Scoop Election 08: edited by Gordon Campbell

On the South Canterbury Finance bailout

September 1st, 2010

south Canterbury finance, receivership, bailout, government deposit guarantee, finance, hubbardLike the war in Iraq, there doesn’t seem to have been an exit strategy for the Retail Deposit Guarantee Scheme – and the extension of the scheme until the end of 2011 has been the government’s way of mutely recognizing the ongoing fragility of the sector. The $1.775 billion bill that the taxpayer currently faces for South Canterbury Finance is a consequence of finance companies being let into the scheme in the first place by the Clark government in October 2008. It is also an indictment of the reluctance and/or inability of the Key government to amend the scheme to limit the taxpayer’s liability for say, the slowly collapsing empire of Alan Hubbard.

At the time, there were always short term reasons for the decisions made. Back in 2008, New Zealand felt it had no option but to follow Australia’s lead and create a similar Crown-guaranteed retail deposit scheme – otherwise, there could well have been a damaging run of funds to Australia. For similar reasons, the exclusion of finance companies at the outset would have caused a similar run of funds from those institutions and fostered an even greater concentration of credit/lending/investment around the Aussie-owned banks – while triggering considerable mayhem at the margins of the financial sector, among the finance companies left out in the cold.

Well, that’s capitalism. Surely isn’t that how the market is supposed to operate? Aren’t the risky and the frivolous are supposed to go to the wall when reality arrives at the party? By trying to give everyone a soft landing, the RDGS has introduced its own set of deadly distortions. For starters, it created a false and unsustainable climate of security that brought predatory speculators flooding into those institutions to chase a ‘can’t fail’ guarantee, plus interest – at rates anything between 3-5% above the rates available through the banks. In turn, this influx of speculative money lulled genuine (ie genuinely greedy) investors into believing that the finance companies were sounder than they really were. The taxpayer is now footing the bill.

The RDGS also generated winners and losers. Those lucky enough to be in the SCF – and SCF can count itself lucky (some would say suspiciously lucky) that it was allowed to stay in the scheme – will get back their investment plus the generous interest rates promised when they signed up. Simultaneously, those investors in finance houses (eg Hanover) not in the RDGS will get no such compensation. This must be a particularly galling outcome for the likes of Hanover investors when yesterday, Treasury chose to extend the SCF payback to foreign investors and others not really eligible under the RGDS rules, simply in order to enable the SCF receivership to proceed more tidily – and less expensively, in terms of those ever-mounting ‘plus interest on the investment’ costs.

The taxpayer has to wear the cost of shelling out for ordinary SCF investors, as well as paying out the speculators who bought into the SCF this year at a discount, in the hope and belief that it would fail and that they would then be paid out at a premium. By some estimates, fully one third of the 35,000 investors being bailed out under the rescue package may fall into the class of speculators betting against the SCF.

Not that there’s much joy in drawing a firm distinction between investors whose greed was driven by credulity, and those who were motivated by sheer cynicism. Anyone putting their money into the likes of SCF is chasing a return over and above that available in banks – and investors chasing those higher returns are supposed to wear the risks involved. Not so in this case. Under the RDGS, taxpayers have been made to subsidise the shonkier players in the finance sector and the greedier investor class in society of society – this, at a time when there is allegedly no taxpayer funds available to pay teachers, or to improve the health system. The nigh on $1.8 billion shelled out yesterday – $340 for every man, woman and child in New Zealand – doesn’t even begin to address the opportunity cost of what that money could have been used for otherwise, to improve social services.

Keep in mind the bailout of the finance sector is arriving on top of the $1 billion plus taxpayer bailout of the crooked and the credulous in the leaky homes debacle. For the cynical voter next year, the major parties pose a genuine dilemma – voters will face a choice between a Labour Party keen on socialising business profits, and a National Party equally keen on socializing business losses. Supposedly, the ultimate cost to the taxpayer (excluding opportunity costs) will be in the order of $600 million if – and that’s a big if – the receivers can attract good bids for the saleable SCF assets.

