It is not surprising that Alfred Mifsud (“Men in a hurry”, TMIS, 23 February) came to the defence of Raymond Sammut whose letter (“NMB compensation claims – who will pay the piper?” TMIS, 9 February) was a response to mine (“Compensation for ex-NBM shareholders”, TMIS, 16 February.). Evidently, Alfred decided to re-enter the fray because his very erudite writings on this subject over the years are far more objective and well researched that Sammut’s poor attempt at challenging my own views.
While thanking Alfred for his kind remarks about me, I reiterate the compliments I had already paid him (“Justice for ex-NBM shareholders”, TMIS, 22 July 2012) in regard to my admiration for his analytical mind and intelligence; something I greatly appreciated when we were banking colleagues with Barclays Bank and Mid-Med Bank. I find an exchange of views with Alfred very stimulating even though we do not always see eye to eye. Alfred said he ‘hates crossing swords’ with me. My own view is that this is no duel which will result in a victor but a frank exchange of views aimed at bringing to an end a situation the solution of which is long overdue in the interests not only of the aggrieved parties but also to conserve the excellent image of banking in Malta.
Without repeating the arguments, which both of us have expounded in support of our divergent views, for want of space, I will concentrate on those elements which I feel warrant emphasizing in considering (a) whether there is justification for ex-National Bank of Malta (NBM) shareholders being given fair compensation after 40 years and (b), why the government should take the honourable way out by agreeing to an out-of-court settlement instead of waiting for any possible further procrastination by the Court.
Illiquidity or insolvency
On the first point, I wish to raise at the outset a very important distinction between a bank’s (i) temporary illiquidity crisis and (ii) insolvent situation. I entirely agree with Alfred that there is a great difference between the two. Where we differ is under which category the NBM should have been classified in 1973. I venture to say it was a case of illiquidity and will explain why. A bank can become insolvent for a variety of reasons, the main ones being failing to meet reserve requirements or due to it having an abnormally high default rate on any of it issued debt (i.e. bonds issues). These factors were certainly not applicable to NBM’s case in 1973.
At the time of the start of the run, the NBM had current (i.e. liquid) assets of nearly Lm6 million plus Malta Government investments maturing within five years (and thus could have been sold without undue difficulty) of nearly Lm7 million. Total ‘liquid’ assets of Lm13 million in relation to about Lm40 million of customers’ deposits could well have sustained the run had not Dom Mintoff threatened to withdraw some Lm4 million of funds held by parastatal bodies; a threat that surely accentuated the run. The Central Bank of Malta did not step in – evidence in Court indicated that it was not allowed to – so as to exercise its role of ‘lender of last resort’ according to law.
Admittedly, the CBM was presented with a set of accounts that were hurriedly drawn by the NBM’s external auditors (at the time a visiting auditor from the UK as Deloitte was not yet established in Malta) reflecting a deficit of Lm253,000 which was created by raising significantly (by 151 per cent) the bank’s provision for bad and doubtful debts to Lm5.9 million. This deficit of Lm253,000 has to be compared with a healthy net assets position of Lm2,857,000 as at 31.12.72 (a mere eight per cent). Even this relatively small deficit was reduced to just Lm13,000 between 12.12.73 and 26.03.74, i.e. during the period when the NBM was run by a Council of Administration until all the assets and liabilities were passed over to BOV. It is significant that the bank made a net profit of Lm240,000 in just over three months!
Bad and doubtful debts provision and government’s threats to shareholders
Proof of the fact that the increase in provisions was exaggerated is that between 1974 and 1978, BOV’s recoveries of advances by the bank, which were previously classed as being bad and doubtful debts, totalled Lm4,325,000, i.e. 72 per cent of the amount which created the so-called deficit of Lm253,000! It is not surprising that allegations were circulating at the time that the auditor was under great pressure to produce a negative net assets position. Sifting through the evidence given in Court by an NBM Board director who was present at meetings with the then Prime Minister, one finds a statement that Dom Mintoff had gone as far as saying (when threatening shareholders with the removal of limited liability if they did not sign over their shares to government without any compensation within a matter of hours) “I know this is against the Constitution, not I wrote it. I don’t give a damn about the judges and anybody.” Is this not a clear indication that Mintoff’s intentions were for the government to acquire the shares in NBM for free?
