There is one key question that needs to be answered unequivocally in the ongoing saga of the National Bank of Malta (NBM). Was the bank not only illiquid but also insolvent? In plain words, was the bank bankrupt?
This sad story which refuses to die cannot be understood without the Mintoff factor- Joseph Pace Ross, Sliema
This is because the main plank in the argument against an intervention by the Central Bank of Malta (CBM) as a lender of the last resort was precisely because some held that the NBM was in fact insolvent. Why throw good money after bad?
The Council of Administration (COA) and the new auditors storming in to clean the Augean stables in 1973 discovered some €8.4 million of undisclosed bad debts, which amount was duly wiped off the assets of the NBM.
This was a monumental amount considering the footings of the balance sheet at the time.
This decision, although subjective, did in fact help to vindicate the government’s theory that the bank was insolvent, justifying in turn the decision of the CBM to refrain from intervening to save the bank.
Following this decision the worth of the bank changed dramatically overnight relegating it to the insolvent category. In the wake of the recent run on the bank and the turmoil caused by the new provisions, who could challenge the opinion of those who held that the shares of the NBM had no value? This was 1973. So far so bad for the NBM shareholders. Against this new scenario how could the shareholders expect taxpayer funds to bail out their bank?
However in the five years that followed, that is 1973 to 1978, the new management was able to recover bad debts amounting to over €8 million, which figure must have included most of the loans that were declared to be bad. Bad debts are not bad if recovered, not even if the COA and the auditors say so. These sharp movements in and out of provisions were obviously the result of a serious undervaluation of the quality of the NBM loan portfolio with grave consequences for the shareholders of the NBM.
While the relegation of a loan to the bad/doubtful category could be a subjective one, when such a bad loan is repaid there is nothing subjective. Borrowers repay in hard cash in an irrevocable and final manner. Given the amount of bad debts repaid in 1973-1978 it is evident that an over pessimistic view was taken by the COA/auditors when providing against possible bad debts. It follows that the net worth of the NBM was in reality higher than that reported at the time. Sufficiently higher in my opinion as to merit an illiquid rather than an insolvent status of the bank. This faults the premise of insolvency from which far reaching decisions were taken.
This sad story which refuses to die cannot be understood without the Mintoff factor. He dominated everything and everybody with his strong personality. Admittedly he had a huge problem on his hands with the run on the bank. But he also had definite ideas regarding what to do with the bank and few, if any around him, had the temerity to oppose his strategy.
The prevailing situation at the time reminds me of the story of the philosopher Favorinus who was criticised by the emperor Hadrian over the meaning of a word. Although Favorinus was correct he yielded to the emperor and was criticised by his friends for doing so. You do not give me good advice, he told his friends, when you do not allow me to believe that the man who possesses 30 legions to be the more knowledgeable of us all.
History indeed repeats itself. We can replace Hadrian by Mintoff and Favorinus by the men around the Prime Minister who also believed or chose to believe the Prime Minister was the more knowledgeable. They kept mum and acquiesced.
What is even more sad is that after all these years our courts have failed to deliver judgment.