http://www.timesofmalta.com/articles/view/20120617/local/Historian-sees-shades-of-grey-inbanking-saga.

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Jeremy Cassar Torregiani Today, 15:49 The article above is based on the interview that Consiglio was asked to give during the DISSETT debate that I held with Alfred Mifsud who tried to defend the decision of the central bank not to lend as it was legally bound to do on the basis that it felt that the bank was at the time, insolvent. Although I tried to explain during the said interview the facts relating to the solvency of the NBM, as witnessed by all, I was not easily allowed to make the necessary points. I have therefore decided to pen them here in an attempt to clarify what is otherwise a misleading representation of the facts by those that choose for reasons of their own to defend the takeover. To start with, the reader must bear in mind that the Central bank unlike what some people who like to defend the forceful takeover like to imply, did have the obligation to act as the lender of last resort. This was not some loose agreement that might or might not have been respected. This obligation was crystallised in the laws of Malta through The Central Bank of Malta Act (Cap. 204)Act XXXI of 1967. To be more specific as there are those amoung us who make this point debatable, I am quoting from the statute of the Central Bank of Malta that specifically spells out this obligation: Fil-qadi ta dan l-obbligu statutorju, il-Bank jikkontribwixxi wkollgall-istabbilt nanzjarja -ona. Il-Bank entrali ta Malta hu responsabbli wkoll biex jipprovdi nanzjament lissettur bankarjupermezz tal-funzjoni tiegu bala lender of last resort Dan is-self normalment jingatafirkostanzi eezzjonali meta jinass li l-istabbilt tassistema nanzjarja tkun mhedda. So anyone who implies that this was not the case is wilfully misleading the public and in so doing is already distorting the truth. The point therefore made on the matter in this article is therefore untrue as it makes it seem that this obligation was optional when this obligation was crystallised in black and white for all to see. So much so that it formed part of the laws of Malta and nowhere was this optional duty presented. The Central Bank of Malta act was there to regulate to activity of the banks according to government policy and in turn it was to provide the banks with the necessary stability to deal with exceptional scenarios. As far as the private banks were concerned this was the private / public partnership to stimulate the independent economy towards growth and self sufficiency in the Independant Republic we had recently acquired. Having said this, once the National Bank directors after having struggled to comply with all the new demands being placed on it as pointed out in the article by virtue of the introduction of these measures only a few years earlier, needed government to come forward with its end of the bargain to deal with the emergency caused by the run, the government turned on its own citizens who had acted in goodfaith and according to all the laws in place at the time and enacted to take over their positions as the owners of the eneterprise for nothing.

I would therefore like to conclude this first point by making a clear and undeniable statement. The Central bank of Malta had the obligation to lend as a last resort and by abdicating from it the Central Bank of Malta betrayed itself and National Bank of Malta to the detriment of its shareholders. In so doing the government acquired a prosperous business for free and established the Bank of Valletta. So, having established this obligation as a fact, my next point is to do with an analysis of its solvency. Up until the run, the National bank was experiencing record results. In so far as it was concerned, 1972 was its best year to date and 1973 would have been even better had it not been cut short through the act as passed by parliament. Yet merely creating record results does not mean that the bank was necessarily better off. The reason for this is quite simple. If a bank lends irresponsibly, that is to businesses that may not ever be able to repay their debts notwithstanding any guarantees in place, then even though its short term results would improve its long term position would be worse as the loans that were initially generating good income would erode the bank should they suddenly turn bad. As a result, the National Bank of Malta could only have been considered to be in weak position if a number of its customers namely the larger ones stopped paying back as contemplated. Although this issue was never brought up in December of 1973, the subsequent battle over value was based on this principle. In fact as mentioned in earlier discussions, the issue depends on the whole balance sheet of the bank and not on any one factor. More importantly, the balance sheet has to be taken at the point in time when the bank was determined to be insolvent. Although the article above implies that the decision was taken in December 1973 on the basis of the information that the Central Bank had, no mention of this was ever made at the time. As a result the contents of this report could never have been disputed as by keeping it secret, the discussion never took place. What we do know for a fact is that once the government had in effect taken over, the auditors were replaced and based on the information supplied to them from the central bank itself the following pivotal adjustments to the accounts were made. First of all long term securities held by the bank in both local and foreign government stock were sold prematurely to provide the NBM with immediate liquidity. This early encashment of these assets led to a loss of 629,000 Malta Liri which in turn were depleted from the balance sheet of the National Bank of Malta shareholders. Had the Central Bank provided the liquidity as contemplated in the law, these losses would never had been sustained and since it was the government and not the NBM that took this decision after having seized control they can by no means be used by government to show the position of the Bank as at December 1973. If for nothing else for the simple reason that at that point in time these securities were still held by the NBM before having been sold off after the takeover ie between December 1973 AND March 1974. The second adjustment which was fundamental to the changes in the balance sheet was an increase of the provisions on bad and doubtful debts to 300% of its previous value. As pointed out in the debate, the provisions as at December 1972 stood at 2 million Maltese Liri. After the government took over these were increased to 6 million Malta Liri on the assumption that local business would not be able to repay the loans given to them by the

NBM. Bear in mind that up until that time most loans were being repaid and there was no alarm that businesses in Malta were failing. Although there is little more than a 2 pg report to back this decision up, the assumption was made on the hypothesis that property in Malta had fallen by 36.6% and as a result businesses that had up until that time always been in position to service their loans would be unable to continue to meet future demands. While one would quickly argue that such an assumption should never have been made, today with the benefit of hindsight we can see exactly how untrue it was. On review, the BOV confirmed that 80% of the provisions were collected and that in fact these businesses had repaid as contemplated. In so doing the BOV itself therefore reconfirmed the position held by the NBM that the provision which stood at 2 million was sufficient to cover any eventual shortfall. Thirdly, although deemed to have made a loss in the year 1973, a tax on its operation of 216,000 Malta Liri was paid on its operating profits. As mentioned earlier, the NBM was experiencing its record results up until the government takeover. As a result had these adjustment never been made, it would have made 616,000 Malta Liri in profit and its tax liability would have been of circa 216,000 Liri. The accounts presented by the council of administration reduced the tax due as if profits were made while in the same breath, created a false position that implied that a loss of circa 3 million liri had been sustain in 1973. Another adjustment made was a subsequent devaluation of all property assets held by the NBM ltd by 40%. Although not a major loss, this reduction was wrong as property values were left at cost price and even if property allegedly fell by 40% between 1969 and 1973 the book values need not have been devalued accordingly. By doing so the government further distorted the correct value of the properties and as a result act maliciously to the shareholders detriment. To conclude one must therefore look at the facts to see whether or not the Bank was solvent or not. Had these adjustments not been made the answer is an undeniable yes. If these adjustments were made to distort the truth and make it appear that it was insolvent then the answer is no. My position is that the bank was solvent at the time of the run as up till then these adjustments were not made and therefore nobody could conclude that the bank was weak. After the run and the act of parliament it is clear that they were made however in my view they were made to make the bank appear insolvent so as to justify the takeover and not because they had any plausible reasons for doing so.