Naked swimmers are exposed when the tide is out

Published on the Malta Independant¸ issue Sunday¸ 4th November 2010


To quote Warren Buffet: “It’s only when the tide goes out that you realise who has been swimming naked”.

To put his quote into context¸ one needs to recall the severe financial turmoil that gripped the Western world from 2008. Whereas before the sub-prime crisis everything seemed so rosy in the Wall Street garden¸ it had to be the sudden demise of Lehman Brothers (among other omens) that uncovered who was swimming naked and thus over-exposed. As stock markets around the world collapsed during 2008¸ the enormous losses caused investors to withdraw large amounts of cash from their investments. These cash withdrawals in turn triggered the discovery of several cases of financial fraud as perpetrators could no longer hide the results.

The discovery of high-profile financial scandals increased scrutiny on governance practices and companies’ financial statements. In Malta¸ this hubris on financial crisis may appear to be stuff fit for Hollywood films such as Wall Street – Money never sleeps¸ but on closer scrutiny we may notice how the wide-reaching tentacles of the US menace has reached our shores.

It is true that 2009 was a disastrous year for us¸ both in terms of exports and tourism (even the local banks¸ which are usually Teflon-coated¸ appeared to have reported lower earnings¸ in fact it was unofficially reported that many had burned their fingers investing in Lehman shares and other so-called “toxic instruments”). But the revelation that a hedge fund run by Valletta Fund Managers ( a wholly-owned subsidiary of Bank of Valletta ) has failed rams home the realisation that we are not immune to the virus that has gripped the world. A lot has been written in the local press about retired investors who were allegedly lured to divest themselves of their life savings to buy units in La Vallette Multi-Manager Property Fund (a joint venture between BOV and Insight Investment of London.) A retired small-timer is protesting that Bank of Valletta advised him to move risk-free Malta Government Bond holdings into the fund. In a shocking revelation¸ the claimants are alleging that La Valette Sicav had invested in funds that had liabilities in excess of the funds’ total assets¸ which is in breach of the rules.

It is true that the directors of a sub-management company appointed in Guernsey were being sued for criminal activity and the fund was thereby suspended pending investigations¸ but this grave situation was not immediately and clearly stated. Another serious allegation is that it appears that insiders at the bank redeemed their units ahead of the fund’s suspension¸ although this still needs to be proved in court. The bank is defending itself on the grounds that there was no wrongdoing on its part and that the fund had simply fallen victim to the international financial crisis.

BOV’s chairman avoided commenting at the press conference last week at which the bank announced a bumper profit of just under €100 million. He wisely steered away from commenting on any potential liability to compensate for alleged infringements. Still¸ one swallow does not make a summer and one has to be cautious not to over-react if one apple in the barrel goes rotten. Regrettably¸ it was such a big apple that went so rotten that we read about a number of investors protesting that the bank’s officers were over-zealous in their drive to promote t