Deposit guarantee spurred flurry of finance company activity

The Treasury, charged with overseeing the retail deposit guarantee scheme that will end up costing taxpayers up to $1.1 billion, looked on passively as finance companies used the guarantee to hoover up investor funds and ramp up lending.

That’s the conclusion of the Office of the Auditor General into Treasury’s handling of the scheme, which posed the question why there is no evidence the department asked itself if it could have taken a hands on approach to the scheme from its inception in 2008.

Deputy Controller and Auditor General Phillippa Smith told Parliament’s finance and expenditure committee today that as a policy providing department, the Treasury wasn’t immediately equipped to take an active role in the first five months of the scheme, which threw a lifeline to firms that subsequently failed, including South Canterbury Finance.

“We have not said they (the Treasury) should have intervened, we have said we could not find evidence that they asked the questions of themselves,” Smith said. “We could find no evidence that they had asked the question should we be behaving differently? Are there ways in which we could intervene?”

Finance companies took advantage of the government guarantee, with South Canterbury Finance in particular increasing its debenture base by 25 percent and ramping up its lending over parlous property developments.

When the report was released in October, Treasury Secretary Gabriel Makhlouf rejected the assertion the department was too hands-off, saying they couldn’t find a case where intervention was more likely to achieve a better outcome.

Smith said when asked why questions weren’t asked earlier, the Treasury answered “because there is a policy of non-intervention.”

“Treasury is largely a policy ministry and this was a big operational task for which they weren’t equipped and had to become equipped,” Smith said. “The other half of the story is that as a policy ministry, where was the policy work? Where was the policy expertise to say actually we’ve got something unprecedented here, is there a better way of going about it?”

The root of the problem in the early phase of the scheme was delays in sharing information, which went from finance companies to the trustees, to the Reserve Bank and ultimately to the Treasury, she said.

The Auditor General didn’t have a mandate to look into the Reserve Bank’s involvement in the scheme’s management, though the bank was helpful in its review, she said.

The report found the scheme to be a success in protecting investors and providing stability to New Zealand’s financial system against the backdrop of the global financial crisis and a similar guarantee being implemented across the Tasman.

The government ended up paying out some $2 billion to guaranteed debenture holders, the biggest of which was South Canterbury, and expects to claw back about $900 million, according to the report. The Crown has since set up an entity to manage the outstanding loan books of the failed lenders.

Godfrey Boyce, a partner at KPMG and auditor of the Treasury, told the committee the department didn’t have the operational capability to take a hands-on role in monitoring the scheme at the outset, and it wasn’t until May 2009 when it attracted staff with experience in credit markets.

Since then, the Treasury’s operational capability has improved, as evidenced by its swift response to AMI Insurance’s request for government aid in the wake of the Canterbury earthquake, Boyce said.