By Elisa Martinuzzi & Vernon Silver – Oct 24, 2013 3:01 PM PT

Siena, the medieval city renowned for its Palio horse races, is home to the world’s oldest bank. Within its aging walls lies a distinctly 21st-century tale of devastation wrought by local politicians and global financiers.

Siena officials founded Monte Paschi in 1472, after the Black Death wiped out more than half the city’s population. They modeled it after the pawnshops Franciscan monks had set up to counter usury. As it grew, the lender helped fuel the Renaissance in Tuscany that pulled Europe from the Middle Ages. Photographer: Alessia Pierdomenico/Bloomberg

Timeline of Monte Paschi's Downfall

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Oct. 25 (Bloomberg) — Banca Monte dei Paschi di Siena SpA’s government bailouts and legal probes expose how the purchase of Banco Antonveneta SpA stretched Monte Paschi’s finances, setting off a chain of events in which the bank used derivatives to hide trading losses. Bloomberg’s Niki O’Callaghan reports on the missteps that led Italy’s third-largest lender to the brink of nationalization. (Source: Bloomberg)

A Banca Monte Dei Paschi Di Siena SpA bank in Pescara, Italy. Photographer: Marc Hill/Bloomberg

After Giuseppe Mussari joined Monte Paschi, the fifth-biggest Italian lender at the time, the board authorized him to search for acquisitions to keep up with the country’s two largest banks, UniCredit SpA and Intesa Sanpaolo SpA, which were expanding. Photographer: Andreas Solaro/AFP via Getty Images

Andrea Orcel, a former Merrill Lynch banker, represented Santander on the $100 billion ABN Amro deal, the largest bank takeover ever. He also headed the Merrill group that helped Monte Paschi raise funds to buy Antonveneta. Photographer: Chris Ratcliffe/Bloomberg

Antonveneta was owned by Dutch bank ABN Amro Holding NV, then in the process of being sold to a group of European lenders, including Royal Bank of Scotland Group Plc and Spain’s Santander. Photographer: Giuseppe Aresu/Bloomberg

Emilio Botin has banking in his blood. The patriarch of a family that has helped run Santander for 118 years, he joined the bank in 1958, became CEO in 1967 and built it through acquisitions in Brazil, the U.S. and the U.K. into one of the world’s top-20 publicly traded lenders. Photographer: Angel Navarrete/Bloomberg

Banca Monte dei Paschi di Siena SpA, Italy’s third-largest lender, is struggling to survive as it seeks to repay a second bailout or face nationalization. Its downfall proved a boon to global investment banks. They offered merger and investment advice to executives beholden to politicians that helped wipe out 93 percent of Monte Paschi’s value. Then they sold it complex derivatives that hid, even worsened the losses.

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