UPDATE 2-Italy probes Merrill, Dexia in Puglia derivs case

* Two bank employees also under investigation

* Up to 103.3 mln euro seized in probe

* Puglia probe among Italian inquiries into derivatives
(Adds Dexia Crediop statement)

BARI, Italy, Feb 3 (BestGrowthStock) – Italian prosecutors are
investigating Merrill Lynch and Belgium’s Dexia SA (DEXI.BR: ) in
an inquiry into derivatives losses from 870 million euros
($1.22 billion) in Puglia regional bonds, authorities said on
Wednesday.

The Puglia investigation involving Merrill Lynch, a unit of
Bank of America Corp (BAC.N: ), and Dexia’s Crediop unit is among
a raft of inquiries throughout Italy after local governments
racked up hefty losses on derivatives contracts.

Tax police in Puglia, in the heel of the Italian “boot,”
have seized up to 103.3 million euros, that includes banks’
assets as potential damages payments, as well as an installment
payment.

The inquiry stems from bonds the region issued in 2003-2004
in a restructuring of its health sector debt through Merrill
Lynch.

The deal called in part for an interest rate swap that
switched bond issues from a variable rate to a fixed rate. It
also changed capital payback from a single “bullet” repayment
at maturity to an amortising scheme, the statement said.

The banks are being investigated for failing to bar
employee misconduct. Daniele Borrega, Merrill Lynch’s Italy
representative at the time, is under investigation for
aggravated fraud, the statement said.

A judicial source said Claudio Zecchi, a Dexia Crediop
executive in Rome at the time, is also under investigation for
aggravated fraud.

Prosecutors have asked that Merrill Lynch be barred from
contracts with public bodies for two years. A hearing has been
set for March 10.

Merrill Lynch had no immediate comment.

Dexia Crediop said in an emailed statement it had not
underwritten with the Puglia region any derivative operation,
adding it adopted required organisational measures since 2003.

Economists last year estimated that Italy’s cities and
regional bodies had an exposure to derivatives of about 40
billion euros, with losses of more than 6 billion euros.

The highest-profile inquiry involves a 1.68 billion euro
bond by Milan, Italy’s financial and fashion capital. The city
has lost more than 300 million euros on the deal.

Investing Advice

(Writing by Ian Simpson; Editing by Tim Dobbyn)
($1=.7137 Euro)

UPDATE 2-Italy probes Merrill, Dexia in Puglia derivs case