Thursday, 31 May 2012

Nationalising the National

National Bank saga

These are both sides of the argument whether the former shareholders of the National Bank Group are entitled to compensation as they claim being robbed off their property through Mintoffian duress.

Arguments for compensation
Arguments against compensation
The Bank was profitable before the depositors run on the Bank began
So what?  Even Northern Rock was profitable before the depositors’ run on the Bank began in 2008.  
The Bank had a strong Balance Sheet before the depositors run on the Bank began and had liquidity buffers above the legal minimum ratios
When the bank lost the confidence of its depositors it lost its most important asset.   Even the Titanic was strong and valuable as it left the port of Southampton on its maiden journey.  After it hit the iceberg it was more than worthless. It was a liability.  Loss of depositors’ confidence was the National Bank’s iceberg
The run on the bank was engineered with malicious intentions
Where is the evidence?   Government threatened to withdraw  public sector deposits only after the run on the bank was in full force and public view.
The Central Bank had a duty to restore liquidity to the National Bank under its obligations to act as a lender of last resort.
Only if the Central Bank made a technical judgement that the problems at the National Bank were problems of illiquidity not of insolvency.   The denial of lender of last resort support shows that the Central Bank made a judgement that the problem at the National Bank was insolvency.   Insolvency requires additional capital not temporary liquidity.   Nobody has provided any evidence that in so deciding the Central Bank had any ulterior motives other than the execution of their role as provided in the law.
The Mintoff government took over the role of the Central Bank and forced the National Bank shareholders to sign over their investments for no consideration under unfair duress
The moment the Central Bank decided not to offer lender of last resort support, judging the National Bank as insolvent not just illiquid, government had to move in to provide the additional capital that the shareholders were unwilling to provide.   Government had a duty to ensure that the taxpayer gets fair reward for the risks they were being forced to take and not to pay any compensation for an asset which at that point was for all intents and practical purposes, worthless.
To justify not paying anything to National Bank shareholders Mintoff government eventually presented audited accounts which increased the provision for bad debts to a level which wiped away all equity cushion.
The accounts were audited by a reputable firm of auditors and the provisions took into consideration a more conservative and realistic view of the value of the security held against non-performing loans.   Prudent banks  value such security on the basis of forced sale whereas the National Bank valued it at optimistic market values.
Subsequent events proved that most of the debts provided for were recovered and Bank of Valletta took back into profits losses incurred by the National Bank to engineer its takeover without compensation
In the years subsequent to 1973 the sharp increase in oil prices delivered several years of high inflation.  Inflation work wonders to ease the burden of debt and to improve the value of security.    But these subsequent events could not have been known at the time of the crisis in 1973 and the decisions made in 1973 have to be judged by the circumstances prevailing at the time.
But still the National Bank shareholders deserve fair compensation for the property taken off them through threats and duress.
Only if there is concrete proof that the value of the assets they surrendered was anything higher than zero based on the facts and circumstances as prevailing at the time.   As to threats and duress these are a sideshow to the core issue that the National Bank was considered insolvent by the Central Bank and failure by government to put in fresh capital would have brought losses on the depositors as had happened two years earlier in case of BICAL.   It would have created an undesirable Barclays monopoly.

That Mintoff was always rough at the edges is a well-known fact.   But reality is that he did not need to threaten as he could have achieved the takeover through legislative means.
Once depositors were made whole and suffered no losses, shareholders should have been made whole too as some of them were also depositors
There is a very different legal position between the rights of depositors and the rights of shareholders.   Shareholders have to lose everything before any depositor loses a penny. Any government would go out of its way to protect depositors to maintain systemic financial stability.   In the years following 1973 the concept of Depositors Protection Scheme was introduced for this purpose. It was not in force in 1973.

Government however has no obligation to bail out shareholders.    In the financial crisis of 2008 shareholders of banks in crisis were practically wiped out in most financial institutions requiring state support. 
We have a right to challenge government for compensation through Courts
Of course you do
The court is taking too long to decide so we deserve an out of court amicable settlement
An out of court amicable settlement will be unjust to either  ex shareholders or the taxpayers as it will leave a sense of justice undone.   This is so especially if pressure is brought on an outgoing government in election mode seeking re-election.
We are fed up of waiting.  We need compensation during our lifetime
So make pressure on government to arrange the court system.  Imagine if government starts offering out of court settlements to all long outstanding court cases.

Having understood these arguments why does it take three and a half decades for the Courts to decide?

1 comment:

  1. Stupid simple....but will they understand it?