Are there any other finance sector dominos left to fall before taxpayers can safely exit their obligations under the RDGS? The exit strategy from this scheme is not yet in place – however bravely Finance Minister is talking up his intention to either end the scheme next year, or raise the entry fee for belonging to it. With the markets facing genuine fears of a relapse into double dip recession, the Mission Accomplished point still seems a very,very long way off.

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    1. 9 Responses to “On the South Canterbury Finance bailout”

    2. By Ben on Sep 1, 2010 | Reply

      So why have all the free marketers and small government zealots who slammed the state bailout of Air New Zealand and Tranz Rail suddenly gone silent on the state rescue of SCF? Haven’t heard boo from the likes of Rodney Hide or Roger Kerr. If they were ideologically consistent then I’d expect them to be up in arms over yet another government intervention in market. Might it be because their ilk will be among those who will benefit from the bailout?

    3. By dave brown on Sep 1, 2010 | Reply

      Yeah but who is the taxpayer?
      Its the working class who will pay through cuts to the social wage and increasing indirect tax. Finance capital avoids tax by putting its agents into govt to cut their taxes and socialise their losses.
      A number of small farmers and businesses will lose their investments but this is a restructuring of the rural sector in a global crisis to allow big foreign investors to consolidate rural holdings as tradeable shares.
      The PM, his minster of Ag, his finance minister and sundry other top NACTs are insider traders in this whole strategy.

    4. By Jane on Sep 1, 2010 | Reply

      Couldn’t agree more Gordon. Greed motivated people to enter this scheme, the guarantee was the wonderful sweetner. Put my taxes towards Health and welfare thanks.

    5. By elyse on Sep 1, 2010 | Reply

      Thank you, Gordon, for the clear analysis.
      I had no idea anything other than banks were a part of the government guarantee.
      The small government crowd’s enthusiasm for corporate welfare but not social welfare seems to be the way of the world these days.
      Suspicious, indeed.

    6. By Chris on Sep 2, 2010 | Reply

      I’m so shocked that the guarantee scheme not only cover the loan principle, but the interest as well.

      In effect we the TAX payer not only mitigated the risk, but guaranteed the profit for a few that new about this small print detail.

    7. By Conrad on Sep 2, 2010 | Reply

      It’s actually worse than that Chris; by essentially ignoring the eligibility rules the Government is bailing out those who were never covered in the first place. In addition the bulk of the fees collected fro the retail deposit guarantee scheme have been paid by the banks. So the net result is savers who kept their money in the bank received less in interest (to cover RDGS fees) and now have to pay taxes to the reckless and greedy who put their money into South Canterbury Finance.

      Personally I’m absolutely disgusted by this decision. The explanation put forward to extedn coverage and pay-out immediately, (“It’ll save money in the long run and make the receivership easier”), seems dubious at best.

      I’d really like to know the following things:
      1. The identities of all recipients of payments;
      2. The dates when they made their ‘investments’ in the failed company;
      3. The amount each recipient received;
      4. Any donations made by a recipient to any political party over the past 3 years.

      I’m sure it would make some very interesting reasons.

    8. By Conrad on Sep 2, 2010 | Reply

      Conrad is right with his wish list, which no doubt would likely throw some much needed light on this missus of our money.

      In the past when fraud was committed, those whom were tricked lost their money. With these government schemes it is those that did not get seduced that pay, and those that did that walk away with a fat profit, which is socially and ethically wrong.

      The financial credibility of the government is in tatters now.

    9. By Jeremy W on Sep 5, 2010 | Reply

      I just cannot believe this, our tyax money should be going to the health system and welfare, this will break NZ, we will become a third world country owned by the rich chinese farmers who intend to buy our prime land.
      GET RID OF THE NATIONAL PARTY

    10. By Stuart Munro on Sep 6, 2010 | Reply

      It would seem to be a reasonably obvious and straightforward plank of future financial guarantee policy, that the taxpayer does not protect your interest.

      Who drafted this piece of incompetent regulatory nonsense, and when were they sacked?

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