Order in the House: Calls for South Canterbury inquiry
Finance Minister Bill English’s ministerial statement today on the South Canterbury Finance (SCF) affair is revealing.
He tracked the history of the company’s involvement in the retail deposit guarantee scheme – and hinted that the government knew SCF was in trouble as far back as June 2009.
When SCF joined the scheme, Mr English said, the company appeared sound.
Later, as SCF’s assets nearly doubled to $2.16 billion over the next four and half years, the government became aware that much additional lending was “not high quality” – and is now aware that the majority of problem lending occurred before entry to the scheme.
In June 2009, the Crown set $831 million aside to cover the deposit guarantee scheme.
“The majority of this related to South Canterbury Finance,” Mr English said today.
He went on to confirm that the Treasury was in close contact with the company throughout its participation in the guarantee scheme.
Treasury was instructed to work co-operatively with any proposals to acquire parts of the firm or to recapitalise once it was clear that it was in trouble.
“However, all effectively amounted to a bailout by the Crown, with extra cost and risk to taxpayers,” he said.
“At no stage would the Treasury have recommended accepting any of these proposals.”
Mr English stuck by the government’s estimate that the total net cost of the deposit guarantee scheme to the taxpayer, once fees from the retail deposit guarantee scheme and wholesale guarantee scheme are collected, is likely to be between $300-400m.
But opposition parties want to know a whole lot more – with Labour and the Greens both calling today for a full parliamentary inquiry into the affair.
‘Racism’ comments not a problem
Land Information Minister Maurice Williamson’s reported comments that opposition to land sales to foreigners is sometimes driven by racism cropped up again today.
Prime Minister John Key repeated his belief that Mr Williamson’s comments were an attempt at humour that may have backfired – and brushed off hints that his ability to decide on the future of the Crafar farms could potentially be biased.
“The minister in due course will be presented by an Overseas Investment Act recommendation ... he’s an intelligent minister and I believe he’ll follow that recommendation through and consider all the merits of the case.”
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Comments and questions22
Labour and the greens are a joke - Lianne Dalzeil blamed the stat mgmt of Aorangi for SCF's downfall - and Russell Norman said something equally ridiculous. They just have no idea do they?
This is a very significant admission. Mr English should be taken to task for:
1. Financial alarmism that the financial system was in jeopardy when it was not. This as a justification for the unnecessary and undesirable Deposit Guarantee Scheme deserves to be challenged because it is the opposite of combined Treasury and RBNZ advice on 10th Oct 2008 (two days before it was introduced), and the RBNZ's subsequent Financial Stability Reports.
2. The size of the cost of resolving SCF is about $177m more than necessary, as a result of taking a tardy and soft response to the issue. SCF should have been placed in receivership in or before Oct 2009, when the losses would have been shared with the USPP noteholders (about $40m) before those investors were granted prior charge security, and the refinancing fees (about $20m), would not have been incurred, and the company would have saved about $100m in financing costs (5% p.a. additional costs times $2b times 1 year), and perhaps $10m in fees for transactions that didn't happen or didn't help, and about $7m in preference dividends and who knows how much from discounted sales of good assets to avoid running out of cash.
I'm writing some more comments about this here:
http://www.lostsoulblog.com/2010/09/govt-we-expected-scf-to-fail-since-june_08.html
I don't see how Bill English should be taken to task for Government decisions in October 2008 when he wasn't Minister of Finance or even in Government. The Deposit Guarantee Scheme was the brainchild of the then Labour Government and its Finance Minister, Michael Cullen, who was proud of ignoring Treasury and Reserve Bank advice.
Mr Key supported the scheme from its outset and even wanted to extend it to wholesale bank funding (see http://www.lostsoulblog.com/2008/10/david-bennett-national-party-from.html ). I never heard Mr English say a word against it.
By allowing SCF to join the GGS initially and then the extended version has been a disgrace and an absolute con by sucessive governments.Yes SCF would have fallen over in 2008 if they hadn't been covered by the GGS, but tough bikkies...people backed the wrong horse out of greed. Instead of a few loosing , all taxpayers now loose. How is this country ever going to grow maturely with so many cowboys around and noone learning form their mistakes.Shame on the 2 Finance ministers in recent times.
Had the Government of the day not implemented the DGS the country would have been faced with a significant flow of capital to Australia which also put a similar scheme in place. The consequences for our economy would have been severe. Doing nothing was not a viable option.
Rob, I'm not picking on your especially, but why just make an assertion without any evidence? If that was your concern, the NZ banking system would not have suffered, because it is owned by the Australian banks who would get their funds. Clearly those banks could have just lent it back to their NZ subsidiaries and/or purchased assets from them and the NZ taxpayer would not be on the hook.
I have provided evidence in support of my assertions, where's yours? (same challenge to others who make such assertions without evidence or reasoning).
And by the way, I'm not so much giving Mr English a hard time for not speaking against the scheme in Oct 2008, but for creating propaganda in support of it today.
