The Dim-Post

August 31, 2010

I’m confuseder

Filed under: finance — danylmc @ 11:40 am

Yesterday the PM announced:

The Crown’s net liability for South Canterbury Finance is about $600 million though the Cabinet is considering other options should the firm fail, Prime Minister John Key says.

“It’s in the ballpark of $600 million” Key told the post-Cabinet media conference. That makes it about two thirds of the $900 million the government has provided for under the guarantee, he said.

But today, according to The Herald:

The Government has already made a payment of $1.7 billion to cover losses to investors in the company.

Acting Treasury secretary Gabriel Makhlouf said all depositors and stockholders on South Canterbury Finance Ltd’s register of debt securities would be repaid by the Crown and they did not need to make a claim because the Trustee had done so on their behalf.

Malhouf said Treasury had now paid the trustee in full the sum owing to investors.

Treausury spokesman Angus Barclay said a payment of $1.7 billion had been made. However the Herald understands that covers all investors including some ineligible for payment under the guarantee.

It is understood Treasury wished to make a single payment early in the process to avoid paying out interest to investors.

Update: Ah, I think I get it – $600 million is the net liability. So the trustee now cashes up all the assets and pays back the taxpayer and that should – hopefully – return about $1.1 billion.


  1. And, shouldn’t the Government liability be even less, once any assets have been liquidated?

    Comment by Sam — August 31, 2010 @ 11:45 am

  2. Oh – see gazzaj’s explanation on the previous thread – it seems plausible. It just needs accurate reporting 9probably too much to expect)…

    Comment by Sam — August 31, 2010 @ 11:49 am

  3. This Scoop article is a bit clearer.

    Key and English don’t want to say $1.7 billion when they can say $600m instead. But the upshot is that the taxpayer has just forked over $1.7bn for a bunch of crappy loans worth in the ballpark of $1.1bn.

    Comment by gazzaj — August 31, 2010 @ 11:55 am

  4. “SCF’s so-called ‘good bank’, which holds its main financing business, was “largely” restructured to separate it from the non-performing assets ring-fenced in the ‘bad bank’, Maier said.”

    From the same Scoop article.

    Am I right in thinking that the sale of the Good bank is where the $1.1billion difference is being sourced from?

    Comment by Sam — August 31, 2010 @ 11:58 am

  5. They’re kicking around $700m as the value of the “good bank”, though they obviously haven’t yet found a buyer for them. Their value should be pretty close to that though if they are actually good.

    So that leaves an estimated $400m to come from the “bad bank”. There’s no way of saying what they’re “worth” right now because there’s no potential buyers so no pricing mechanism. It’ll probably be several years of winding down before anyone knows what the total liability was.

    Continuing this “back of the envelope” thing, if the receivers can flick off the $700m of good loans relatively quickly that means the short-term cost to the taxpayer is $1 bn – with $400m-odd to be clawed back over the next few years.

    Comment by gazzaj — August 31, 2010 @ 12:20 pm

  6. is this all consequence of the 2008 meltdown or would this have happened anyway because Hubbard was into his dotage and the investors have got very very lucky having a guarantee system which they would not have had 2 years ago?

    Comment by NeilM — August 31, 2010 @ 12:20 pm

  7. now Hubbard is blaming govt regulation. He da confusedest

    Comment by NeilM — August 31, 2010 @ 12:24 pm

  8. There is no confusion its all the Gubbermints fault:

    Hubbard speaks out – Govt to blame

    Allan Hubbard is blaming Government regulations for the failure of South Canterbury Finance.

    “It has been deeply frustrating and hurtful, over the last nine months, to have been sidelined by my fellow SCF directors, and subsequently straight-jacketed by the Government regulators, from working to save South Canterbury,” he said.

    Comment by andy (the other one) — August 31, 2010 @ 12:25 pm

  9. In hindsight they shouldn’t have had the Deposit Guarantee and I think the big question is why they qualified.

    If there’s been mismanagement then they shouldn’t have had a guarantee; and if it was just bound to happen in this market they shouldn’t have had it either.

