Editorials on SCF

September 1st, 2010 at 4:00 pm by David Farrar

The Herald:

In the end, was not, as some had predicted, too big to fail.

The Government, quite correctly, resisted the temptation to support the recapitalisation of the country’s second-biggest finance company, consigning it to receivership. …

There was, however, no point in keeping South Canterbury Finance afloat. Bad governance and loan practices have destroyed a once strong brand.

The Press:

South Canterbury Finance’s decision to call in the receivers yesterday had an inevitability about it. …

But the investor repayments, and the fact that the receivership process means there will be no fire sale of assets or fast call-in of loans, should limit the economic, and perhaps political, fallout. This might otherwise have been more serious at a time when the economy is still fragile, a strong reason for the Government to act.

The Dom Post:

The failure of South Canterbury Finance is a tragedy – for founder Allan Hubbard, for South Island businesses and for taxpayers who must now make good the deposit guarantee made by the last government.

Mr Hubbard, 82, is no Mark Hotchin or Rod Petricevic. There are no multimillion-dollar mansions, flash cars or luxury yachts lurking in his cupboards. He lives in a modest Timaru bungalow and drives an ageing Volkswagen Beetle.

However, the $1.6 billion SCF owes investors is roughly three times the amount Mr Hotchin’s Hanover and Petricevic’s Bridgecorp each owed investors when they collapsed. …

It is time for the loyal band of letter-writing supporters who believe Mr Hubbard can do no wrong to bite their tongues. Their hero is decent, generous and well-intentioned. Earlier this year he put family assets worth more than $150m into SCF in an attempt to shore up its balance sheet. Those assets have now been lost.

The interim report of the statutory managers appointed to run his affairs, plus those of other companies and charities associated with him and his wife, Jean, suggests the acumen that made him the South Island’s richest man has deserted him. …

Many will wonder why the last government ever agreed to guarantee the deposits of investors who went looking for higher interest rates in . The answer is that both Labour and National, then in Opposition, considered the guarantee the lesser of two evils. Better payouts than the total collapse of the financial system. They may have been right, but the payouts announced yesterday still stick in the craw. This is not what we pay taxes for.

The Dom Post is on the money. It is easy in hindsight to say that one should not have had the guarantee scheme, but in late 2008 the wordl financial system was on the brink of possible collapse, and pretty much every OECD country did much the same as a stability measure.

The ODT:

But with SCF’s investors largely covered by the guarantee scheme, the Government chose to see it go into receivership at least in part so that it could have some degree of control over the impact of the company’s failure on the core South Island economy – and so the fallout could be managed, as far as possible, in an orderly manner.

SCF may be regarded as the biggest single South Island casualty of the recession, and without the greatest care by the receivers and the principal debtor – the taxpayer – the long-term consequences may be a chief cause of slowing the economic recovery.

Everyone in the South will hope that prospect can be avoided.

On the brighter side, some sensible reduction of rural land prices may eventually result from this failure, just as it appears to be occurring in the urban property market once the speculative bubble burst.

None of the four are saying the Government should have stepped in to stop receivership, which is what some were urging.

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37 Responses to “Editorials on SCF”

  1. vibenna (305 comments) says:

    It’s not just hindsight DPF. Some of us strongly criticized the guarantee scheme at the time for including finance companies, where the risk of related party loans with weak collateral was obvious. Treasury said at the time that such comments were “not helpful,” as if every shark in New Zealand hadn’t already spotted the obvious possibilities for rorting the scheme.

    Now we pay the price.

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  2. GPT1 (2,106 comments) says:

    And when the guarantee was brought in National showed a degree of country first bipartisanship that Goff is lacking on the SCF disaster.

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  3. roger rabbit (45 comments) says:

    Wait there will be more Hone Key will fob of everything to the chinese, remember hone was in the money world ie a leech

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  4. Guy Fawkes (702 comments) says:

    Goff’s stance on all of this is just amazing really.

    It is best for all of us on this side of things that he continues in the same vein.

    All we now need is David “I run the show” Cunliffe to pipe up, with “me too” Mallard in hot pursuit.

    Labour’s top table, the gift…………………..

