the latter, avoiding the professional jargon and bringing about clarity. He helps us understand how people are losing their investments and savings to a system in which they placed their trust.

- Les Blough, Editor

The story of Banca Popolare di Milano convertible bond is very sad and disappointing.

On 3 July 2009 the BPM issued a convertible bond for 695,535,200 euros. The expiry date was set at 1st June 2013. Fixed rate at 6.75%.

Being a convertible at maturity the value would be converted into shares of the bank, according to the conversion ratio determined in the Regulations. The determination of the latter is pretty complex.

Essentially, the conversion ratio is determined by the official 20 day conversion ratios calculated on the basis of the official price of the shares in the last 20 trading days preceding the third trading day prior to the expiration date (!). Now if you aren't still dazed, we can move forward to the calculation of the daily Conversion Ratio.

The minimum conversion price per share is set to € 6, the maximum conversion to € 7, the Maximum Conversion Ratio is 100/6 (ie 16.667 shares per bond) and the Minimum Conversion Ratio to 100/7 (or 14.286 shares per bond).

When it is necessary to calculate the Conversion Ratio Daily, if the official price market is equal to or less than the Minimum Conversion Price the Daily Conversion Ratio will be equal to the Maximum Conversion Ratio.

And I'm stopping here, because the other two cases are now impossible to happen.

On 22th December 2011 the bank has officially ratified a decision previously taken, the restructuring of the loan.

Obviously the investors are really angry because the resolution is to anticipate the conversion to 29 December 2011, but changing the minimum conversion price from 6 to 2.71 euros.

Since the Banca Popolare di Milano market price is currently at around 0.32 euro per share, the transaction involves undoubted loss to the bondholders.

If we consider an investor who has bought € 10,000 of the bond, he will get 3,690 BPM shares in the conversion, which at current market price are € 1,180.

Since a few days the bank has closed its capital increase (with the placement of 94.02% of the shares offered) with 92 shares for each bond (priced at € 0.30 per share). If our Mr. X had subscribed the whole due amount, he would have 9,200 shares (paid 2,760 euros). In total he would get 12,890 (9,200 + 3,690) shares paid the sum of 12,760 euros (10,000 bonds nominal value + 2,760 for capital increase), and currently on the market worth 4,125 euros. The potential loss is 8,635 euros, or about 68%.

A small comfort could be the interests already received and those that will accrue, but they are taxed, being as a "derivative" instrument, at 27% instead of 12.5%.

It seems a crack like Argentine and Parmalat bonds, the most important Italian financial scandals.

Savers have just to hope for a market value rise of their shares, a situation for which you may not be able to know neither "when" nor "if".

Meanwhile, the stock market greeted the operation with a rise in the share. That's normal. Financial markets do not affect the rights of savers, as the fact that the bank, either through the capital increase or through the restructuring of convertible bond, has improved its capital base; before these operations the Banca Popolare di Milano Core Tier 1 was at 6% , far from the average (7.3%) of the major Italian banks as highlighted in the European stress tests, and far from 9% "recommended" (or forced) by the EBA (European Banking Association) by June 2012.

But the most serious issue is the highly improper and unlawful behavior of the banking network, highlighted by a fine of 377,000 euros to three directors of the financial institute imposed by Consob (the Italian agency overseeing financial transactions) because of serious irregularities that the bank branches are made in altering the risk profile of the clients for the purpose of selling a highly dangerous financial instrument (similar to a derivative).

The MIFID legislation (the “Markets in Financial Instruments Directive” by the European Union) is revealed in these cases as a palliative and a cure absolutely useless, because only very careful savers sign the contract after reading what is written in the famous "financial questionnaire", where the customers should tell bank their risk profile (low, medium, high). But the others trust bank, because for many people the relationship with the bank is still based, and rightly, on credibility.

Directives and rules such as MIFID are useless if the behaviors are always the same, selling financial instruments not completely suitable for the customer risk profile. Indeed, this case is if anything, even worse, because it involves the adoption of conduct not only attributable to a lack of professionalism, but to a blatant circumvention of the law, with the inevitable trail of "class actions" or individual legal actions that will follow it.

The vast majority of operators are adopting behaviors professionally and morally impeccable. Precisely for this reason should be hit harder those who, at each hierarchical level, take advantage of the situation.

But perhaps the remedy would be to adopt in the Italian system a figure used widely in the Anglo-Saxon world, that of the "independent financial adviser".

In the U.S. or England, next to the lawyer as legal counselor and to the accountant as tax consultant, it is normal that the investors have a consultant to take charge of their financial investments (and who is paid a fee). This, not being bound by an employment relationship or a mandate with a bank or financial institution, is free to propose to his client products on the market that best reflect their needs, without having to sell the securities "recommended" from above.

It would be a great solution for the Italian financial system characterized by the monopoly of the banks in selling only their own products and an incentive to restore professionalism in an industry that in many cases has forgotten to be responsible with the savings and the money (and therefore the future) of people.

(*) Annibale Marsili spent the last 15 years as manager in the Italian banking industry. Currently he is the managing director of his company in London. He lives in London.