    Government guarantees should just be a confidence boost for risk-free investments like bank deposits to prevent a run on the banks in a crisis. They shouldn’t be anywhere near badly-run or highly leveraged finance co’s.

    Comment by gazzaj — August 31, 2010 @ 12:26 pm

  10. Hubbard’s defense is sad. And a woeful indictment of his business practices.

    His approach might work for a lawn mowing business, but for 1.7 billion dollars of investor money it stands as a stark monument to all of the failings of the NZ managerial class.

    Lack of proper training, anti-intellectualism, lack of proper systems, lack of proper accountability, lack of business sophistication; Allan Hubbard is only different from practically every other businessman in this country by the sheer bloody staggering magnitude of his neglect of these things.

    Comment by Sanctuary — August 31, 2010 @ 1:15 pm

  11. the big question is why they qualified [for the Deposit Guarantee Scheme].

    As I see it, the major factor for a finance company was demonstrating that you were within the parameters of the Trust Deed. Until the receivership today, they were.

    Comment by Phil — August 31, 2010 @ 1:17 pm

  12. It’s disappointing that Hubbard seems devoid of humility and won’t take any personal responsibility. I think the old codger has lost it – in fact that could be one of the reasons behind statutory management.

    Comment by Ruth — August 31, 2010 @ 1:36 pm

  13. So the answer to why they qualified, then, was because the criteria was waaaay too lax. Thanks Mr Cullen, and thanks again Nat’s for extending some pretty shonky and ill-thought through legislation…

    Comment by Sam — August 31, 2010 @ 1:38 pm

  14. Sautee or Fricassee?

    Comment by NeilM — August 31, 2010 @ 2:24 pm

  15. @Sam

    Cullen was backed into a corner by the Aussies when they offered a deposit guarantee scheme, if we didn’t at the time we would have had runs on our banks. English had the best of both worlds and he took the worst option. English rolled the scheme over after the GFC (hindsight) and lots of pain had been spread around and the banks were fine and decided not to re sign onto the scheme, so at that point everyone who signed up were shore to go belly up if they already hadn’t because why else would you need the guarantee (foresight).

    Comment by andy (the other one) — August 31, 2010 @ 3:37 pm

  16. Before Sandy Maier came on the scene hadn’t Hubbard handed over day to day management of SCF to others? What part did they have in this fiasco and why aren’t their names being mentioned?

    Comment by PaulD — August 31, 2010 @ 3:58 pm

  17. Here’s the Herald article from 2009 about the extension of the scheme, with English’s rationale for it. Basically a necessary evil kind of deal. SCF had just been downgraded to BB so they only just qualified.

    There’s also some waffle in the extension about the Reserve Bank “investigating options that will, if feasible, bring forward prudential requirements that would impose a greater measure of prudential discipline on non-bank deposit takers.”

    That many qualifications seems to suggest that they weren’t planning to do much to make them safer.

    I was thinking there might be an easy way to divide “sensible” and “risky” finance co’s so we could only guarantee the low-risk/low-return/more-regulated ones in the future. Which would make things nice and obvious for investors.

    Instead they just had tiered fees based on ratings, which have been pretty useless lately.

    Comment by gazzaj — August 31, 2010 @ 4:36 pm

  18. Umm – didn’t the Aussie scheme only cover banks – not investment outfits like SFC. Cullen had to go one further.

    But English rolled over the scheme earlier this year – Moves could have been taken to tighten-up the criteria to exclude dodgy institutions (for better or worse) at that time (they had plenty of time to signal intentions earlier), but were not. That was a decision made by THIS government with at least some knowledge of the impending situation (English has been receiving advice about SFC since 2009) that has now come to pass. Whether good or bad, the government’s actions are anything but swallowing the dead rat – sautéed or otherwise.