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  5. mjwilknz (612 comments) says:

    DPF, I don’t agree that the Dom Post editorial is “on the money”; it says nothing about whether we should keep the guarantee now that the global financial crisis has, to a lesser or greater extent, passed. Surely that’s the key issue, from here on. The guarantee brings major risks; what benefits does it bring to compensate for those risks?

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  6. vibenna (305 comments) says:

    Are there any people who: (1) Have an unrecoverable loan from SCF, and (2) But are recovering money under the crown guarantee? For example, are there any unrecoverable loans associated with the Torchlight group?

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  7. labrator (1,849 comments) says:

    Considering South Canterbury Finance is 84 years old and Alan Hubbard is 82, surely the Dom Post could work out he didn’t found it?

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  8. tvb (4,259 comments) says:

    The guarantees were flawed policy because the Government was never in a position to honour them anyway. They were not worth the paper they were written on. And as appears in this case they created a moral hazard whereas SCF could behave in a profligate way because the deposits were guaranteed by the Crown. So a flawed policy made things worse. I though we learned all this back in the 1980s. In any event an orderly liquidation of the company is the way forward. Some lessons from DFC in getting the overseas depositors out of the mix was an important lesson. Having Sandy Mayer ex DFC Statutory Manager probably helped the Government considerably here. As for Hubbard it takes all sorts to cause financial failure.

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  9. krazykiwi (9,189 comments) says:

    The guarantees were flawed policy because the Government was never in a position to honour them anyway

    Couldn’t believe the glib soundbyte yesterday.. something along the lines that “the government didn’t believe the bailout of SCF’s investors would have much impact on the economy”.

    Incredible. So NZ Ltd just found $1.6b down the back of the couch did it? Or do we have to borrow this money and “add it to the bill, Bill” for future [endangered] taxpayers to service?

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  10. Dirty Rat (504 comments) says:

    I love the way that DPF spins this Socialist rubbish.

    I dont mind paying tax, but for fuck sake gimme back my $403, investment is a risk…..unfortunetly, the tax payer has to pay, as Rasputin English doesnt want to piss off his fellow Farmers.

    I wonder how much Blingenglish has invested in them ?

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  11. Adolf Fiinkensein (2,834 comments) says:

    tvb, you know you really beat the band.

    In 1944 you would have pontificated that the Allied policy of landing at Normandy was flawed because they could never get ashore. And you would have written such inane stupidity on or about the 15th of June, no doubt.

    It seems to have passed you by that the gummint only yesterday honoured its guarantee.

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  12. roger rabbit (45 comments) says:

    Under HONE KEY the land will belong to the chinese and the foreshore and seabed will belong to what ever maori group offers hone the most to stay in power

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  13. Ed Snack (1,801 comments) says:

    As a suggestion, perhaps the guarantee could offer capital plus the risk free rate of return only under a guarantee. As it is the investors have had a far too high a rate of return for what was essentially “risk-free”. Perhaps to offset this the government should defer the repayments which will no longer attract any interest until the average return is a more reasonable level. Hardship withdrawals of capital can be granted if the interest portion over the risk-free rate is forgone.

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  14. RRM (9,667 comments) says:

    I’m no financial expert, but wouldn’t the collapse of investments the size of SCF still be a sizeable kick in the whole country’s guts, pretty much regardless of whether there’s a state depositor guarantee scheme or not?

    If it had been left alone to dig an even bigger hole with the result that the economy of the whole south Island fell over (as some pundits seem to be suggesting is possible) surely that would cost taxpayers plenty as well?

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  15. lastmanstanding (1,241 comments) says:

    The Government had little option but to step in . However I was disappointed they covered the bond holders. generally these are informed investors who understand the market and in this case gambled on being included and picked up a healthy profit for in some cases a few weeks investment.

    The best hope is the Government will listen to advice on the rewrite of the Securities Act and rebalance this towards the investor.

    As one who was involved from the original 1978 version and who has pleaded for the buy side to have some consideration we wait in hope.

    Otherwise a new generation of investors will turn their backs of the stock market as many did after 1987 never to return.

    Given population the NZX should have 500 listers rather than the current 150 compared the Oz.

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  16. Dirty Rat (504 comments) says:

    RRM

    Only in Bill English’s eyes

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  17. Simon (718 comments) says:

    tvb, you know you really beat the band.

