The Dim-Post

August 29, 2010

TARP Aotearoa

Filed under: finance — danylmc @ 7:02 am

According to the SST the government plans to buy around $500 million dollars in troubled loans from South Canterbury Finance:

The government has been looking at a plan whereby it will take over the troubled loan portfolio, probably at its face value.

South Canterbury has already taken steps to facilitate this, putting its impaired loans under the control of a separate administrative unit which has been nicknamed “the bad bank”.

Last month the company said the bad bank was administering about $500m of loans.

Under the proposal, the government would effectively buy those loans from South Canterbury, immediately giving the company a $500m cash injection.

A new owner could then take 100% control of the remainder of the company by injecting another $200m or so of cash into it, although it is believed negotiations are continuing around those numbers.

So the taxpayers are buying a finance company! Go the free market!

Snark aside, the alternative is to let South Canterbury go into receivership – but because of the Deposit Guarantee Scheme the government has massive financial liabilities to investors in the company. There would also be dire implications for the wider economy, especially in the South Island. The collapse would make Hanover look like [insert previous Finance Company collapse that looked real bad until Hanover went under].

I guess Hubbard’s supporters will see this as another part of the government’s anti-Hubbard conspiracy – spending $500 million of the public’s money rescuing Hubbard’s finance company from bankruptcy was the secret plan all along.

Hubbard’s admirers point to his long history of philanthropy as proof that he’s unlikely to defraud his investors: but financiers don’t just defraud their investors because they want to steal their money. If – hypothetically – Hubbard were to have made some poor decisions with his investors money but felt confident that he could quickly make it all back then he might feel he were doing the right thing by – temporarily – misrepresenting the books to show anticipated future profits, saving everyone unnecessary concern about the security of their savings (and himself a bit of embarrassment). But then economic conditions worsen, further loans turn bad . . .

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19 Comments »

  1. ‘Around 500 million’ that’s a nice round number that shows good intent yet isn’t too scarey; but is probably a euphamism for almost nearly a billion. Watch good bank furiously carve off another 250+ million of low grade loans to bad bank over the next couple of weeks.

    Comment by dribble — August 29, 2010 @ 7:44 am

  2. Rather than considering that the books were being cooked (just till things came right), I suspect the thought processes would be more along the lines of the books saying what really is the case using good old fashioned common sense rather than generally accepted accounting practice. You know, the practical common sense that John Key would have shown had he been in the country at the time those young whippersnappers at the SFO got the bit between their teeth.

    Comment by Richard — August 29, 2010 @ 9:25 am

  3. Hubbard’s admirers point to his long history of philanthropy as proof that he’s unlikely to defraud his investors

    By that reasoning, the Medicis must be the most viciously defamed family in human history, how could people with a history of arts patronage extending over centuries and encompassing some of the greatest architecture and art ever seen also be mad, vicious, blood-stained bastards?

    Comment by Craig Ranapia — August 29, 2010 @ 10:27 am

  4. Re the philanthropy – fraudsters (not saying Hubbard is one) are known for hiding behind their good works. Some points from The Art of Spinning http://whitecollarfraud.blogspot.com/2006/12/art-of-spinning-how-to-identify.html

    -When you cannot defend your actions or arguments attack the messenger to detract attention from your questionable actions.

    -Always show your kindness by doing people favors. You will require the gratitude of such people to come to your aid and defend you.

    -Build up your stature, integrity, and credibility by publicizing the good deeds you have done in areas unrelated to the subject of scrutiny.

    -Build a strong base of support. Try to have surrogates and the beneficiaries of your largess stand up for you and defend you.

    Sounds like someone, I think.

    Comment by Ruth — August 29, 2010 @ 11:17 am

  5. What do people who steal thousands recieve?

    Comment by George D — August 29, 2010 @ 1:57 pm

  6. If – hypothetically – Hubbard were to have made some poor decisions with his investors money but felt confident that he could quickly make it all back…

    LOL, the dude is what – 82? We don’t trust old people to remember how to DRIVE at that age, let alone keep track of hundreds of millions of dollars.

    Comment by SHG — August 29, 2010 @ 4:15 pm

  7. SHG I think you have hit on the real underlying problem.

    My understanding is that most of the detail is in his head and that there are no sound governance or management processes in place. A disaster waiting to happen. The mere fact that such a large proportion of the loan book is said to be ‘bad’ is the key warning signal.