    Comment by Sam — August 31, 2010 @ 4:50 pm

  19. Umm – didn’t the Aussie scheme only cover banks – not investment outfits like SFC. Cullen had to go one further

    Cullen had too because of the interconnected nature (or outright ownership) of banking in NZ and Australia. If Cullen did not offer the same scheme as aussie our banks would have been perceived as weak and not worth lending too as a depositor. If our banks were perceived as being at risk as opposed to the safe Aussie banks, people withdraw funds and banks need actual cash to cover withdrawals, the cascade effects can be disastrous, asset fire sales and freezing up of the economy.

    The scheme was designed to give confidence to mums and dads with cash in the bank, not to make banks or finance companies make smart decisions about who they lent too as we have found out.

    Comment by andy (the other one) — August 31, 2010 @ 5:32 pm

  20. Having spent a good part of my life in the rural sector and in farm financing, I have a particular interest in the caterwauling coming from South Canterbury. Amongst all the rhetoric it’s worth noting the gummint has collected thus far from the guarantee scheme some $250 mil worth of fees and accrued interest therefrom which is a legitimate offset against any loss which may arise from the receivership. You don’t see anything of this in the media.

    I see from an earlier comment that SCF just scraped in back in April when the scheme was extended. That certainly calls into question the screening carried out by authorities at that time now that the extent of the internal malaise is becoming evident. Having said that, it seems to me this receivership will be a hell of a lot less damaging to the country than the ongoing debacle of Hanover which now has taken with it Allied Farmers (as well as all the depositors), one of the countries pre-eminent rural secondary lenders.

    I suspect in a couple of years, people from all sectors will look back and thank God Cullen put the scheme into place and English extended it.

    In many respects the gummint’s role in this is akin to that of a reinsurer – spreading risk in an orderly way.

    Sadly, it looks as though Mr Hubbard is to finance as Mr Crayfor is to dairying. With the exception of course that Mr Hubbard is a gentleman.

    Comment by Adolf Fiinkensein — August 31, 2010 @ 6:23 pm

  21. “In many respects the gummint’s role in this is akin to that of a reinsurer – spreading risk in an orderly way.”

    Except I don’t remember choosing to invest in the reinsurance market. I don’t think it’s my risk that is being spread, Orderly.

    Comment by Clunking Fist — August 31, 2010 @ 7:11 pm

  22. Maier now sayin that because of the guarantee scheme, that the previous management took much larger risks cause hey who cares – no downside here. Case study in moral hazard

    Comment by garethw — August 31, 2010 @ 9:43 pm

  23. In many respects the gummint’s role in this is akin to that of a reinsurer – spreading risk in an orderly way.

    Sort of – BB rated co’s like SCF were paying only 1.5% p.a. to be “insured”, a 1-in-66 chance of failing, which is much cheaper than the market would have priced it if we had Credit Default Swaps (insurance on a co going under). Sure, the banks for a while paid into the scheme that they didn’t need, but they were paying a lot less.

    The government was betting that the Guarantee would give finance co’s enough breathing room to trade their way out – without it many would have failed immediately. It’s probably a bit early to say whether it was a good idea or not.

    Comment by gazzaj — August 31, 2010 @ 10:19 pm

  24. As long as the investors get their money back, then that’s OK. But if the money’s going to continue the high salaries, bonuses, and perks for executives and managers, then that will be further devastating for the New Zealand economy which is already in a deep recession.

    I feel, though, that National don’t want New Zealand back on a stable economic road because if they did then they would have provided fair tax cuts for the low earners, raised the minimum wage, and could have taken a multitude of other wise measures in order to stimulate the economy, many of those measures not taking taxpayer’s money out of the coffers.

    Comment by Liam — September 1, 2010 @ 1:27 pm

  25. Liam, how does raising the minimum wage help “stimulate” the economy? Have you not noticed what has happened to youth unemployement since youth rates were abolished? All those extra dole payments DO take taxcpyers money out of the coffers.

    Comment by Clunking Fist — September 1, 2010 @ 6:07 pm

  26. Oh, and explain how tax cuts for low earners don’t take taxpyers money out of the coffers. Every other lefty here has bleated here about how tax cuts for the middle and top earners have taken money out of those same coffers.

    Comment by Clunking Fist — September 1, 2010 @ 6:10 pm

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