The Dim-Post

August 31, 2010

Okay. So. That happened

Filed under: finance — danylmc @ 10:05 pm

The government just spent the nation’s entire health corrections budget for a year refunding investors in a failed rural finance company. The PM and Finance Minister insist that they’re going to realise the value of most of the assets – maybe they will, maybe they won’t: right now the bill is $1.7 billion. Sure, given the alternatives that was probably the least shittiest option – but it’s still pretty shitty. Especially now that the details of SFC’s behaviour are emerging:

South Canterbury Finance (SCF) ramped up its risky real estate loans after it signed up to the Government’s scheme

Bad loans were the main reason for its downfall, and Mr Maier revealed the high risk tactic in an interview on TV3`s Campbell Live programme.

Asked whether it had been cynically exploiting the government guarantee, Mr Maier replied: “It might have been cynical, it might have been merely incompetent… it probably violated a lot of prudent lending criteria.”

At least this solution wiped out the owners of SCF so there’s some minimisation of moral hazard and we won’t see US style hundred million dollar bonuses paid out with taxpayer cash. Still, I’d love to know what advice Treasury were giving the Finance Minister about this liability – and how they intend to protect the taxpayer from further exploitation given that the Deposit Guarantee Scheme is scheduled to extend until 31st December 2011.

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29 Comments »

  1. I don’t think it particularly fair at all. But then isn’t Binglish all about buying back votes in Canterbury?

    Comment by Chris — August 31, 2010 @ 10:12 pm

  2. Health is $13 billion a year, according to the Budget 2010 summary tables [PDF]. $1.7 billion is more like Corrections (incl capex).

    Comment by Idiot/Savant — August 31, 2010 @ 10:14 pm

  3. Looks like we made one of the same mistakes as the US – relying too heavily on the ratings agencies. As long as you could show a BB rating, you could sign on to the scheme.

    I can see the rationale for the wide-ranging Guarantee, but I would have expected there to be actual oversight – not just a blank cheque to take risks.

    Comment by gazzaj — August 31, 2010 @ 10:26 pm

  4. Oh, ok – the government has “had advisors in there for 12 months”. So there seems to be an implicit endorsement of SCF’s risk-taking by the government. So either the regulators are bad, or SCF was just doomed in this market.

    Comment by gazzaj — August 31, 2010 @ 10:30 pm

  5. But then isn’t Binglish all about buying back votes in Canterbury?

    the scheme was introduced by Cullen. Key and English don’t sound like they’re going to be picking up many votes around Timaru having kicked a populist hero into touch.

    Cunliffe is already trying to wip up a bit of populist anger over this. It’s a rather large rat to have to swallow and one does have to think long and hard to see that the greater good argument makes sense. But so much easier to go for partisan politics.

    Comment by NeilM — August 31, 2010 @ 10:46 pm

  6. Maier was appointed CEO in December 2009, and he’s talking about the loans made in late ’08 and ’09 under the previous executive.

    Maybe Edgeler can confirm, but I think the legislation required for the Reserve Bank to take over regulation of non-bank deposit-takers is still going through parliament? Until then, the Trustee Organisations remain the supervisors.

    Another group of people that deserve to get a boot up the arse are the Auditors. They’ve been signing off the accounts of finance companies as ‘true and fair’ for years…

    Comment by Phil — August 31, 2010 @ 11:16 pm

  7. But then isn’t Binglish all about buying back votes in Canterbury?

    Like the seat English held with a 15,000 majority (and a 34 point magin of the party vote)? Sorry to let the numbers get in the way of a good conspiracy theory, but I can think of less costly, and much lower risk ways of spreading the pork around the Canterbury plains.

    Comment by Craig Ranapia — September 1, 2010 @ 1:13 am

  8. Cunliffe is already trying to whip up a bit of populist anger over this.

    Bell Tea Bagger, ahoy? If I was advising Bill English, I’d draft a patsy question that would give him the oppotunity to give Mr. Cunliffe a history lesson. I’d also ask Mr. Cunliffe if the then-Health Minister was awake when the Deposit Guarantee Scheme was, presumably discussed in Caucus and signed off on by Cabinet.

