The retail deposit scheme
October 5th, 2011 at 10:00 am by David FarrarVernon Small at Stuff reports:
Treasury failed to stem the flow of millions of dollars into risky finance companies, including failed South Canterbury Finance, after the Government guaranteed their deposits, a report highly critical of the management of the scheme reveals.
The report, by Auditor-General Lyn Provost, reveals deposits in South Canterbury Finance jumped 25 per cent and another finance company saw more than $7million flow into its coffers as investors chased higher returns once they realised the Government was there to pick up the tab when riskier finance companies fell over.
Ms Provost says Treasury knew from the start that depositors would chase the guarantee and that that carried significant risk, but did not take sufficient steps to minimise that risk.
“We saw one example where a finance company’s deposits grew from $800,000 to $8.3 million after its deposits were guaranteed. At South Canterbury Finance Limited, the deposits grew by 25 per cent after the guarantee was put in place,” the report found.
“Once deposits with these companies were guaranteed, depositors could safely move investments to where they would get the highest return, irrespective of the risk of company failure. The finance companies also had less reason to minimise risk in their investment activity. The Crown was carrying much of this risk.”
From mid-2009, Treasury was closely monitoring these changes and the companies that were identified as being at risk.
“However, it was largely doing so to prepare for potential payouts. It did not see itself as able to interact with a finance company to attempt to moderate that behaviour, even when it could see the Crown’s potential liability increasing markedly. The view appeared to be that it was better to recover what funds it could after an institution failed, than try to influence events before a failure.”
So the criticism is that having guaranteed the deposits, Treasury should have told some finance companies to pull their heads in, presumably with an implicit threat to revoke the guarantee if they don’t.
Treasury Secretary Gabriel Makhlouf said yesterday that Treasury disagreed with the assertion that more intervention in finance companies might have reduced the fiscal risks that were an inevitable consequence of the scheme.
I suspect it would have reduced the fiscal risks. However it may have increased other risks such as reputational risks. If Treasury was acting as a sort of implicit director of a finance company and it then crashed, the company might blame Treasury for interfering and say that without the interference they would have been fine.
Related posts:
- The deposit insurance scheme
- Sensible guarantee scheme but what is the secret agenda?
- The Hive on the Deposit Scheme
- Editorials on SCF
October 5th, 2011 at 10:21 am
This scheme would have been much better if it only guaranteed a percentage (say 80%) of the deposit and none of the interest.
Vote:October 5th, 2011 at 10:21 am
In hindsight it may have been more prudent to limit the Government Guarantee to 70-80% thus leaving some of the risk with the depositor.
Vote:October 5th, 2011 at 10:28 am
Next time offer a 90% deposit gaurantee. Or a graded set of gaurantees – 99%, 95%, 90% and so on.
Vote:October 5th, 2011 at 10:29 am
Extending the guarantees to the finance companies was unneeded and dumb. We had to guarantee the banks to prevent free-riding on Australia. The logic never applied to finance companies which anyone could see were almost all going to fail.
Vote:October 5th, 2011 at 10:30 am
No next time – depositors take the benefit of the interest they should take 100% of the loss.
Vote:October 5th, 2011 at 10:33 am
The government should never have guaranteed interest payments on failed finance companies.
It was objectionable for greedy investors to pile into risky investments with 10% returns, only for the government to assume all 100% of the risk .
No investor has learnt a thing.
Vote:October 5th, 2011 at 10:34 am
Of course at the time it was an election and middle class investors of finance companies are swing voters, who can be bribed.
Vote:October 5th, 2011 at 10:40 am
There is probably (I hope) a good reason for this, but why were new deposits after the guarantee was launched also subject to the guarantee? I’d have thought one could allow deposit shifting between guaranteed companies to remain subject to guarantee, but exclude new money coming into the system from outside. Perhaps that what they did.
Vote:October 5th, 2011 at 10:59 am
Another reason why the governments (both Lab and National) should have stayed away from bailing out private companies. If people lost their money – too fucking bad. Shit happens.
