Imperator Fish on South Canterbury Finance

September 10th, 2010 at 2:27 pm by David Farrar

is a lawyer. He leans to the left, but has always been a fair critic.

He has gone through all legal deeds about , which were posted on Red Alert. has shown his legal skills are as excellent as his diplomatic skills and concluded it is all ’s fault, and Bill has cost the taxpayer $300 million.

If you wish to take your legal advice from Trevor, then can I suggest you hire him to negotiate your purchase of the Auckland Harbour Bridge, which I have exclusive sale rights to.

Here is what Imperator Fish has found and concluded:

The Crown unquestionably had a legal obligation to pay out New Zealand depositors. This is unarguable. When SCF went into receivership, Bill English had no choice but to write out a cheque. Had he not done so the Crown would have been sued en masse by investors, and would have lost and been ordered to pay costs. The same business commentators now savaging Bill English for paying out investors would then be calling him a fool.

Including Trevor no doubt.

Some in the media and blogosphere have suggested the terms of the guarantee deeds may have been breached, and that this meant payment didn’t need to be made. Some go on to say that the fact payment was made proves this is just National looking after its mates. Wrong. It’s quite possible that breaches of the deeds occurred and should have been detected, and that the detection of such breaches may have enabled action to be taken to limit the Crown’s liability. But prior breaches do not affect the Crown’s liability to pay.

Important to note.

There was no obligation to pay overseas investors, as Bill English has himself admitted. He has said paying them out enables the Crown to take control of the receivership. It may seem unfair that some people are getting the benefit of a guarantee not designed for them, but the alternative is to risk getting much less during the receivership. English’s position on this matter is at least defensible, and may in fact be financially prudent.

One may have ended up with years of litigation, if some investors were excluded. An extra $20 million, to gain full control seemed worth doing.

SCF had a number of obligations under the deeds, including the obligation to conduct its business and operations in a proper, businesslike, efficient and prudent manner, and the obligation not to engage in related-party transactions. Any breach by SCF of those obligations would give the Crown the right to withdraw the guarantee in relation to future deposits only.

This is what many people do not realise. Once the guarantee is in place, you can’t punish the investors for the sins of the company.

IF does want an inquiry though:

I stand by the move to pay New Zealand depositors, because legally any other position would have been utterly indefensible. The decision to pay overseas depositors can at least be debated, though I understand the reasoning behind the move.

But questions remain about the role of Treasury and others in this. Could SCF’s troubles have been detected earlier? Could the Government have avoided paying out some of this money?

This needs a public enquiry. A huge amount of money has been paid out, and the decisions of those involved should be scrutinised. If it turns out they have acted entirely properly, then they will have nothing to fear.
I am not against an inquiry, but I think it is too early for it now. The SFO is still investigating Aoraki, and the Statutory Managers are also sorting through things. Possibly once both those entities have concluded their inquiries, then one can look at whether we would benefit from an inquiry into everything.
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29 Responses to “Imperator Fish on South Canterbury Finance”

  1. peterwn (3,157 comments) says:

    If Labour wants a parliamentary inquiry into SCF, then National could quite easily mount a similar inquiry about the purchase of an overpriced clapped out train set. The ultimate cost to the taxpayer of bank guarantees including SCF bailout but less financial organisations’ levies is probably $300 – $400 Million, less than the purchase price of the train set.

    Good luck on selling the bridge, David.

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  2. scrubone (3,048 comments) says:

    Like I said on The Standard the other day: what decision did cabinet take that resulted in a payout of $1.7b?

    Last I checked, no one seemed interested in answering that, yet the entire discussion was on an IOA request for details of it. (Yes, there are some details where decisions were made, but overall it was automatic that the cheque be written)

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  3. Inventory2 (10,100 comments) says:

    Be nice to Trevor DPF; he’s a fighter, not a lover!

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  4. alex Masterley (1,490 comments) says:

    It’s nice to see some-one with some commercial legal ability looking at the various documents and then commenting in a rational manner rather than nutting off as others have done.

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  5. backster (2,077 comments) says:

    Chris Lee has a comprehensive analysis of the downfall of S C F on his website.

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  6. Cactus Kate (545 comments) says:

    A very selective cut/paste of IF’s post …….

    The DoG’s were entered into in November 2008 on the basis of the company being in position A. The company it is now being revealed was actually in position B. For that someone needs to be accountable beyond auditors and accountants.