    Comment by Craig Ranapia — September 1, 2010 @ 1:18 am

  9. We are all SCF depositors today.

    Comment by Simon — September 1, 2010 @ 7:11 am

  10. In decisions big (SCF) and small (http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10670277) the routine of poor ethical standards, entitlement, and economy of truth that passes as expected behaviour from our deified business class continues unabatd.

    Comment by Sanctuary — September 1, 2010 @ 7:19 am

  11. I’d draft a patsy question that would give him the opportunity to give Mr. Cunliffe a history lesson

    Would that lesson include the fact that more claims have been made on the scheme since Mr English had the opportunity not to extend on 25th of August? Would the question include the discussion on possible systemic risk of our financial system had Mr Cullen not introduced the scheme. Would it also note that the Australians who we have financial and banking CER obligations announced a similar scheme without much warning and that the Government at the time was forced to act (a cascade effect of the Irish doing so a month before)?

    The original deposit scheme was introduced under the Public Finance Act when Parliament was dissolved, so I assume the soon to be Nat government was briefed as is the convention along with treasury.

    Comment by andy (the other one) — September 1, 2010 @ 7:48 am

  12. What would Michael Cullen have done in the circumstances?

    Comment by Thomas — September 1, 2010 @ 8:02 am

  13. I’m confused. Repaying some 36,000 investors at least their capital isn’t about shoring up votes? As opposed to several hundred thousand other investors (mostly in the North Island) who haven’t a brass razoo to rub between them? The other question is why them and not us?

    Cullen and Co did lots of things, good and bad. I’m still waiting for my pony, ok?

    Comment by Chris — September 1, 2010 @ 8:26 am

  14. Hubbard may be past it but at least he has paid a price….unlike those pieces of shit Bryers and the Hanover lot!

    Hubbard pushed millions of his own money into SCF……he could have easily not paid over a cent just like the rest!

    Comment by kerry — September 1, 2010 @ 8:43 am

  15. Kerry wrote: “Hubbard pushed millions of his own money into SCF……he could have easily not paid over a cent just like the rest!”

    good point! the others paid Finance Company money out to themselves, Hubbard gave his own money to shore up the finance company!

    Comment by kahikatea — September 1, 2010 @ 9:00 am

  16. Would that lesson include the fact that more claims…

    I wasn’t intending to criticise Cullen rather to point out that this measure had cross-party support (because it was the least worst option) and the current round of it’s-just-National-buying-off-its-supporters is completely counter to the facts and that I would expect better of Cunliffe. He’s been going on and on about how he’s been reading Interesting Books on economics but when it comes to the crunch he throws what ever he’s learnt away and opts for populism rather than trying to explain a complex situation.

    Comment by NeilM — September 1, 2010 @ 9:13 am

  17. You can piss off with the rat-swallowing argument. The National-led government were receiving advice about SCF well-prior to rolling over the scheme. You can argue that they had to roll it over, but they did so without amending it’s quite bizarrely faulted criteria/scope. And they did this with knowledge of the SCF position. That makes it a conscious decision to include the very probable collapse of SCF within the deposit guarantee scheme. That was probably a good decision on the face of it (for the Canterbury region at least), but it was certainly not sprung on them as a result of the ‘rat’ – it had to have been a calculated position that they adopted. That it is against any sort of right-wing/market oriented principle is just further evidence of National’s centrist (Labour-lite) position and a degree of ‘social responsibility’ I guess…

    Comment by Sam — September 1, 2010 @ 9:17 am

  18. As for Cunliffe/Goff jumping on the bandwagon, do we really expect anything less of perhaps the least effective opposition in the history of oppositions. It is just another example of that deluded group of figures…

    Comment by Sam — September 1, 2010 @ 9:20 am

  19. …the least effective opposition in the history of oppositions.

    one expects oppositions to make mischief for the govt but sometimes there are bigger issues involved and this is one of them. There’s potential for a lot of anger and resentment. Lots of people lost investments and wont be seeing any govt compensation. It’s a very difficult decsion to have to justify.

