Surplus and deceit

The accounts posted and accepted by the Central Bank of Malta in 1972 show that the NBM was solvent to the tune of Lm2.9 million as audited by the bank’s auditors

28 June 2017, 7:30am
Dom Mintoff personally demanded that National Bank shareholders sign off their shares to the government
Dom Mintoff personally demanded that National Bank shareholders sign off their shares to the government
“Surplus and Reward”, regarding the National Bank of Malta takeover by act of parliament XLV 1973 on the 12th of December 1973, is a lie put forward by the government to justify the bank’s illegal expropriation without compensation.

As most would be unaware, the government recruited the same experts to defend its position and the role played by the Central Bank during court proceedings following the favourable judgements given by Judge JR Micallef and as confirmed in the court of appeal.

Ugolini was already recruited to do some work for the government before, so rather than being independent they are to some extent compromised by already having received money from the people they were now being asked to defend. The argument put forward by the government is simple and is as follows – “We took over the bank to save the economy. When we did we found it was worthless and so no compensation is therefore due”. 

While this is a convenient spin for the government and the public that benefitted, it is a complete lie and as such deserves to be defended.

Liquidity

Ugolini and co. support the claim of the government that the National Bank of Malta was illiquid.

Suffice to say that the liquidity parameters were set by the Central Bank. At the time, the legal liquidity requirement was 25% of deposits. The NBM figures show the following liquidity ratios: December 1971 – 36.62%; December 1972 – 34.72%; December 1973 – 28.91% (after the unexplained run).

Documentation shows that the overall liquidity ratio was consistently above the statutory minimum of 25% of current liabilities. 

From the letter in the Times of 8 June, 2017, Ugolini, Nunn and Chilton simply endorse what was conveniently stated by the government in 1973, while the documented facts as illustrated above show otherwise. At no point did the bank withhold deposits and even at the height of the government-aided run, never did the NBM default on payments to its depositors nor did its liquidity level ever fall below the requirement of 25%. 

In fact, specific CBM reports in October of 1970, March of 1972 and July 1973 did not flag liquidity ratios of any concern. Moreover NBM held substantial local and foreign reserves with varying maturity dates that could have been sold to add liquidity. These were in fact sold between December of 1973 and March of 1974 by the government of Malta right after the takeover so there is no reason to think that these could not have been used as a guarantee for the Central Bank of Malta to forward the cash as defined in its statute and to act as lender of last resort.

The saga of the National Bank of Malta is entering its 44th year
The saga of the National Bank of Malta is entering its 44th year
Solvency 

Ugolini and co. support the claim of the government that the National Bank of Malta was insolvent.

The accounts posted and accepted by the Central Bank of Malta in 1972 show that the NBM was solvent to the tune of Lm2.9 million as audited by the bank’s auditors, Turquand Young. Note that these auditors had been appointed many years previous to the takeover and continued to be accepted as such by the same Central Bank right up until the government passed into law Act XLV 1973 to take over the NBM group on 12 December 1973. 

For all intents and purposes the government had no reason to change these auditors, yet as soon as the takeover was effected, the government proceeded to change these auditors and appoint “new ones” of their own so that the accounts could be drawn up to suit the government without any contradictions that would have followed should the same auditors that approved the books earlier be forced to change their view under pressure from the government. Worth mentioning is that the following accounting procedures were applied in order to achieve the desired results.

•    Provisions for Bad and Doubtful debts increased from Lm2.4 million in 1972 to Lm5.9 mllion in 1973 for no apparent reason

•    Zero given for goodwill

•    No revaluation of property held by the Bank since 1809

•    Sale of NBM reserves prior to maturity by the government for a loss of Lm627,000 attributed to the shareholders

•    Charged tax of Lm216,000 in the year when the alleged loss of Lm3.1 million was made

After applying these four accounting procedures to the detriment of the NBM shareholders, the government presented a net position of Lm253,000. Reversing any one of these four procedures would instantly put the National Bank of Malta group back into a positive equity position. 

Putting them all back would show that the calculations as presented in Court by the NBM shareholders are factual and valid. Worth noting also is that the group was also charged Lm216,000 in income tax for the year 1973 when it allegedly made a loss on its operations of Lm3.1 million in that final year. 

Of course we know that this loss was not a real loss but only induced by creative accounting at the behest of the government that had seized control through an act of parliament. That it was sanctioned by their newly-appointed auditor who was chosen specifically for the purpose is conveniently ignored. That the same loan book was inspected by the central Bank on at least two other occasions in both October 1970 and again in March 1972 and found no cause for concern was also ignored. 

My question to Ugolini is how can he justify his statement if the same Central Bank did not flag the concerns in the earlier inspections but only started to do so when the Deputy Governor was changed and when the government appointed Lino Spiteri to head the inspections unit instead of him?