    IF states quite rightly:

    “SCF had a number of obligations under the deeds, including the obligation to conduct its business and operations in a proper, businesslike, efficient and prudent manner, and the obligation not to engage in related-party transactions. Any breach by SCF of those obligations would give the Crown the right to withdraw the guarantee in relation to future deposits only”.

    So most important are his questions (that were not cut/pasted as they question Treasury and Govt officials):

    “When should Treasury have become aware of SCF’s troubles, and what was it doing to monitor the company?”
    “If Treasury was aware of SCF’s troubles, did it consider giving notice of breach, and if not why not?”
    “The deeds give the Crown the right to require directors of SCF to give undertakings to use their best endeavours to ensure SCF complies with its obligations under the guarantee deeds. Were such undertakings asked for? If so, will they now be enforced against the individuals? If not, why not?”
    “But questions remain about the role of Treasury and others in this. Could SCF’s troubles have been detected earlier? Could the Government have avoided paying out some of this money?”

    The CEO of the company has stated that the company was not acting in a prudent fashion, that alone is grounds for an inqury.

    Another issue is whether at 19 November 2008 the company was already in breach of the guarantee it was entering into.

    IF agrees: “It’s quite possible that breaches of the deeds occurred and should have been detected, and that the detection of such breaches may have enabled action to be taken to limit the Crown’s liability. But prior breaches do not affect the Crown’s liability to pay”.

    Prior to what?

    The company is reportably such a dog itself that an inquiry is needed to see if it was ever adhering to the terms of the DoG in the first place.

    Any suggestion that an inquiry is not needed is a whitewash, of course there needs to be. For English to ever state a flat out “no” is ridiculous. The only question is the timing of such an inquiry. The pertinent questions are who knew what, for how long and when.

    Allan Hubbard may be the best person to assist with such so it’s crucial the inquiry starts sooner than later….for obvious reasons, the dialysis machine may not last too much longer.

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  7. pollywog (1,153 comments) says:

    I am not against an inquiry, but I think it is too early for it now.

    strike while the iron is hot and while theres still life in the old dog…

    Hell, i’m no expert, not even a layman but even i can smell that this whole affair reeks of insider trading

    …with Key and English right in the think of the stench.

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  8. Nookin (3,034 comments) says:

    Pollywog
    Are you saying that Key and English used knowledge not available to the public and which related to the circumstances of South Canterbury Finance in order to gain financially? That is the essence of insider trading. Can you point to even a suggestion of a fact supporting that view? Are also saying that the trustees for the debenture holders closed its eyes during the last few weeks while insiders plundered the coffers and that the efforts of Sandy Maier who, as I understand it, was entirely independent of the company and engaged as a troubleshooting CEO were a sham? As far as an enquiry is concerned, given that receivers have a statutory obligation to lodge a report on the companies office website and given that they are a) independent and b) well-regarded, why do you say that the taxpayer needs to stump up with 2 reports? I expect that in due course a liquidator will be appointed and the issue of director liability will be considered . Specifically, what is it about that process that is so inadequate that you and I have to fund yet another enquiry? I do not suppose that blind prejudice has anything to do with your position has it?

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  9. Guy Fawkes (702 comments) says:

    A fabulous businessman that Allan Hubbard.

    So well thought of.

    The whole thing is starting to stink in the direct sunlight.

    I would like to know how AH had a reported $150m at his families disposal to attempt to shore the whole thing up.

    Given the crappy lending, I am amazed that there was ever a surplus in play. Just stunning ineptitude.

    So many questions

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  10. bobberesford.com (12 comments) says:

    Go the Fish ! It’s time Union lawyers like trevor mallard were banned from parliament ! Or why not just ban lawyers from parliament ?
    Or any Union reps at all ? Debates would be so much more reasonable.

    Regarding SCF – i still feel Hubbard was basically okay – very prudent by nature – but he got caught out by the new breed of speculators who came on board – eg that Lachie guy who was deputy manager. moving them into speculative property in Auckland etc.
    I’d guess only dairy farms were Hubbard’s erroneous lending, and easy to get caught out there.
    Land values have been pushed too high due to foreign cash entering our open economy . Time to close it.

    The unwind seems sensible enough. They didn’t want the risk and bad image of foreign investors laying claims and tying up the process. I think keeping NZ image as a top place for foreign capital was foremost in Bill English’s mind. He’s basically announced the country is for sale and will sell off the Crafar farms to China if he can.