There is no doubt that the govt had to put up the DGS for the registered banks - which they charged appropriate pricing model for the risk they were taking. However it was completely nuts to offer the DGS to small undercapitalised NZ finance companies owned by kiwi entrepreneurs and then charge them a pittance. South Canterbury accelerated its lending simply because the money was pouring in and that was in a market where the risk profile was extremly high due to the recession. It was a no brainer to invest in SCF and get 8.5% for government risk! Thank god the DGS wasnt around when Bridgecorp,Strategic and Hanover were live.
What approach would the Reserve Bank of New Zealand or the Australian Prudential Regulatory Authority have taken to inter-group transfers or purchases of assets, David? Do you have evidence that they would have allowed such transactions?
Both regulatory bodies are very prescriptive in what they will and will not allow, and have been even more so since the GFC.
Anon at 6:38 PM asks if the NZ major banks would have been allowed to borrow from or sell assets to their parents as I have suggested. Actually this is exactly what they did, and there is no policy or regulatory reason why they can't or shouldn't.
See here for the details:
http://www.lostsoulblog.com/2010/01/even-more-evidence-nz-big-banks-had.html
ANZ National Bank, the country's largest bank, as an example, sold billions of dollars in assets to its parent and on 10th Oct 2008, before the DGS was introduced, it created structures giving it access to billions of dollars in contingent RBNZ secured funding.
There is no policy problem with these transactions because they involve simple funding arrangements, and in the case of asset sales to parents, involve taking risk off the NZ subsidiary banks.
The real problem is how SCF behaved after they joined the DGS. Obviously Treasury checked them against criteria and let them join, but what about ongoing monitoring of their lending??? Clearly the Govt has to blame for not keeping SCF on a short leash.
None of us really know what happened unless all details are tabled and shared with those who are left with the bill. You would all be demanding full disclosure if there were labour Govt in office.
I don't trust National or Labour any more. If I'm paying the damned bill I want to see all the details.
Anyone who wants to pay this without demanding a real good look at the details is a fool.
Bollard has stated that in the weeks leading up to the introduction of the DGS there was huge demand for $100 bills (http://www.stuff.co.nz/national/politics/4094682/Bollard-tells-of-rush-on-100-bills), this was similar to experience elsewhere around the world.
David, whilst I respect your views and have enjoyed your opinions on SCF (which I think you have been spot on about) I believe that as soon as Aussie indicated they were going to introduce a gtee scheme, following the lead of other developed countries around the world, that NZ really had no choice.
In times of crisis, investor panic can result in irrational decisions and have severe consequences. The DGS assisted restore and preserve investor confidence and meant that NZ avoided a real financial crisis. If the total cost is $300-400m that is a small price to pay.
As has been said before, NZ is lucky to be closer financially to Sydney than Suva.
Get over it guys its happened & it will work its way out....with minimal loss
but nobody'll want to read them.
Huge demand for $100 notes: time to panic? No, I covered that at the time (http://www.lostsoulblog.com/2010/08/perhaps-smallest-bank-run-in-world.html )
As I've commented before, apparently NZ retail depositors and wholesale finance markets can largely tell the difference between sound and unsound financial institutions.
I'v made a fortune from this. I just $300k worth of bonds 6 days before the collaspe at a very CHEAP price. Thanks Allan hubbard
Very interesting - it did seem obvious to follow Aussie with the GG - but reading you arguments I have changed my mind. The finance companies who have failed since the intro of the GG would have gone sooner with less investors/taxpayers money - and the solid ones (UDC, Marac etc) would have survived OK.
Plus it all would have happened 2 years back - and we would be recovering faster now. The resulting asset drop (eg vacant land in Queenstown) would have happened earlier.
Thanks for considering the non-obvious. Sometimes the obvious is nothing more than a popular myth. The costs of a failed financial institution to its creditors and shareholders are visible, but the benefits of investor fear and discrimination in keeping the banks honest and prudent are unseen.
Big Deal.
You won and the person who sold the bonds lost.
So what.
You got it wrong.
No thanks to Mr Hubbard.
He didn't bring in the GG.
As Chris Lee's archives record,with the emergence of the GG,there was a flood of money into finance companies.
I could not resist investing with Allied Nationwide Finance for 18 months @ 10,65%,and SCF for two years at 10.25% .
Why not ?
Govt Guaranteed at those interest rates,.
You would be a mug not to.
If the GG had not been offered,would I have invested with those companies.
Allied no because it is in the wrong island.
SCF would have depended on my sharebroker's advice[not Forsyth Barr] so probably no.
There is absolutely no doubt that the GG prolonged the existence of these companies.
Hugh 7.46pm has a good point. "We" - NZ - now own this beast, is there not an arguement we should understand where it went wrong and who was driving it? I am not advocating a witch hunt by any means, but to understand why and to know who may protect us all in the future from the same mistakes by the same people. I to respect David Hilary's past insight (looking forward to the book when it comes out ..) and would be interested in his views on this.
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