Sunday, 13 May 2012

A Republic built on injustice?

This is the title of an article, the first in a series, published in Malta Today (13th May 2012 page 10) authored by Raphael Vassallo (RV).

RV normally comes up with very readable and interesting opinions but this one seems completely untypical of him and it is clear he has chosen, or made to choose, a subject for which he is completely unprepared.  The result is a very subjective opinion piece which treats very superficially the delicate intricacies of the case on which he is basing the title question.   It is whether Prime Minister Mintoff in 1973 had engineered a forced takeover of the National Bank of Malta Group (NBM) without any compensation and morphed it into what is Bank of Valletta today.
I lived through those days and can therefore speak with better authority than RV and many others who think they know more than they do.  Although I was not directly involved in it, as an upcoming bank executive, I was working closely with people who were directly involved in it like the late Denis Degorgio, the late Louis Galea and the still amongst us Anthony Curmi and Francis Flynn amongst others.

In his sh**ty opinion piece RV makes these unproven assertions:

1. That the NBM was not insolvent at the time of the 1973 crisis because the loans which at the time were considered doubtful of recovery where in their majority fully recovered in subsequent years so no recovery provisions were required at the time.

2. Failure of the Central Bank to provide lender of last facilities to overcome the temporary illiquidity problems, forced the then shareholders to sign away their shares without compensation  leading to a great injustice on which the Republic was built the following year in 1974.

My answer to these unproven assertions is that RV knows not what he is talking about.

The fact that loans which were considered doubtful of repayment during the crisis of 1973 were subsequently recovered does not in any way disprove the fact that they were indeed doubtful of recovery in 1973.   Perhaps RV does not recall that in the years following 1973 there was the first oil crisis which brought about high levels of inflation and that inflation works wonders in lowering the real burden of debt and renders capable of recovery what would have remained irrecoverable without the onset of high inflation.

Whether NBM was simply illiquid or insolvent at the time will always remain a subjective judgement but this judgement had to be made by the authorities tasked to do so i.e. The Central Bank of Malta.   And I have no doubt in my mind that at the time all professional opinions and studies upon which the Central Bank of Malta based its judgement that NBM was insolvent and not simply illiquid, and therefore did not merit salvation through lender of last resort arrangements, all converged to show that NBM was very unprofessionally run, where credit decisions were mainly a one man show based on personal contact rather than professional evaluation and that lending files at NBM carried pretty little analysis of the loan exposures and simply reflected one man decisions of who deserved credit lines and who did not.

Banking is a risky business as we are still seeing till this very day.  Goverments  in Ireland, Spain, UK and other countries have been forced to take-over and partly or fully nationalise banks that would have failed without public sector involvement.

A bank's main asset is its credibility.   This week the US largest bank J P Morgan had to announce with an egg on its face that it lost USD 2 billion in speculative trading that went bad.    J P Morgan can easily absorb USD 2 billion of losses but what hurts more is the damage to its reputation and credibility which had been enhanced by its so far successful navigation through the financial crisis since 2008.  

Without credibility a Bank has nothing.   In 1973 NBM Group had lost its credibility and people had strated queueing up to withdraw their deposits.   Without government intervention the bank was finished and the value of the bank's shareholding was zilch, just as the value of the Titanic after it struck the iceberg.

Once the judgement was made that the bank was insolvent and not just illiquid, the government had a duty to demand a fair reward for the risks taken by tax payers to save the Bank.   This is what the UK government did to save Lloyds and RBS, it is what the Irish government did to save all its banks and it is what the Icelandic government did too when its banking system imploded.

Or do the shareholders of NBM expect to eat the fruit of their investments when the going was good, but the taxpayer has an obligation to come to their rescue when they hit trouble?  Do they expect to live in a society where profits are privatised but losses gets socialised.

RV should know better.

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