21/07/2012

When will the National Bank of Malta saga come to an end? - timesofmalta.com

Monday, July 9, 2012 by Neville Curmi

When will the National Bank of Malta saga come to an end?

With the intention of putting together an independent evaluation of the National Bank of Malta affair, information was gathered solely from what was published at the time, mainly parliamentary reports and reports published by the NBM and Bank of Valletta plc. The Central Bank Act was passed in 1970; the banking system was previously more self-regulatory. L-Orizzont of December 11, 1973 said:Il-gvern kellu informazzjoni mill-Bank Centrali li l-qagda tan-National Bank of Malta mhux talli ma kienitx aina, ida kienet ajar minn dik tas-sena lora. (The government had information from the Central Bank that the National Bank of Maltas health was better than that of the previous year.) It is true that the NBM had certain issues still open with the Central Bank, but it seems these related to the lending made to B. Tagliaferro & Sons when the group had joined up with NBM. These issues were being tackled. An explicit note to this effect appeared in the 1972 NBM accounts. The asset base of the National Bank of Malta: Other statistics are available which show the healthy position of the NBM. A run on any bank is always a very difficult and stressful situation. Il-PM appella ukoll biex ma jibqax ikun hemm dan ir-run on bank galiex bsatu kemm hu bsatu bank jekk ikun hemm run fuqu jitkisser. (PM Parliamentary debate, In-Nazzjon Tagna, Dec ember 11, 1973). The run on the NBM could not have been any different when at least Lm2.5 million was withdrawn rapidly over a period of a few days with Lm1.5 million on the last day before intervention. I assume that had no intervention by the government taken place, the run would have continued with inevitable results. But what prevented the CBM that lender of the last resort, that banker of banks from intervening to shore up the NBM, quieten down the cows running towards a precipice and save the situation? Would the strength of the CBM alone, without the backing of the government, have been sufficient? The strength of our Central Bank would have left nothing to be desired, and if at all necessary it was for our government to back its Central Bank. However, even after the run, the liquid assets of the NBM would have been sufficient even to satisfy the liquidity ratios demanded by the CBM. So what really went wrong? What really allowed the banks position to go so radically wrong that the new auditors at the time engaged by MG, ie. Deloitte & Co, a very reputable firm, felt it fit and proper to report a deficit of Lm253,000 between assets and liabilities, and thus bankruptcy?
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21/07/2012

When will the National Bank of Malta saga come to an end? - timesofmalta.com

A property index was compiled by the Council of Administration to show the value of property fall between 1969 and 1973. This index was compiled by two bank officials both fortunately still alive and who both pursued a successful career in the financial world and was based on a sample of 163 properties taken from 1969 sales, while another sample of 198 items of actual property sales taken for 1973. This index was intended to serve only as a guide for the council but it seems to have been used as the main guideline to re-evaluate certain properties used as security for advances. Certain weightings were given to these property segments: thus, villas (39.3 per cent), terraced houses (12.2 per cent) and flats (48.5 per cent). For some reason, no weighting was included for hotels which formed part of at least one major debtor whose debt was classified as doubtful. The basis on which this security was revalued down is unknown. Between 1971 and the time of the run, the values of properties had reduced somewhat. With the pending departure of the British forces, many residents decided to leave the island, selling their properties at cheaper than market prices but still being able to take advantage of what was called the dollar premium when repatriating their funds to the UK sometimes making gains of as much as 40 per cent when converting to sterling. We have not seen any lists of properties owned by the NBM. However, we understand from the balance sheet that these properties were shown at cost less depreciation. Had the same property index been used perhaps these properties most in prime areas could have been revalued, and maybe the deficit could have been reversed, even in this way. It seems that the new auditors Deloitte & Co. did not agree with the provisions for bad debts which the previous auditors, Turquand Youngs & Co., had approved. The Central Bank does not seem to have had any objections to the provisions over the previous years. Therefore, the new auditors increased this provision from Lm2.38 million in 1972 to Lm5.97 million for 1973 an increase of 150 per cent or Lm3.59 million. The annual report, issued by the Council of Administration, for the year ending December 31, 1973, sets out the policy followed to arrive to the Lm5.97 million provided for bad and doubtful debts. As a result of this index, the provision for bad debts was radically increased. As a result of these provisions, of course the NBM group was shown to have a deficit of assets/liabilities of Lm0.25 million. These figures can be obtained from reports and balance sheets published firstly by the NBM group and later on by the council of administration and Bank of Valletta. When the government issued shares to the public to buy into BoV a short while later, these shares were issued at a premium of 25 per cent. Also this new bank made a profit of over Lm1 million in its first eight months of trading. Was this profit achieved only because of the guidance of new management (the council of administration)? Because of the secure backing of the government only? What about the NBMs premises and equipment? What about the team? What about the core of the international bank connections which NBM already had? Surely these assets must have played a critical role in achieving not only the profits made in those first eight months, but also the many years of profit that followed. The balance sheet and accounts information published by BoV Group show that over the next five years a total of Lm4.32 million was recovered from what was thought to be bad debts and these figures would, of course, once written back here been transferred immediately to distributed profits with the government as major shareholder becoming prime beneficiary of these funds. It can be argued, and there is an element of sensible calculation, that the provision was increased by that much to cover any contingencies and to cover the worst position. The time during which the run took place was a difficult period and the council of administration wanted to be ultra-cautious and possibly err on the side of caution. But even so, there is something which does not make sense. When I gave a copy of this report to Prime Minister Eddie Fenech Adami in 1994, I was told that the case was sub judice and there was nothing he could do. So the case remains today, 19 years later. Is it not high time that we come to some conclusion through a settlement out of court? With good will all things are possible. How much is, of course, the problem. Before the last election, Dr Austin Gatt had offered a one-off payment of Lm8 million which is not acceptable based on cost of money alone, let alone other starting considerations. If we had to arrive at some acceptable amount, then people must remember to reason with their minds, not their hearts. One can never go back to being the owner of the National Bank of Malta then, and now become the owner of the Bank of Valletta. That is absolutely impossible to my mind as now the owners of BoV have changed and so have the times. The NBM is no more. It stopped functioning in 1973. Its licence was withdrawn then, whether rightly or wrongly, those are the facts. The government also knows the facts.
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21/07/2012