    Claiming this is all National’s fault when the fault clearly lies with Hubbard is just pandering.

    Comment by NeilM — September 1, 2010 @ 9:36 am

  20. In Sandy Maier we have an experienced insider who is well-informed, and is clear and honest with his opinions. I feel like I’ve stepped into an alternative reality of NZ media.

    Bell Tea Bagger, ahoy?

    If the tea bagger drank Twinings, would the conspiracy theory be more sophisticated? :D

    Comment by Ataahua — September 1, 2010 @ 9:55 am

  21. “one expects oppositions to make mischief for the govt”

    But they aren’t, and cannot from this situation – and haven’t been able to do so on any issue of substance. This is why they are so so ineffective. I am not going to have faith in a Labour party again until they eradicate all members of the previous administration.

    Comment by Sam — September 1, 2010 @ 9:58 am

  22. …by whatever means necessary…

    Comment by Sam — September 1, 2010 @ 10:02 am

  23. Neil, got alionk for Cunliffe’s ‘populism’. All I’ve seen is him basically asking what the government knew and when it knew it. Which seems reasonable enough.

    Also, Cactus Kate is worth a read on this. I’m anot a lawyer but she reckons SCF was possibly in breach of the agreement. If true, then the government’s choice to honour the agreement anyway is very much something an opposition should be asking the ‘what did you know and when did you know it’ questions.

    Comment by Pascal's bookie — September 1, 2010 @ 10:27 am

  24. All I’ve seen is him basically asking what the government knew and when it knew it. Which seems reasonable enough.

    reasonable would be attempting to explain why all this was necessary rather than muttering darkly about govt incompetence. Cunliffe likes to portray himeslf as some sort of intellectual immersed in the cutting edge of economic thinking. But when it comes down to it that all goes out the window.

    And with Goff chiming in I think the cheap populism is a reasonable allegation.

    Comment by NeilM — September 1, 2010 @ 11:02 am

  25. So no links then.

    You seem to think that the opposition finance spokesman should act as if he was the Minister of Finance and justify the current govts actions instead of question them.

    I’m not in favour of such a system, and prefer the one we have had been trialing for the last few centuries, but thanks all the same..

    Comment by Pascal's bookie — September 1, 2010 @ 11:26 am

  26. Cunliffe at the reading of the bill(2009) – Bold mine:

    Looks like he was muttering darkly from the reading of the bill, but broadly accepted the wider aim of the newer scheme English put forward.

    This bill does not outline the eligibility policy; it merely provides the Minister with the authority to determine that eligibility. We have some concerns relating to the policy that is currently being drafted, as was set out in broad terms by the Minister a few weeks ago. The criteria requires that companies have at least a BB credit-rating to be eligible. However, some companies might not be able to obtain a sufficient credit-rating, having insufficient scale to meet the requirements of the credit-rating agencies. The transaction costs of obtaining a rating could also be disproportionately high. This could cause a further shake-out in the non-bank finance sector, resulting in further finance company losses or collapses, taking from mum and dad investors while the big banks move in to mop up the customer base.

    http://www.parliament.nz/en-NZ/PB/Debates/Debates/f/a/c/49HansD_20090908_00000800-Crown-Retail-Deposit-Guarantee-Scheme-Bill.htm

    Comment by andy (the other one) — September 1, 2010 @ 11:39 am

  27. So, in effect, Cunliffe is darkly muttering that the roll-over of the scheme should have an even broader scope!?

    Comment by Sam — September 1, 2010 @ 11:51 am

  28. Treasury blew it! Again.

    English is a one time Treasury boffin. (Sigh)

    A lot of people have made a lot of money out of this debacle.

    English hs admitted as much.

    No wonder he cancelled overseas visits.

    Key was not going to be left behind to face this music.

    It is difficult to tap dance and smile and wave to a dirge.

    Comment by peterlepaysan — September 1, 2010 @ 8:03 pm

  29. It’s pretty rare to spot a grammatical error on this blog…

    ….but it should be “least shitty option”, not “least shittiest option”.

    Comment by Will Truth — September 1, 2010 @ 9:30 pm


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