    There are far better ways . If you need more money in an economy , then print it . Why borrow someone elses funny money instead ?
    It’s the Real Economy that matters, and ours is productive .

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  11. Trevor Mallard (245 comments) says:

    DPF you normally cut and paste with at least an attempt at balance. You didn’t this time. Don’t often agree with the prickly one but she has called you out on this very very fairly. In fact the post is so bad I wonder if the Double Dipper has your password.

    I do agree that there needs to be a bit of time before a Royal Commission gets started – but someone needs to ensure the evidence is secured.

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  12. Cactus Kate (545 comments) says:

    “There are far better ways . If you need more money in an economy , then print it . Why borrow someone elses funny money instead ?It’s the Real Economy that matters, and ours is productive .”

    Bob, can you submit your DNA for examination to test the hypothesis that Muldoon is still with us?

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  13. Ruth (178 comments) says:

    No point in an enquiry – officials know the law was flawed – it was put together over a weekend for heaven’s sake and you don’t make good law that way. An enquiry would accomplish nothing except wasting more trees.

    The guarantee was not breached – atttention seeking bloggers saying otherwise from far away lands are wrong – as usual.

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  14. Cactus Kate (545 comments) says:

    Oh look Ruth doesn’t agree with me. As usual.

    You’d think a woman with that many opinions (and insider knowledge into officials knowing laws are flawed) would ergh, get a blog and contribute to the debate in a more meaningful way than grumpy comments when she has PMT.

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

    What I want to know is what other finance companies are looking shaky and what are their interest rates, I have a lazy 50k looking for a home.

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  16. Caleb (467 comments) says:

    have to agree with cactus.

    the government (as insurer) was obligated (to the taxpayer) to make sure that SCF was operating under stict terms laid out in the contracts.

    i dont believe the govenment was ‘caught out’,

    more likely,

    they where not doing their job and monitoring SCF like they should have, considering 100s of millions were at stake.

    who is getting the sack!

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  17. Trevor Mallard (245 comments) says:

    And tell me again why Bill doesn’t want an Inquiry.

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  18. Eddie (295 comments) says:

    Perhaps you could enlighten us as to the baseline monitoring and reporting framework Labour implemented around the Government guarantee scheme eh Trev.

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  19. Falafulu Fisi (2,176 comments) says:

    Ha, one doesn’t need to be a lawyer to know what Imperator Fish was arguing about. I knew early on from experts’ comments in the media and from blogs that the govt is obliged legally to pay out SCF investors. The point of the argument from our law-makers (Mallard et al) if they want to make a political scoring is to ask who approved to put SCF in the govt guaranteed scheme in the first place.

    Some commentators (even here at kiwiblog) had pointed out that Dr. Cullen in 2008 with the backing of John Key & National were the culprits. This is exactly what Ruth was pointing out. It was hurriedly put together in a weekend. So, both Labour & National should blame themselves. They (Labour/National) both love and adore the failed Keynesian economics (government bailouts, stimulus & handouts). Let capitalism works its magic. Less adaptable businesses (or badly managed ones) must be allowed to fail (i.e., Darwinism – survival of the best fittest).

    Economic stimulus packages only prolong the road back to recovery and there are historical empirical facts to this (Not PC blog has heaps of articles on those) including recent theoretical research work that has been published. Not PC blog is the best one to read about this for the inquiring minds out there who are interested to learn about facts.

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  20. Falafulu Fisi (2,176 comments) says:

    Caleb said…
    who is getting the sack!

    Well, those who advised the government in the first place to include SFC in the govt guaranteed scheme? Who were the financial economists (advisors) & lawmakers (that approved the advice of advisors) must bear the responsibility and this is the right question to ask. Commentators in the media have been asking/debating about wrong questions (Bill English’s faults, etc,…). If our expert commentators who frequently appear on TV to give oracle economic forecasts, have a single neuron in their brains, then they would have brought up the question of why SFC was included in the govt guaranteed scheme in the first place? But you don’t see our so called experts brought that question up, do we? Why? They have no neurons in the brains.

    I heard Dr Bollard last weekend’s on TV1′s Agenda mentioned that they had to move fast (in their advisory role to the government back then for the govt approved scheme) plus they were evaluating the risks involved thoroughly. I bet that Dr Bollard’s and his experts were using the now debunked traditional gaussian (normal or bell curve) probability distribution risk evaluation method. It is established that markets don’t follow Gaussian (equilibrium), but they follow power-law (non-equilibrium). Equilibrium doesn’t exist in the real markets and that’s an undeniable fact.