Vote:October 5th, 2011 at 11:01 am
@ ben the theory was they needed to be able to keep borrowing to allow repayment of other deposits as they became due else the company would default and call on the guarantee. If it sounds familiar you’ve probably heard of ponzi schemes.
Vote:October 5th, 2011 at 11:02 am
Only certain key finance companies were included in the deposit guarantee – the ones who could afford the $100k cost of a Fitch or Standard and Poors review. The extension of the guarantee beyond the banks was a populist folly entered into by the Clark government. It immediately created a 2 tiered market for debenture securities – those guaranteed and those not guranteed. If you were a retired finance company investor reliant on a pension and interest income, you’d be mug to get 5% from a bank when your money with SCF at 8% would be just as safe.
Unloaned investment funds is a killer to any finance company. They are having to pay 8% to their investors from the day the funds arrive whilst only getting maybe 3% on call with their bank at the most so they are 5% per aanum down each day they dont loan out the money. With such a huge increased influx of investment money that came to the likes of SCF as a consequence of the guarantee, these guranteed finance companies were under real pressure to loan these funds out. There are only so many potential rural/farm borrowers (SCF’s traditional borrower client base) and so to expand their lending portfolio quickly they branched out into the riskier and larger property investment deals in Queenstown and Auckland – lending activity that ultimately led to their downfall. We’ll never know to what extent Alan Hubbard’s alleged mismanagement contributed to this outcome since his sad accident ended the SFO’s investigations however it is fair to say that the likelihood of SCF surviving had it stuck to the lending polices that had made it so successful for so many decades would’ve been higher had the gurantee scheme been limited to the trading banks.
As always with the left who pass seemingly do-gooder laws, they ignore the law of unintended consequences.
Vote:October 5th, 2011 at 11:29 am
Wow.
Do you guys know why the guarantee was put in place?
Fair enough saying that finance companies shouldnt have been included, and I find it hard to blame Treasury for that, given that the whole thing was thrown at them in a press conference with Clark’s me-too after the Australians proposed theirs (which only covered banks, and Macquarie.)
But having one guarantee rate for one company and a different one for another would have been completely unworkable within the time constraints they had, and could have actually been counter-productive.
The idea that people shouldnt have been paid interest means that no one would have offered any more money, and everyone would have withdrawn their money. Idiotic.
The idea that those taking the interest payments should have taken all the risk defeats the purpose of the scheme. Just say finance companies shouldnt have been included and be done with it.
Vote:October 5th, 2011 at 12:12 pm
This hastily conceived scheme was a mistake right from the start and the Reserve Bank and the Treasury have responsibility here. First the Crown Guaranteeing billions and billions of dollars of deposits had no credibility at all. The Crown could never meet the obligation. Secondly there should have been some due diligence on the organisations that got the guarantees. The Crown should NOT have guaranteed a failing or dodgy organisation. I think of Hubbard’s finance companies in particular when it was KNOWN there was trouble. In those latter cases the organisations that were weak should have been placed in statutory management rather than given a guarantee. This in my view was a major error of judgment and cost the taxpayer a great deal of money.
Vote:October 5th, 2011 at 12:29 pm
Of course they could.
Yup, and a well thought-out, tempered, conservative scheme would have had that. The deposit scheme started with a one-sheet application form. If there is one thing the Reserve Bank and Treasury are famous for is not taking their time to come to a decision and their aversion to excessive amounts of paper work.
Vote:October 5th, 2011 at 12:54 pm
Amazing that once again Standard & Poors, Moody’s, and Fitch ballsed up with their ratings. Like AMI similarly.
There should never have been a Guarantee Scheme – it was a Cullen/Clark political ploy, and like them it canned.
Vote:October 5th, 2011 at 1:10 pm
Where’s the publicly-available ‘Register of Interests’ for Treasury employees?
How can the public be assured that there were/are no potential ‘conflicts of interest’ and that Treasury officials were/are serving the ‘public interest’ and not the interests of particular finance companies?
Who is checking?
