A sad guilty verdict

February 24th, 2012 at 1:44 pm by David Farrar

Stuff reports:

Former cabinet ministers Sir Douglas Graham and Bill Jeffries, and two other former Lombard Finance directors, have been found guilty of four charges of making false statements.

The verdicts, delivered in the High Court at Wellington this morning, also included one set of not guilty verdicts for Graham, Jeffries, Lawrence Bryant and Michael Reeves. They were allowed bail without conditions.

Sir Douglas was visibly shaken and some members of the men’s family were in tears after the hearing. …

Lombard Finance was put into receivership in April 2008, owing $125 million to 4400 investors. Secured creditors were expected to be repaid less than 24 cents in the dollar.

I know several family members of the directors, and less well a couple of the directors. Regardless of what the actual penalty is, the actual conviction itself will be what is hardest to live with. They are all people whose reputations are very important to them.

I don’t think any of them ever set out to do wrong, but it is a reminder that the obligations and liabilities on directors are significant. I’ve been a company director of a couple of companies. Not ones listed on the NZX or in financial services, so the complexity and risk is much less. Despite that though, I take the legal obligations as a director incredibly seriously and probably to the occasional annoyance of management will read financial documents very carefully, and even do my own series of checks on them, ranging from does everything add up to does the variation in realised revenue from a product match the variation from budget for total number of that produce.

A lot of people think it is easy being a director. If everything goes well, it can be a very good role to have. But if things go badly, you never want to be relaying on the line “That was the responsibility of management”. You can’t interfere in operational issues, but you can make sure you have asked the right questions, and be prepared to refuse to sign something until you are satisfied you have done everything that could reasonably be expected of you.

I don’t know the specifics of what went wrong at Lombard. I suspect that its situation was little different to most finance companies. However as some investors have said, having high profile persons on the board does attract investors, and makes people think a company might be safer than it is. I can quite understand the  views of investors  – they are the victims who lost money in Lombard.

I think calls for Sir Douglas Graham to lose his knighthood are uncharitable. He did not get it for services to finance companies. He got it for his contribution to Parliament, Government and Maori. But again, I can understand the views of the investors who lost their money.

The lessons for the future might be that investors should not rely on the presence of high profile board members in deciding whether to invest, and high profile persons should think very carefully before accepting directorships, as they will be in the gun if things go wrong, and they haven’t done everything they could.

SFO announces SCF now under investigation

October 19th, 2010 at 9:55 am by David Farrar

This will upset the cultists. The SFO has announced:

The Serious Fraud Office (SFO) today announced that it had launched an investigation into South Canterbury Finance (SCF).

Chief Executive, Adam Feeley, said that as a result of inquiries made by its newly established Fraud Detection Unit, the SFO had grounds to suspect that a number of related party transactions involving SCF may have involved false statements or other fraudulent conduct.

“Given the scale of the SCF collapse, it would be neither feasible nor productive for SFO to carry out an investigation into all aspects of the failure. Instead we will focus on specific transactions which we consider may have been a fraud on the investors in SCF and/or the Crown as the guarantor of investor funds.”

Mr Feeley said that despite the volume of cases which SFO had taken up in recent months, the matter was one which would have a high priority and would be progressed as quickly as possible.

Also of interest:

Mr Feeley added that the SCF investigation was an entirely separate matter from the SFO’s investigation into the affairs of Aorangi Securities Limited.

“While there are some persons who are common to both cases, the SCF transactions we are currently investigating have no material connection with the affairs of Aorangi Securities.

Mr Feeley added that, subject to receiving any new information from the statutory managers, the SFO was in the closing stages of its investigation into Aorangi Securities.

Until their investigations are complete, it is hard to comment in great detail. But

Editorials on SCF

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

The Herald:

In the end, South Canterbury Finance 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 finance companies. 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 editorials are saying the Government should have stepped in to stop receivership, which is what some were urging.

The SCF payout

September 1st, 2010 at 9:11 am by David Farrar

The Herald reports:

Yesterday Mr Hubbard condemned the Government for preventing him working to save South Canterbury by placing his affairs under statutory management two months ago.

This, he said, was “a body blow” for the company.

But Prime Minister John Key said the global recession and the company’s poor-quality lending had “taken us into the situation we’re in today”.

If the gap between assets and liabilities is $500 million, then the collapse was probably inevitable. Mr Hubbard would be well advised to reflect on his own role in costing taxpayers such a huge amount of money, rather than seek to blame those picking up the pieces.

Mr Key said the Government’s finances could handle the payout and credit ratings agencies had assured the Treasury it would not have any immediate effect on the country’s credit rating.

