So
the Prime Minister and the Minister of Finance will be meeting representatives
of the Ex- National Bank of Malta shareholders to see whether there is scope
for reaching an out of court settlement.
Taxpayers
should be naturally wary of such dealings in sensitive pre-election mode when
government is extremely vulnerable to sectorial pressure. Government should remember that its duty is
to defend the general public and not to seek expensive undeserved settlements
with niche sectors. National interest
must come before any narrow partisan interest.
There
should be no contestation on these basic points of the whole saga.
1. A depositors run on the bank was in full force
and without external intervention the Bank would have collapsed in a matters of
days putting at risk not only the shareholders’ investments but also the
depositors’ funds.
2. In
such context the value of the shareholders’ investment in the Bank was zilch as
no future cash flow streams could be expected from a bank in such a situation. Asset values in a forced sale would have wiped away all reported
shareholders’ equity.
3. No
one has yet provided any proof of how the rumours that sparked off the
depositors run on the Bank started.
4. The
National Bank of Malta was not professionally run, with very poor credit
assessment processes, unqualified staff, no proper organisational structure, no
operations manual and generally considered as a one-man show where credit
decisions were taken on basis of personal connections rather than professional
assessment of risk.
5. The
Central Bank internal audit team had completed an inspection and the findings
were unsatisfactory to such an extent that the Governor had verbally warned the
Chairman of Bank to ‘put your house in order or it will happen’.
The
only logical and fair way that any compensation may be considered is if either
of these two hypothesis can be proved beyond reasonable doubt:
·
Either that the run on the bank was instigated by government
with malicious intent.
·
Or that the Central Bank failed its duty in refusing to
provide lender of last resort facilities
The case has been outstanding in front of the Court for
an extraordinary long time even if measured by the normal slow rotation of the
wheels of justice. Presumably the
Courts are still sifting through the evidence to see if there is enough raw
material to justify either of these suppositions. So the delay in the end is working in favour
of the ex-shareholders as they have the onus of proof and it is much quicker
for the courts to say there is no proof rather than to say there is enough
circumstantial evidence to collectively constitute a proof for either of the
above hypothesis.
In agreeing to meet government is succumbing to pressure from ex-shareholders
to discuss an out of court settlement rather than allow the courts to proceed
with their work. If PN strategists
think that such out of court settlement could win them net votes they are grossly miscalculating. No other measure would win Labour more votes than a generous out of
court settlement with the ex-NBM shareholders which will be perceived as a free
ride for the few at the expense of the many. The unmistakeable
impression is that this seems a last-drink-for-the-road arrangement between close friends.
To
ensure decisions with eyes wide open I list both sides of the arguments.
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 only 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 motive 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 or unable 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, in
evidence of it unprofessional management, had continued to value
secuirty 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, and in fact the eventual legislation was achieved
with support of both sides of the House.
|
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.
|
Grave moral hazard would result if ex-National Bank shareholders
are given compensation out of the process of court proceedings. Shareholders are not depositors and do not
qualify for the same level of protection.
We must not create a system where profits are privatised and losses gets
socialised. If we are generous with of
court settlement with ex-NBM shareholders, what shall we say to Maltacom
shareholders who lost money after the privatisation or to Middle Sea
shareholders who got burnt after the Italian venture mishap?
No comments:
Post a Comment