Vatican used charity funds to bet on Hertz credit derivatives

The Vatican invested some donations for the poor and needy in derivatives that bet on the creditworthiness of Hertz, the US car rental company that defaulted on its debts earlier this year, according to documents seen by the Financial Times.

In 2018, Pope Francis said credit default swaps “encouraged the growth of a finance of chance and of gambling on the failure of others, which is unacceptable from the ethical point of view”. The instruments, he said, were “a ticking time bomb”.

But three years earlier, part of a €528m Vatican portfolio “derived from donations” bought structured notes containing CDS as part of a bet that Hertz would not default on its debts by April 2020, the documents show. The company filed for bankruptcy the following month, giving the Holy See a narrow escape on the investment, which paid out in full.

The investment was made under the watch of Cardinal Giovanni Angelo Becciu, who was stripped of his rights as a cardinal by the Pope last month over what Cardinal Becciu described as an allegation of “misappropriation”.

Money was invested on behalf of the Vatican’s Secretariat of State, the Holy See’s powerful central administration office where Cardinal Becciu was second-in-command from 2011 to 2018. The Secretariat has responsibility for administering donations made to the Church by Catholics around the world.

There appears to be no evidence Pope Francis himself was aware of the investment in the CDS-linked notes, which were held directly through a Secretariat account in Switzerland and made by a third-party consultant on its behalf.

Similar CDS trades have proved disastrous for several hedge funds in a wave of US corporate bankruptcies this year.

CQS, the London-based hedge fund run by billionaire trader Michael Hintze, suffered a roughly 50 per cent drop in the value of its flagship fund in the spring, after defaults including Hertz led to large losses on high-risk derivatives.

Other investments made by managers for the Secretariat appointed by Cardinal Becciu include financing the 2019 film Rocketman — a biopic of the musician Elton John — according to fund documents seen by the FT.

The Secretariat also bought multiple luxury residential properties in London’s Knightsbridge, and securitisations partly comprising invoices owed by the Italian state to Vatican-controlled hospitals. 

Late last month Pope Francis asked Cardinal Becciu to resign — relieving him of his position as the man in charge of overseeing the canonisation of Catholic saints — as a result of allegations about the management of Vatican money. The cardinal has not been charged with any crime by the Vatican. He said he has committed no wrongdoing and vowed to clear his name. He and the Vatican did not respond to requests for comment on the derivatives investment. 

The management of Vatican assets held in Swiss bank accounts during Cardinal Becciu’s watch has come under mounting scrutiny after Vatican police last year raided the offices of the Secretariat to seize documents linked to a London property deal.

The Secretariat’s investment in the London building known as 60 Sloane Avenue was made through a fund in Luxembourg in 2014 in a deal personally authorised by Cardinal Becciu. In June the Vatican’s state news service reported that Holy See prosecutors believe the investment caused “huge losses”.

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