Kiwi Mum and Dad investors

Via The Herald:

A private equity fund associated with rich-lister businessman George Kerr is to receive a $100 million taxpayer-funded payout from the Government in order to make the receivership of South Canterbury Finance run more smoothly.

Kerr’s Torchlight Fund No1 LP is the largest of a number of prior ranking debtors who are in line to be paid first from the realisation of South Canterbury’s assets . . . the Crown’s $1.6 billion payout to 35,000 depositors will include a $350 million payment to NZX-listed bondholders.

Is there anything stopping hardworking Kiwi mums and dads like George Kerr from taking their money, investing it in one of the seven finance companies still guaranteed by the RDGS at high interest for high risk and then making another taxpayer funded windfall profit if that finance company goes under?

There’s a bit about this in the Herald today: Brian Fallow explains the reasoning behind the government’s actions:

With the economy in general, and rural property market in particular, in their present delicate state, a fire sale is in nobody’s interests.

A receivership with the Crown as the sole creditor also avoids the pressure to call in existing good loans and force borrowers who are meeting their commitments to refinance . . .  And the payout of $1.6 billion to depositors over the next month or so constitutes an unintended additional fiscal stimulus.

So what do we get for our $600 million (plus)? We have already got it.

It is the benefit to the economy as a whole of setting up the deposit guarantee scheme in the darkest days of the global financial crisis two years ago.

I doubt any of this will appease the public’s fury. This will hurt the government’s popularity and hang around its neck right through to the election: every single fiscal decision they make will have the ‘you can afford a $1.7 billion bailout for a finance company but you can’t afford to pay for (x)’ line thrown in their face.

For what it’s worth, I think they did the right thing given the circumstances even though they knew it would be unpopular – which is almost the definition of good government. The important questions now are how the circumstances came to be.  As is almost always the case when a horrible economic catastrophe wipes out massive amounts of wealth in New Zealand, Treasury is deeply implicated. Liam Dann writes:

A lot was already wrong with South Canterbury when it had its public guarantee extended.

For a start it was effectively in breach of its trust deed and had failed to file audited accounts. Having a look at the numbers is usually considered important when assessing a business decision.

The Treasury – which officially makes the call on who gets in to the scheme – could have waited months before accepting the finance company.

But it didn’t. It rushed South Canterbury in to safety because the Government knew it was a goner without the guarantee – although in the end it was a goner anyway.

When those accounts finally arrived a few days later, the auditors highlighted serious concerns about the company’s viability.

Six weeks later, ratings agency S&P downgraded South Canterbury Finance to a level that would have made it ineligible for the scheme.

Treasury were probably too busy urging the government to privatise Kiwibank to bother doing any due diligence on the liability to the taxpayer.