The then Attorney General, Dr Edgar Mizzi, was also quoted as having said that as the NBM’s banking licence was being withdrawn, the bank – and consequently the shareholder’s equity – had no value. Incidentally, this was the same argument that was subsequently used when Barclays Bank was told in March 1975 that its licence would cease as from 01.10.75. This is undeniable, as I was present at the meeting when this was stated in the course of negotiations between the government and Barclays. Simultaneously, the bank was offered a 40 per cent shareholding in a new bank (Mid-Med Bank) to be established as from that same date with a 60 per cent government majority shareholding. However, in that case Barclays’ minority shareholding was represented by a transfer to MMB of net assets of Lm2.4 million as the Barclays’ Malta operations reflected a surplus of assets over liabilities and so it could not be claimed that the bank was insolvent!
In my letter published on 16 February, I highlighted other factors in support of my view that the deficit of Lm253,000 was unrealistic, i.e. because no goodwill was taken into account, neither was an upward revaluation made of very substantial immovable assets. I wish to return to the vital question of ‘goodwill’. Alfred did not contest my comparison with the cost to Banif Bank (Malta) of creating in five years – and running annual losses in the process – a bank network which is just one-third of the NBM’s in 1973. I will go further with this comparison as this has a bearing on the solvency issue. In 1973, the NBM’s net equity represented 9.4 per cent of its advances to customers plus deferred debt. According to their latest published accounts, the figures for BOV and Banif were respectively 8.7 per cent and five per cent. On the basis of the ratio of net equity to deposits by customers and banks, the NBM’s figures were also better than those of the two existing banks mentioned above. So much for the claim that the NBM was insolvent and not illiquid!
Fair compensation
I now come to the all-important second point of fair compensation to all ex-NBM shareholders. Alfred is firmly of the opinion that this should be decided by the Court. I would agree with him had not the two cases instituted by two groups of shareholders had not dragged on for so long until recently when the government was adjudged as having violated the shareholders’ fundamental human right to enjoy property in terms of Article 37 of the Malta Constitution. This long-awaited fact has now to be faced by government.
It would be immoral for the government to appeal this decision and thus prolong settlement. Moreover, even if there is no appeal, in view of the complicated factors involved in assessing the loss suffered by ex-NBM shareholders, one cannot expect the Court to arrive at a quick decision on the amount of compensation payable by the government that, I repeat, has reaped no less than +€400 million by way of dividends etc. plus the market value of its existing shareholding in BOV. To my mind, basing compensation on just the value in 1973 of the NBM shares (as is claimed by Alfred) would not constitute a fair conclusion to this saga.
Thus, while I respect Alfred’s views, I still feel strongly – now more than ever in view of the recent Court judgments – that the honourable way to resolve this saga is for an out-of-court compensation settlement as indeed was the government’s declared intention years ago. If Alfred concurs, perhaps some good might yet emerge from this exchange of views by offering our joint services, without remuneration, to the government if there is a willingness to achieve an out-of court settlement.
In the event that the government is definitely against intervening by leaving the decision to the Court, I would be quite happy, without remuneration, to make my services available to the presiding judge if this is deemed by him appropriate and necessary so as to speed up the process of determining what fair compensation should be paid.
I hope that, either way, the long suffering ex-NMB shareholders and their families will see an end to this saga – a blot on Malta’s banking history which I would be very happy to see erased once and for all during my lifetime. This wish is prompted by my long affinity with banking and financial services in Malta and abroad over the past 64 years.