As is often the case, bad loans were the cause of the downfall for both banks. They made too many risky bets on borrowers that didn't pay off.

On the Hook for Billions

Banca Populare di Vicenza SpA and Veneto Banca SpA are the two banks that failed in this case. Their loans and deposits will be taken over by another bank, Intesa Sanpaolo SpA, for the grand total of 1 Euro. More specifically, Intesa is only acquiring the good assets. Meanwhile, the excessive losses on the bad loans will be absorbed by the Italian government, which is putting up $19 billion in support for the deal.

The end result is a good deal for Intesa, which acquires income-generating assets without meaningful risk. It's also a great deal for the investors and creditors of the failed banks. In a true bankruptcy, they would have lost much or all of their money. But under the state-assisted sale to Intesa, these creditors and investors – who willingly took a risk – will be protected from loss.