    In 1915 you would have pontificated that the Allied policy of landing at the Gallipoli was flawed because they could never get ashore.

    Debt $1.7 billion
    Assets $1 billion
    Shortfall $700 million

    That is worse than those ponzi banks in Florida.

    SCF ahead of curve by about 18 to 24 months.

    New Zealand fuck yeah!

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  18. Adolf Fiinkensein (2,834 comments) says:

    RRM is one of the few people here who is really ‘on to it.’

    It’s called opportunity cost.

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  19. Dirty Rat (504 comments) says:

    conflicting info by John Key and English too

    Key fully put the blame on farmers, English wants to protect them.

    Normal Recievership/Liquidation practice would be to sell the books, the books that were not bought would be those who brought about the collapse of SCF. Thats where they should have been a fire sale.

    Fuck, my kids are paying $405 each, to what is effectively bailing out bad businessmen

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  20. Dirty Rat (504 comments) says:

    And what is wrong with the South Island falling over anyway ?

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  21. Guy Fawkes (702 comments) says:

    Deposits should be guaranteed as stated and paid. All interest ‘earned’ over the prior 12 months should have been netted off.

    Bond and Debenture holders of whichever ranking if in business should have had either no cover or a max of 50%. net of coupon.

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  22. berend (1,676 comments) says:

    DPF: but in late 2008 the wordl financial system was on the brink of possible collapse, and pretty much every OECD country did much the same as a stability measure.

    Spoken as a true blue liberal.

    And all these bank investments are still killing nations, and might well bring them down in the end. The world financial system wasn’t on the brink of collapse, if you believe that bankruptcy of a company is the end of the capitalist system, you haven’t gotten a clue. Taxpayers were sold it was the end, by those who received large contributions from the companies that were going bankrupt.

    And still billions of taxpayers money is transferred from its legal owners into the hands of the rich and powerful.

    This is no longer the capitalist system, it’s crony capitalism and the politicians have their hands full of it. At least in the US they have a Tea Party. We only have John Key.

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  23. LC (162 comments) says:

    Look the people who invested in SCF weren’t using money that they had borrowed, and it wasn’t money doing anything useful, so it’s loss to the investors would have had no impact on ‘the economy’ (as the poor loans given out by SCF had already been used to stimulate the mainly South Island economy).

    They now have their money to re-invest in productive assets, hopefully back into the community.

    The net effect is that the South Island has managed to get the North Island to pay for their failures, and to stimulate the Southern economy again.

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  24. side show bob (3,660 comments) says:

    RRM, In a radio interview on Radio live it was stated that the collapse of the Lehman Brothers (US) in 2008 cost the US about 0.5% of their GDP. To compare, the demise of SCF is 0.8% of our GDP, so the collapse of SCF is of greater proportions then the collapse of Lehman in the US, not good !!!.

    Given the mad Kenyan and his band of progressive pullers are now talking of a second stimulus I would say economic recovery in NZ is simply propaganda. Things are only going to get worse. So I’m picking the government will not wish to continue with it’s guarantee come October. Their is no free lunches and the investors in SCF should be breathing a huge sigh of relief for dodging the bullet.

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  25. kaya (1,360 comments) says:

    What berend said at 6.28pm

    Utter bullshit being stated today as it was in 2008, too big to fail my arse. The sooner they fail, the sooner the real world can get on with the business of doing business. The guarantee scheme was and is a total joke. Private business being guaranteed by taxpayers’ money!!!! WTF!!! I can’t believe National supporters are finding socialism suddenly acceptable. Grow a fucking spine and call it for what it is, absolute theft.

    ssb – I’m not a fan of Obama but it is the Federal Reserve and Ben Bernanke who are the morons propping up Wall Street with the promise of more taxpayers money. The Federal Reserve is accountable to no one. Ron Paul has tried introducing a Bill to have the Fed audited but it has been shot down. I think they are too scared to see the results.

    These Ponzi schemes are falling down all over the show, crunch time is fast approaching.

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  26. questlove (242 comments) says:

    The government sold us out to the farmers. They didn’t have to extend the scheme in April, especially when they knew in February that SCF was going down and tax payers would be the ones footing the bill.

    But who gives a shit eh? Goff not playing nice is the real issue.