Penny Bright
Vote:Independent ‘Public Watchdog’
Candidate for Epsom
October 5th, 2011 at 1:32 pm
OMG, people would have been exposed to risk in an investment market, oh noes. [/sarc]
What is more idiotic?
- pouring $billions into unproductive investments that are economically ruinous.
- or not doing that.
Wanna buy some 30 yr Greek bonds?
Vote:October 5th, 2011 at 2:05 pm
Penny
Vote:Treasury didnt choose the finance companies – the scheme was offered to any company who could (a) get a rating agency to do a detailed bond market style in depth assessment and (b) was given a rating of at least BBB from memory (known as investment grade). Not that many finance companies had the spare $100k+ to get the assessment done and not all met investment grade bar. Now you can legitimately criticize the rating agencies for a crap job (look at the sub prime mortgage backed securities in the US as an example – the collapse of which was part of the financial meltdown) but to allege Treasury officials who had deposits with finance company x made sure that their own deposits were taken care of is a pretty scandalous allegation to make without proof beyond your penchant for conspiracy theories.
October 5th, 2011 at 2:30 pm
@kiwi in america
I’m not making any allegations about anyone.
I’m seeking ‘transparency’, ‘openess’ and ‘accountability’.
Although there is a publicly-available ‘Register Of Pecuniary Interests’ for NZ MPs, there isn’t for local government elected representatives (and their spouses).
(There isn’t a ‘Register of Pecuniary Interests’ for NZ Judges either.)
There is no publicly-available ‘Register of Interests’ for local government or central government employees responsible for property or procurement.
Given that there is so much contracting-out of public services by Public-Benefit Entities (PBEs) to Profit-Oriented Entities (POEs) – how is it decided who gets these contracts?
Who is checking for possible ‘conflicts of interests’ between those who give the contracts and those who get the contracts?
Publicly-available ‘Registers of Interests’ are a simple way for the public to help directly scrutinise those who are involved with the spending of public monies at local and central government level.
Wouldn’t you think that a country like New Zealand – ‘perceived’ by Transparency International in their 2010 ‘Corruption Perception Index’ to be the ‘least corrupt country in the world’ (along with Denmark and Singapore) – would already have such ‘transparent’ frameworks in place?
Penny Bright
Vote:Independent “Public Watchdog’
Candidate for Epsom
October 5th, 2011 at 2:45 pm
Bollocks Penny
Vote:You said “How can the public be assured that there were/are no potential ‘conflicts of interest’ and that Treasury officials were/are serving the ‘public interest’ and not the interests of particular finance companies?” You are seeking assurance that Treasury officials weren’t acting in the interests of the finance companies – that is a scurilous accusation. No one is opposed to transparency nor the registers you suggest but you completely ignored my post earlier – that the decision as to what finance companies got to use the scheme was not a Treasury decision beyond them checking the credit rating agency’s report that the applicant company was investment grade. Even if a senior Treasury official disclosed in a register that he/she had $40k in SCF debentures it wouldn’t have made one iota of difference to Treasury’s decision – SCF had a S&P BBB or above rating so they were in! The mistake was not in some good old boys club decision made at No 1 The Terrace but in Clark’s rush of populist blood to the head during the 2008 campaign that led to the policy to include BBB or above rated finance companies.
October 5th, 2011 at 4:21 pm
The point was that if you are not going to let people get paid interest then they will never invest, which means there is no point having a guarantee scheme. Just say that there should have been any guarantee.
Vote:October 5th, 2011 at 4:26 pm
Penny got pwned again.
On another topic, stop calling yourself the public’s watchdog. Watchdogs are aquired by those that need them, they dont appoint themselves.
Call yourself BusyBodyCommentingOnEverything, or TheFollowingIsCrap.
Vote:October 5th, 2011 at 8:17 pm
They should be well informed next year when they same situation occurs again in the credit markets. Interesting to see what happens.
Vote:October 6th, 2011 at 3:00 pm
@kimble
Of course we’d let people be paid interest, just not gaurantee they are paid interest.
Vote: