An Italian judge ordered JPMorgan Chase, Deutsche Bank, UBS and a banking unit of the German company Hypo Real Estate Holding to stand trial for fraud in their handling of interest rate swaps acquired by the city of Milan in 2005.

The prosecutor, Alfredo Robledo, said that the banks made illicit gains by misleading Milan about the costs of the swaps, which the city bought to lower the interest payments on 1.7 billion euros ($2.3 billion) in municipal debt.
Mr. Robledo is not contending that Milan paid higher interest rates, but rather that the banks profited illegally in arranging the deal. (Ya’ think?)

Milan, the country’s second-biggest city after Rome, is one of dozens of Italian municipalities that undertook swaps – contracts in which a fixed interest rate is exchanged for a floating one – in the hopes of saving on interest payments.

(You mean to say Italy actually cares if their citizens pay too much in taxes?)

Italian cities are scrambling to cancel their swaps before interest rates increase, as is widely predicted to happen. The cities had a total 35.5 billion euros in debt linked to these derivative contracts at the end of 2009, the Italian Finance Ministry said.

If the banks are found guilty, all swap deals with Italian cities could be called into question and other banks could find themselves facing similar fraudulent charges according to a former executive from one of the banks being investigated, who spoke on condition of anonymity because he was not authorized to speak publicly about the case.

In a court filing the prosecutor said that the four banks earned 101 million euros in undisclosed fees linked to the interest rate swaps over a two-year period. He said that JPMorgan Chase made 45 million euros and Deutsche Bank earned 25 million euros. Depfa Bank, a unit of Hypo Real Estate Holding, made 21 million euros, and UBS 10 million euros, according to the filing.

Mr. Robledo said that while the banks charged nominal fees up front for their services, they hid their profits. He accused the banks of misleading the city and falsely claiming the deal would generate savings.

(How do you know when a banker is lying? His lips are moving!)

If all the hidden costs had been properly included, the prosecutor argued in the court filing, the deal would have been illegal under an Italian law that allows restructuring of debt by municipalities only if the restructuring produces a saving.

(Let’s see if I understand: The defense is that since the hidden costs were not properly included – the deal was legal???)

All four banks have denied wrongdoing in the case. “We are comfortable saying we believe our case is compelling and we will be cleared” a Deutsche Bank spokeswoman said. “We are also confident the employees involved in the transactions acted with integrity.” In a written statement, Depfa Bank said, “We are convinced that neither Depfa nor the accused employees have violated any law or regulation. We will keep on defending our case.” UBS and JPMorgan also denied any wrongdoing.

With fingers raised in a euro version of the peace sign, they were overheard telling the judge: “We are not crooks!”

(Meanwhile, in California a whirring sound was heard emanating from Richard Nixon’s grave.)