When will the National Bank of Malta saga come to an end? - timesofmalta.com

The government has received from BoV so much from dividends, so much from tax and so much from sales of part of its shareholding made on two occasions. All can be calculated. The government must understand that it has done extremely well in the venture. Yet it still holds 25 per cent of BoV valued at over 140 million. This article continues on the first part which appeared in The Times Business last Thursday. Mr Curmi is a director at Curmi & Partners Ltd.

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Vera Sant Fournier

Jul 10th, 19:13 Well written Mr.Curmi!!!
Reply to Vera Sant Fournier

michael micovic
Jul 10th, 14:36 Excellent article, doesnt push subjective viewpoints down your throat (Without facts to back them)....Well reasoned and facts to back up his point of view! Unlike others whose opinions are as credible and believable as a child's "Fairy Tale" :-) (only difference is in child's fairy tales there sometimes is a moral)
Reply to michael micovic

Alfred Mifsud
Jul 10th, 16:17 This is no fairy tale and it is very real. And the moral is beware of moral hazard. Privatising profits and socialising losses is a very bad moral, especially for the corpse of general taxpayers. This looks like a desperate effort to have one last drink for the road between friends unwilling to await for the court to decide.

Alfred Mifsud
Jul 10th, 07:34 Neville Curmi's suggestion that because the government has done well on its original investment in BoV it should give compensation ( and Lm 8 million is declared as too little) to the ex-NBM shareholders is like saying that because Government has done badly on its investment in the dockyards it should seek compensation from its former owners Bailey's and Swan Hunter. We should not promote a situation where we protect and reward failure, where we privatise losses and socialise losses. That's is not the spirit of free market, it is the spirit of clubby arrangements between business people and politicians. It is crony capitalism which is the source of most problems that brought the world financial system to its current precarious state. Alfred Mifsud
Reply to Alfred Mifsud

Alfred Mifsud
Jul 9th, 22:26

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21/07/2012

When will the National Bank of Malta saga come to an end? - timesofmalta.com

Neville Curmi's arguments do not address the core issues that need to be decided to arrive at a fair compensation, if any, for ex shareholders of NBM. For any such compensation to be fairly due one has to establish the true worth of the shares during the crisis. Obviously with depositors queueing behind the doors and a run well and truly on and gaining momentum, the bank's business model was broken, so the the shares had no value based on the expected future returns. Consequently for any compensation to be fairly due by government one must prove one of two hypothesis: 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. Neville Curmi has not proved either of these points and frankly it is only the Court with full access to Central Bank records and depositions of witnesses under oath can arrive at a conclusion which would be considered (hopefully) fair by both ex shareholders and present / future taxpayers. Any settlement out of court in this sensitive pre-election period smells of abuse of power. Alfred Mifsud
Reply to Alfred Mifsud

Vera Sant Fournier

Jul 10th, 11:56 Abuse of power is the forced seizure on the National bank of Malta by the government. Let's not start this again Mr.Mifsud.

Steve Sant
Jul 9th, 21:04 The bank made over Lm1.3 million in the first 9 (NINE) months of operation, so if this bank was indeed insolvent would it not have to pay off any creditors before issuing any dividends, as it did in its first year of operation. Another point worth mentioning, the NBM had 29 plus properties/assets in 1973 (maybe more) and of considerable value today. As an example the one in Republic street alone is worth millions on todays market, and when Austin Gatt was approached the figure mentioned was never confirmed. Gatt only suggested a figure and never confirmed it as an approved figure by government. In fact when our negotiator later returned with a figure slightly higher than the one mentioned, apparently he told the negotiator or mediator that the figure was a hypothetical figure and he never actually got any approval from the Prime Minister and would have to go to parliament with the request, which he certainly never did. Another strange piece of the puzzle was when person a shareholder got wind of the Deutsche Bank possible purchase, the shareholders asked the bank to check the facts before indulging in any purchase as there was a court case pending. Deutsche Bank made some checking and on finding out immediately retracted their bid and Gatt apparently went ballistic (or so they said). As at February 2012 the Government owned 68,119,673 shares.
Reply to Steve Sant

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