The letter carries on to explain that the takeover legislation as passed by the government and its actions including the Lm3 million investment of new capital was the only viable option to save depositors and the economy at large. Again this is a lie as the bank continued to operate without one cent of assistance for a period of five months after the government’s takeover. 

Had the bank really been in a state of collapse, government investment would have had to be made into the National Bank of Malta Ltd immediately; however this was not the case and the Lm3 million invested by the government was only ever put into the newly formed Bank of Valletta Ltd five months later. 

This in itself shows that the bank had not failed as it continued to operate without any assistance from any other source for five whole months once calm was restored. The fact that the government never needed to invest in the NBM group over the five-month period that followed shows how it was still a viable entity even after it was falsely declared illiquid and insolvent for the reasons I have mentioned above. 

When the Central Bank appointed the experts to justify the takeover, it appears that the court was being given the appropriate instructions to justify the takeover at zero compensation. Citing examples of failed banks to show that no compensation is due is again deceiving. To my knowledge, none of the examples mentioned were taken over in similar circumstances. In none of these cases was there legislation passed in parliament to defraud the shareholders before any accounts were presented to them. 

In a country where there is no political will to find a fair and just settlement one might expect that a ruling is in the offing. As I have stated in the past, one must concede that for a bank to become insolvent, the entities to whom it lent the money need to be insolvent also. If the government insists that the National Bank of Malta group lent money unwisely it must also declare to which companies or entities it should never have lent to? 

If these same companies have flourished and the ones with the largest loans, like the Corinthia Group, have grown to become the champions of the Maltese economy, how can one allege that the National Bank of Malta was wrong to have supported them? 

Unlike a company in Panama, all transactions are traceable through public records so further investigations would be possible if deemed necessary. It is my opinion that the truth rather than a lie should be presented to the Maltese public and that all the claims of bad lending should be listed and inspected if need be.

If the National Bank of Malta, as cited in the last inspection headed by Lino Spiteri in July 1973 – only a few months before the run in early December of that same year – was over exposed to tourism and property, how much more were the National Bank directors correct when history has proven that they were right all along? 

How much more should the experts concede that it was right for them to sustain these Maltese companies and to enter the eye of the storm with faith and conviction in Malta and its enterprise when the “experts” at the time were proven wrong by the passage of time? Had the National Bank of Malta directors not acted in support of local businesses by lending to companies involved in tourism and construction, we would never have had the successes made by these same Maltese companies and they would never have been given the chance to start the Malta we enjoy today.

That people can endorse the statement that the NBM was over exposed to property and tourism shows that they know nothing about the Maltese economy and which industries have performed well for the Maltese economy since independence. 

Ugolini and Nunn are mistaken to make the solvency argument when we already have a clear judgement by the Court and the Court of Appeal that there was value in what was expropriated. Ugolini and Nunn are also stating a blatant lie when they say that the NBM was riddled by 40% of its loans being non-performing. 

This is in fact a complete fabrication and follows from a court appointed inquiry into which of the larger loans were never repaid. The report investigated 18 debtors that constituted the larger loans. Of these 18 loans, 10 had complete records. Of the other eight, the files were missing from the BOV archives and so – because there was no actual conclusive evidence in these missing files (which was up to the BOV to produce) – they conveniently concluded that 40% of the loans were non-performing. If that’s not a blatant lie then what is? 

Not only was there no evidence of any write-offs having been made by the BOV but, to add insult to injury, there is clear evidence in the accounts presented by the BOV that between 1974 and 1978 the exaggerated provisions which were unfairly inflated from Lm2.4m to circa Lm6m to erode shareholder value after the government takeover in 1974, had actually been reduced to Lm1.65m by 1978, showing that the provision of Lm2.4m as presented by the National Bank directors was adequate. Suffice to say that the Corinthia loans were the ones considered to be bad debts, written off on account of the missing files, while they continue to flourish today.

Still Ugolini goes on to lie. He says that the securities held by the NBM were pledged, which is why the Central Bank could not accept them. As far as we know, this is a complete fabrication as they were all sold prematurely to generate cash when the government took over. Again, the loss on the sale of these before maturity came in at Lm627,000 which was unfairly charged to the account of the NBM shareholders. 

The final point is that the NBM was wrong to invest in Maltese enterprise and as such it deserved to be taken over by the government as it was poorly managed. While this was the argument made by the government at the time, history has proven just how wrong these were. In fact the passage of time has shown that the NBM directors were right to invest in Maltese enterprise and especially to support businesses engaged in property development and tourism. 

The lie which was spun to justify the theft of the NBM in 1973 holds no water today. 

With the benefit of hindsight we can see just how right the NBM directors were and how wrong the government was to say that these companies would fail. Even if a bogus expert decides to write in defence of the forcible takeover through an act of parliament, it cannot hold out against truth and the reason of the common man. 

Jeremy Cassar Torregiani B.Comm BA (HONS) Banking and Finance