    This means that Dr Bollard and his experts were clearly under-evaluating the risks involved. The Gaussian methods were also used in the development of certain derivative instruments’ pricings & risk evaluation models that contributed to the recent financial crisis. If one is using a wrong risk evaluation method/model, then don’t be surprise when one is get caught up in a financial tsunami unguarded, because of severe risk under-evaluations.

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  21. kaya (1,360 comments) says:

    The reality is that the guarantee should never have been available in the first place. The talk of imminent financial disaster without it ranks up there with Bush claiming Iraq had WMD’s – scare mongering bullshit. Let them fall.
    It is of concern that we are repeatedly told that we have to ensure there is confidence in the market. I thought it worked on science and mathematics, not crossed fingers and “she’ll be right mate” economic voodoo bollocks.

    Economists joke:

    An experienced economist and a novice economist are walking down the road. They come across some dog shit lying on the pavement.

    The experienced economist says, “If you eat that dog shit, I’ll give you $20,000!”

    The novice economist runs his optimization program and figures out he’s better off eating it, so he does and collects the money.

    Continuing along the same road they almost step into another pile of dog shit. The novice economist says, “Now, if you eat this shit I’ll give you $20,000.”

    After evaluating the proposal, the experienced economist eats the shit and collects the money.

    They go on. The novice economist wonders, “Listen, we both have the same amount of money we had before, but we both ate shit. I don’t see us being better off.”

    The experienced economist retorts, “Not so! We’ve created $40,000 of trade!”

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  22. kaya (1,360 comments) says:

    Anyone got a list of the rest of the dodgy finance companies covered by the guarantee scheme? I feel and “investment”opportunity coming on.

    Fran O’Sullivan

    What we have ended up with is very untidy: the Government has paid out “in the know” bond investors and foreign preferential shareholders who did not qualify for the guarantee.

    Forget about moral hazard – the smart money now knows that the Key Government can be “gamed”.

    http://www.nzherald.co.nz/best-of-business-analysis/news/article.cfm?c_id=1501241&objectid=10671797

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  23. BeaB (2,057 comments) says:

    God how boring an official inquiry would be and how little we would learn from it. As long as the receivers do their job well and any wrongdoing is exposed and dealt with by the appropriate authorities what would be the point? We already know all we need to. I assume Labour thought they were doing the right thing at the time so no point trying to hang them now things have moved on.
    I know Labour loves playing the blame game (especially when they are trying to pin it on someone else) but I suspect the mood of the country is more in line with John Key’s “let’s get on and fix it” approach.
    And watching Trevor playing the clever dick in parliament makes one wonder why any adult with an ounce of intelligence wouldn’t be able to find a much more useful and fulfilling job than endlessly reprising high school debating tricks. He’s more and more sounding like the gossip over the back fence – “and she said and then he said and then I said”…

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  24. kaya (1,360 comments) says:

    “God how boring an official inquiry would be and how little we would learn from it.”

    More to the point what a waste of time and energy because as always happens in NZ (leaky homes), it would be “nobody’s fault”, it was just “one of those things”, “suck it up” and pay the money and “move on, nothing to see here”.
    Leave it for what it is, one more straw.

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  25. Kimble (4,379 comments) says:

    The guarantee wasnt there for SCF, it was there for investors in SCF. That might not be technically correct, but it is practically correct.

    I dont see how a breach in the conditions, unknownable by the investors at the time, could morally lead to the guarantee being revoked.

    If you go guarantor for somebodies loan, and they commit fraud, does that really mean your guarantee is worthless and the lender has no recourse?

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  26. lilman (890 comments) says:

    Mallard you wanker, what would you know about anything,we told you schools closure in some cases was wrong ,but you knew better, MINISTER OF EDUCATION,what a joke.
    You cant even be honest to your family.

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  27. pollywog (1,153 comments) says:

    oh there’ll be an investigation alright…

    …just not before ‘smile and wave’ and ‘the dipton dipshit’ buy enough time for hubbard to die or be paid off for his silence, and for their rich mates to hide their involvment and cover their tracks

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  28. Kimble (4,379 comments) says:

    I dint know whats funnier, Hubbard being paid off to remain “silent”, the idea that the investors in SCF were the “rich mates” of the PM, or the overall amateurishness of your conspiracy theory.

    Planet earth to pollywog, you are a joke.

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  29. pollywog (1,153 comments) says:

    baited, hooked…

    …now reel him in !!!

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