    I do not favour a gummint buy out. The statutory managers should be allowed to do their job and either trade the outfit out of trouble or call in receivers.

    Pretty simple really. If it all turns to custard then so be it. The wild talk about the ‘hurt to the SI’ is nonsense. Other institutions will take over the loans and projects which are worthwhile and life will go on.

    A few gullible South Islanders will lose their shirts but that’s their fault for investing on the basis of warm and fuzzy misguided notions of ‘local boy can do no wrong.’

    Comment by Adolf Fiinkensein — August 29, 2010 @ 6:00 pm

  8. Come on Dim

    The free market would let it fail….any intervention cannot be blamed on a free market but interventionalism.

    Let it fail. Adolf is correct.

    Comment by Cactus Kate — August 29, 2010 @ 6:23 pm

  9. But if there is a government guarantee, the government cannot avoid this liability anyway.

    Comment by Vibenna — August 29, 2010 @ 6:37 pm

  10. Vibenna, that is so. I understand it might amount to at most $250m. However, let our liability be limited to that guarantee and let us not take on yet another pig in a poke.

    If the US had allowed IAG to fail, their economy would have been in a hell of a lot better shape today. No policy holders would have been damaged. If they had allowed GM to fail ditto. Obama was blackmailed by the auto unions whose members would have lost their fantastically featherbedded pensions. So today, American tax payers are paying and paying to subsidise the pensions of the same union members whose outrageous demands sent the company broke in the first place.

    Comment by Adolf Fiinkensein — August 29, 2010 @ 7:44 pm

  11. The Weekend Press said 600million.

    Comment by marsoe — August 29, 2010 @ 7:55 pm

  12. Try AIG Einstein

    Comment by Thomas — August 29, 2010 @ 8:48 pm

  13. “If the US had allowed IAG to fail, their economy would have been in a hell of a lot better shape today. No policy holders would have been damaged. If they had allowed GM to fail ditto.”

    Don’t know what IAG is, but just asserting something ludicrous on its face as a fact as you do does not leave me convinced as to your credentials as an economist (or anything, other than a clown).

    Comment by Guy Smiley — August 29, 2010 @ 8:53 pm

  14. If the US had allowed [AIG] to fail, their economy would have been in a hell of a lot better shape today

    Because letting Lehmans fall over worked out so well for everyone . . .

    Comment by danylmc — August 29, 2010 @ 9:27 pm

  15. From what I understand of Hubbard’s ‘BAD LOANS’ debacle, a large proportion are to farmers. Now I’m not a conspiracy cat but it’s funny how we can let the mums and dads of NZ lose the shirt off their backs with the likes of Hanover but we protect farmers with a gov guarantee set-up by a pro-farmer National government. Did the fat cats have a meeting sometime back? just a thought

    Comment by Stew — August 29, 2010 @ 9:50 pm

  16. Let it fail so it costs the Government twice what some of its other options are! Business cases have no place in the public purse!
    And LOL at letting AIG fail and claiming nobody would have been worse off. You may have a point with GM but not as strong as you are trying to make it.

    Comment by garethw — August 29, 2010 @ 9:55 pm

  17. Now I’m not a conspiracy cat but it’s funny how we can let the mums and dads of NZ lose the shirt off their backs with the likes of Hanover but we protect farmers with a gov guarantee set-up by a pro-farmer National government.

    The deposit guarantee scheme was set up by Labour.

    Comment by danylmc — August 30, 2010 @ 6:40 am

  18. mums and dads of NZ lose the shirt off their backs with the likes of Hanover but we protect farmers with a gov guarantee

    Point 1: The deposit guarantee scheme covers depositors, not the farmers/developers that have borrowed from SCF.

    Point 2: Hanover investors chose to waive their rights under the DGS when they voted in favour of the Allied Nationwide takeover.

    Comment by Phil — August 30, 2010 @ 9:44 am

  19. John Key and the missus are soon off to London to see the queen or to be more
    specific – a weekend away in an amusing little castle ‘Liz’ owns in Scotland.
    Indeed one is highly amused – or is that confused.
    What I would like to know is ‘HOW COME’?

    Comment by Stew — August 31, 2010 @ 4:34 pm


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