Chance for a fresh start
It’s hard to find any positives to come from South Canterbury Finance being put into receivership this week but at least the ailing company has been put out of its misery.
And while taxpayers across the country can feel rightly aggrieved at bailing out South Canterbury’s investors, the government arguably picked the least bad option.
The economic stagnation of Japan over the past couple of decades is an example of what happens when governments keep zombie financial institutions on life support when they should be reaching for the off switch.
South Canterbury Finance has been in a moribund state for some time and, if the government had decided to meddle by taking an ownership stake or giving it a loan, it would have made matters worse.
If it had taken either of these options, the bill to the taxpayer could have been much bigger down the line.
Ignore the doomsayers – it’s not the end of the world when a major company, be it in finance or any other industry, falls over.
In fact, bankruptcy is a necessary and healthy part of capitalism, enabling scarce resources that were being directed to unprofitable uses to be quickly shifted to more productive activities.
Keeping loss-making companies going artificially with the forced generosity of taxpayers simply enables more resources to be wasted and for a longer time.
When a company fails, the capital it owns, be it farmland, tractors, chocolate-making machines or high-rise buildings, doesn’t simply cease to exist.
Instead, it is transferred to new owners at prices that reflect the new market reality.
For that reason South Canterbury Finance failing is actually good for the economy but it would have much been better if the government hadn’t got itself involved unnecessarily.
The rest of New Zealand has just bailed out Timaru but you wouldn’t know it from the ungrateful attitude being shown by the worshippers of Allan Hubbard.
They seem to blame South Canterbury’s collapse on the government and by proxy the rest of the country when the fault lies with the company’s management for dishing out the dodgy loans that got it in trouble.
One wonders how many of Mr Hubbard’s more vocal supporters have been recipients of his generosity through the interest-free loans he’s been known to hand out.
For weeks the Hubbard fan club has invaded comment boards on news sites such as NBR Online, berating those who dare to criticise their idol.
What they don’t seem to understand is that when your company costs the taxpayer more than a billion dollars you should expect some serious scrutiny and plenty of criticism, with possibly a bit of anger thrown in too.
Not a saint
The attitude of Mr Hubbard himself also leaves a lot to be desired.
Following South Canterbury’s failure he claimed that he could have saved the company if he hadn’t been sidelined, blaming the government for putting him in statutory management.
But as reported in the NBR print edition today, former South Canterbury director Stuart Nattrass has pointed the finger at Mr Hubbard, saying his refusal to dilute his shareholding by raising capital contributed to the company’s demise.
“The strategy Allan was pursuing was too large and too ambitious for its capital structure,” he said.
Compared to other bosses of failed finance companies such as Rod Petricevic and Eric Watson, Mr Hubbard has been given a relatively easy ride by the media and general public until now.
But he was doing the sort of related-party deals these other men of finance have been given a hammering over.
He still has plenty of support in Timaru but Mr Hubbard will struggle to find much in the rest of the country.
An ugly precedent
Although it might have been the best decision in the circumstances, National’s choice to hand over more than $1.7 billion upfront to South Canterbury Finance could have serious political consequences.
The “heads I win, tails you lose” game played by investors in the government-guaranteed company has rightly left voters who didn’t invest in it, or invested in other finance companies that didn’t the same special treatment, fuming.
National may be hoping that by paying everyone quickly the issue will be largely forgotten by the time the next election rolls around.
But it won’t disappear because every time National announces even a minor spending cut its political opponents will throw the big bailout right back in the government’s face.
If National decides to, say, re-introduce student loans or make cuts to Working for Families or early childhood education subsidies, it can hardly preach fiscal prudence with a straight face when it found the cash to give to wealthy finance company investors.
But Labour would be standing on shaky ground if it tried to launch a major assault on the bailout for finance company investors, seeing it set up the original guarantee scheme in the run-up to the 2008 election with National’s agreement.
Labour leader Phil Goff’s suggestion that South Canterbury’s problem was National’s failure to get the economy growing strongly enough for the company to trade its way out of trouble, was ludicrous.
However, because National was holding the egg when it finally burst it will be the party that gets most of the blame for the mess.
The issue could prove especially damaging for its support among male blue-collar workers, who swung from Labour to National in large numbers at the last election after getting sick of “nanny state” bossing them around.
These voters, known in the US as “Reagan democrats,” are crucial to National’s chances at the next election and they are unlikely to be happy at their hard-earned tax dollars going to the likes of NBR Rich Lister George Kerr, who was first in the creditor queue and would have got all his money back anyway.
While these working class voters may not cause National to lose, they could leave it saddled with a hotchpotch of coalition partners from all parts of the political spectrum.
This would leave National even more incapable of bringing about the change New Zealand needs but isn't getting.