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  27. side show bob (3,660 comments) says:

    Kaya I see Ron Paul wants an audit done on the Gold reserves in Fort Knox, no one seems to keen on that idea, wonder why :-) . It would make great tele.

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  28. kaya (1,360 comments) says:

    ssb – it would be a reality TV show I would love to see! Have a look on Youtube for “The Creature From Jekyll Island”. No, not a 60′s B grade horror movie, much more frightening! Some info on the Fed and how it came about.

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  29. Poliwatch (335 comments) says:

    I have never read a kiwiblog item with so much ignorant dribble on it. It is almost making me want to go and listen to the talkback, although I suspect most people who comment above are those that ring in there.

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  30. kaya (1,360 comments) says:

    Theft, nothing less. No other word sums it up better.

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  31. Scott (1,736 comments) says:

    I think the Dom Post has it about right. Hubbard was a decent well intentioned man who genuinely tried to help others and give them a helping hand. He was also a man of integrity who lived modestly and did not fritter away other people’s money to maintain his own lavish lifestyle.

    However I suspect he ran the business too long and lost the business acumen and mental sharpness as age took its toll. A shame really as he was a man of sound character who tried to make good the losses with his own money.

    Lastly it should be noted his was not the only finance company that has gone belly up. The economic downturn has claimed many such companies.

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  32. tvb (4,259 comments) says:

    The Government guaranteed billions and billions and billions of dollars under the guarantee scheme. And this is against the background of the Government running a huge deficit. Just tell me how guarantees of that magnitude could ever be honoured. They are not worth the paper they are written on. So the guarantees were pointless. I fail to see how all this has to do with Normandy or Gallipoli – though I see some parallel with Gallipoli.

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  33. Kimble (4,417 comments) says:

    tvb: ” Just tell me how guarantees of that magnitude could ever be honoured.”

    Well yes, if ALL the guarantees had to be honoured it might be difficult, but not impossible, to print enough new money. Of course, that is the worst case scenario and there are very large number of not-worst case scenarios. At the very least, individual risks would be reduced.

    Scott: “Lastly it should be noted his was not the only finance company that has gone belly up. The economic downturn has claimed many such companies.”

    What made SCF different is that it wasnt run by a rich person. He was from the South Island and therefore infallible. He didnt drive a Ferrari, he didnt wear nice suits. He wasnt from Auckland. All this means that he was better than the other guys that lost money in the eyes of his parochial supporters. None of that is worth a damn though. (Which might be why Hubbard borrowed millions using it as collateral. ZING!)

    Is this the death of the New Zealand finance company? Should it be?

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  34. mistywindow (27 comments) says:

    I accept that the government guarantee scheme was a necessary evil. However, its implementation was a disgraceful cockup.

    By committing the taxpayers to paying out on whatever skyhigh interest rates these cynical manipulators dreamed up, our politicians, both Labour and National, and their regulators virtually set up South Canterbury Finance and others to fail.

    Then Bill English (a rorter of the system if ever there was one) had the gall to say that it didn’t really matter because the payout money has already been earmarked. Perhaps he’s hoping that 90% of voters don’t understand the concept of opportunity cost.

    He’s probably right.

    Our whole political system is morally and intellectually bankrupt, the voters don’t understand the system so the turkeys keep voting for Christmas.

    Dean Baker has it right:
    http://www.huffingtonpost.com/dean-baker/when-wall-street-rules-we_b_688866.html

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  35. RRM (9,667 comments) says:

    I’ll just leave this here…

    For the cost of two new hospitals, we now effectively own the failed South Canterbury Finance company and John Key’s Government controls some prime South Island farmland (plus a lot of worthless property investments).

    If the failure of the free market is going to cost us $1.6 billion today, the least the Government can do is ensure that we don’t then lose our best farmland to foreign owners.

    We have an unexpected opportunity to protect a strategic asset, especially while the Government dithers over introducing tighter overseas investment laws.

    Regards,

    Russel Norman

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  36. peteremcc (341 comments) says:

    “It’s not just hindsight DPF. Some of us strongly criticized the guarantee scheme at the time.”

    This.

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  37. Pete George (23,351 comments) says:

    If the failure of the free market is going to cost us $1.6 billion today

    Not correct, it’s the up front cost but $1b or so should be recoverable. They’re not all bad investments.

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