Although the sum involved would appear large to struggling taxpayers, “it is relatively small compared to other losses the Crown has incurred with the deterioration, for instance, in ACC”, Mr Key said.

Sad but true.

Opposition Leader Phil Goff said yesterday’s payout was “a huge cost to the taxpayer for the ordinary Kiwi who’s struggling to save for him or herself”.

“Having to bail out the investors of South Canterbury Finance will come as a huge burden.”

Mr Goff said the company’s fate was “sealed by the Government’s failure to get a proper economic recovery”.

Oh what a pathetic statement. You just look desperate and irrelevant when you come up with such tripe and nonsense.

SCF goes into receivership

August 31st, 2010 at 9:50 am by David Farrar

The Herald reports:

South Canterbury Finance Limited announced today that it has been unable to complete a recapitalisation and restructure.

As a result, the Company would have been unable to certify to Trustees Executors Limited, in accordance with the terms of its debenture trust deed with Trustees Executors Limited, that it was compliant with various financial covenants under the debenture trust deed for the financial year ended 30 June 2010.

Accordingly, South Canterbury Finance Limited has requested Trustees Executors Limited to appoint a receiver in respect of the whole of its undertaking and assets, and Trustees Executors Limited has done so.

This is not the end of the road – it means TEL now has control of SCF. However it strongly indicates that the Government’s guarantee of deposits will be called on.

Personally I am pleased the Government didn’t attempt a King Canute.

Bernard Hickey writes:

The government’s decision not to support a recapitalisation plan for South Canterbury Finance was the right one. Receivership was the cleanest, simplest and ultimately safest option for both taxpayers and investors.

The government will now have to pay out around NZ$1.6 billion to 35,000 depositers in South Canterbury Finance that were covered under the extended guarantee scheme.

They have already paid out today $1.7 billion. Ouch. However some of that will be recovered over time.

It was clear from Prime Minister John Key’s comments yesterday about the administrative and institutional mess inherited by CEO Sandy Maier that he was no fan of the way Allan Hubbard had created and run the business as part of his own charitable small business empire.

Hubbard was making no interest ‘helping hand’ loans to young farmers and then mortgaging his own assets to make the interest payments.

Which is well intentioned. But he lent too much bad money, and in the end he has left the taxpayer with the bill. That is not generosity. Allan Hubbard is not the victim here – the taxpayer is.

Should the Government bail out SCF?

August 30th, 2010 at 8:10 am by David Farrar

Bernard Hickey is one of the few voices arguing that the Government should allow South Canterbury Finance to go into receivership:

But now the government faces an urgent decision between putting South Canterbury into receivership now, or putting in yet more taxpayers money in the hope it can survive and then thrive past the end of the government guarantee.

The choice is a difficult one. The immediate pain from a receivership would be substantial.

Receivership would trigger a payout to investors under the government guarantee of around NZ$1.7 billion. Some believe that shock to the government’s finances would be enough to trigger a review of New Zealand’s sovereign credit rating downgrade by Standard and Poor’s and/or Moody’s.

I don’t believe it would be enough to justify a rating review, but if it did that would immediately increase wholesale interest rates, which would eventually flow through to the entire economy. There is also the fallout on the South Island rural economy.

Any receiver would force through sales of farms, property developments and small businesses, many of whom are not paying the interest on the loans received from South Canterbury Finance. Dairy farm prices in the South Island could potentially take a big hit. Some believe this could send a new chill through the South Island that eventually cost jobs and stunt any recovery of economic growth. That’s because the Australian-owned banks are unlikely to step in to take over the loans.

This is the potential cost of letting it fail. It may be quite huge. It’s easy to just say “let them fail”, but that will mean a large payout by the Government, and a hit to the South Island economy.

South Canterbury Finance does not have a future beyond the end of the Deposit Guarantee. To have such a future, it would need to substantially increase its credit rating, find a new funder and convince already sceptical investors to go naked in backing the finance company without a deposit guarantee. They will also have to do it without their talisman Allan Hubbard, who will be long gone as owner and maestro.

At some point New Zealand’s dairy farming sector, particularly in the South Island, will have to reduce its debt.

When that happens it will be painful.

But as many investors in finance companies such as Strategic, St Laurence, Hanover and Dominion would attest, giving finance companies more time to ‘work it out’ and wait for the ‘market to bounce back’ is often worse than pulling the plug immediately. The New Zealand government faces a bail out decision in the same way Hanover Finance investors did 8 months ago and 12 months before that.

This is the crucial test – can SCF survive in the future if bailed out. Some compare it to Air NZ, which has thrived after a bail out. But there is a major difference between deciding to fly on an airline, or lend money to a finance company.

David Hillary also argues SCF should not be bailed out:

SCF is not a successful business, and it does not have a successful ‘good bank’ to salvage. The damage to SCF’s brand is total, SCF has been selling its best loans, and encouraging its best customers to re-finance elsewhere for probably a year now, leaving it with few good assets left. Its asset origination and management systems and personnel are the problem, and it is what needs to be closed down, not saved. …

SCF’s governance, leadership, culture and practices have been and are so bad that the company’s problems are pervasive, and this means that its liquidation value is likely to be higher than trying to keep it as a going concern.

Whatever the Government decides is going to be pretty unpopular.

Editorials 24 May 2010

May 24th, 2010 at 3:14 pm by David Farrar

The Herald applauds changes to per-school budgets:

One of the more contentious decisions hidden in the Budget last Thursday was in the financing of early childhood education. The previous Government gave childcare centres an incentive to employ trained teachers, increasing their grants as they hired a greater proportion of qualified staff.

The Budget has done away with two of the highest bands of subsidy, effectively cutting funds to centres with more than 80 per cent of their staff trained. …

Fewer than half the country’s 4300 centres have more than 80 per cent of their teachers registered yet. The cost blowout over the past five years would have escalated further without the decision National has taken.

While the cut-off will save $295 million, Education Minister Anne Tolley plans to put $107 million back into other early education programmes, $91.8 million of it earmarked for Maori, Pacific and low-income areas. …

Plainly, National does not regard specialist teaching of pre-school children to be quite as important as Labour did. It is probably right. When the previous Government imposed training requirements, there were loud objections from childcare companies that some capable and dedicated staff would be unable to meet these. National does not want to drum them out of the industry.

Nice to see some balance on this issue.

The Press looks at the two Koreas:

Crises between the two Koreas have been so commonly in the headlines for 60 years that it is tempting to dismiss the present tension as a replay of the usual game that will come to nothing. But such is the unpredictability of the North, that would be unwise. …

The South Koreans’ painstaking investigation and the employment of international experts mean the findings are incontrovertible. Thus China, the North’s closest supporter, accepts that the boat went down as a result of a torpedo attack from an armament of the type employed by the North.

The hope must be that the same considered approach will prevail now that the report has been made public, and in this, China’s role is vital.

Its ability to lean on North Korea is the best hope that the hysterical response there to the report will not escalate into another act of military bravado.

North Korea commits an act of war, and then threatens anyone who complains about it. They really are the most thuggish of the various regimes of ill repute.

Seoul wants punishment of the North by way of United Nations sanctions, on the grounds that the incident breached the Korean War armistice and the UN charter.

China’s veto power over a resolution triggering such a response is likely to be used, if only because the North says war will result if sanctions are imposed. Few countries would regret the veto’s use, even if they publicly deplored it.

I would. China’s protection of North Korea emboldens them.

The Dom Post talks finance companies:

Mark Bryers, who is bankrupt in New Zealand but not in Australia, was sentenced last week to 75 hours’ community work and fines of $37,470, plus court costs, after earlier pleading guilty to 34 charges laid by the Economic Development Ministry in relation to the running of Blue Chip. The charges dealt with book-keeping and a failure to attend a creditors’ meeting.

For many of the more than 2000 investors owed a total of $80 million after being caught in the February 2008 collapse of Blue Chip, the sentence is not enough. Some have had their futures destroyed, and their anger was on show at the court, where Bryers was described as scum as he entered. They believe he showed little sign of repentance.

The frustration is at the law’s inability to deliver what the aggrieved would see as justice. Bryers is legally guilty of paperwork failings, but those who lost their money believe they were taken advantage of in a more fundamental way.

That may be true, but the courts and justice system deal, as they should, with legality, not morality.

There is, for example, no suggestion that Mark Hotchin or Eric Watson did anything legally wrong in the collapse of Hanover Finance, which left more than 16,000 investors out of pocket when it froze more than half a billion dollars of assets.

There is morality, and then there is the law.

The ODT also focuses on finance companies:

There were gasps in the court from those investors present, many of whom had lost their houses and savings, when it became evident that Bryers would not serve a custodial sentence.

As he entered the court some had called him “scum”, others “thief” and still more “low life”.

After hearing of his sentence they pronounced their own verdicts outside the court: “he needed to go to jail,” said one; another insisted he should “pay the price”; a third said she felt “absolutely let down by the justice system”. …

Notwithstanding the fact – as pointed out by the ministry lawyer – that the charges were not of fraud, the penalties imposed seem extraordinarily light when set against the loss and suffering of those who invested with Bryers and the Blue Chip group.

Even though they were not of fraud, he still got off lightly.