Hard News by Russell Brown

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Hard News: Meaning well with the money of others

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  • jeremy gray,

    According to the herald, they only release the amount collected by the scheme at the end of each year, and as of June 30 2009 had collected $228 million.

    The $900 million is money set aside to pay for defaults. The difference of $700 million is crazy - insurance generally takes in more than it expects to pay out. The $700 million difference could do a bunch of better things - like universal student allowances ($728 million).

    point chev • Since Apr 2008 • 44 posts Report Reply

  • giovanni tiso,

    Or starting an aerospace industry from nothing, yes.

    Wellington • Since Jun 2007 • 7473 posts Report Reply

  • Russell Brown,

    Yet another number from a Treasury paper in September last year.

    To date, fees collected under the current fee structure are approximately $87.4 million per annum ($81.9 million from banks and $5.5 million from non-banks).

    However, the net costs of the Scheme extend beyond just fiscal: there are also economic costs. As a result of under-pricing of risk due mainly to the subsidised fee schedule, the current DGS has created distortions in financial and capital markets. Economic distortions include encouraging guaranteed depositors and deposit taking institutions to make riskier investment decisions since the gains from these riskier decisions will be accrued by the depositors and deposit taking institutions, while potential losses to depositors (of up to $1 million per depositor per institution) will be borne by the taxpayer. This is referred to as a “moral hazard” problem.

    An example of this “moral hazard” problem within the current DGS is that finance companies, which tend to be involved in higher-risk and higher-return lending, have grown their deposit books by approximately $880 million (19%) since the guarantee was introduced in October 2008. Before the guarantee, the deposit books of many finance companies were shrinking. In some cases, finance companies have used retail funding to replace their bank funding lines.

    There are parts redacted on grounds of commercial sensitivity, and it's not hard now to see that SCF was on everyone's radar even then.

    There follows an extremely useful discussion of the pros and cons of extending the CDS, or letting it lapse in October 2010 as Cullen originally stipulated.

    The eventual recommendation is that the scheme should be extended so it expires around the same time as Australia's, but with stricter conditions.

    Auckland • Since Nov 2006 • 22754 posts Report Reply

  • Kumara Republic,

    Has anyone picked up on the potential urban-rural divide that could emerge from this? John Armstrong summed things up in one sentence:

    Timaru is the kind of swing-vote provincial territory National must hang onto to win next year's election.

    The southernmost capital … • Since Nov 2006 • 5418 posts Report Reply

  • Tom Semmens,

    I saw this in today's paper, and thought about it in relation to Allan Hubbard and SCF, and how the appearance of these two stories at the same time offer a serendipitous illustration of the totality of failure that is the New Zealand business class.

    In the case of SCF, we've got a 1.7 billion business being run by a pair of octogenarians in the same way they might run a dairy or a small chain of hardware stores. A classic Kiwi business tale characterisitc of our deep, lazy cultural predilection to anti-intellectualism (expressed in the form of scorn of properly implemented management systems, and the ignoring of business best practices and standards in favour of "better" empirical local methods) and a desire to do business on an informal, ad-hoc, handshake basis.

    In the case of our Citizen & Ratepayers friend, you've got a classic example of the warp and woof of the Auckland business community - grasping, shady and self-entitled shiney shoes wannabes who all happily play fast and lose with the truth, in the process revealing an utter failure to understand or pay cognisance to accepted norms of ethical standards and business behaviour and an endemic hubris.

    Today's two stories - the lethal juxtaposition of lazy anti-intellectualism and self-entitled sharp practice - is the story of New Zealand business writ large.

    Sevilla, Espana • Since Nov 2006 • 2213 posts Report Reply

  • DexterX,

    After all of this SCF, Hanover etc - I ask will a fence be put at the top fo the cliff and what form should it take?

    Auckland • Since Nov 2006 • 1224 posts Report Reply

  • Rich of Observationz,

    What Tom said.

    If the sewer commentators are generally employed in the secondary finance industry (as opposed to living with their parents at the age of 37, which I thought to be the norm) it explains a lot.

    Back in Wellington • Since Nov 2006 • 5550 posts Report Reply

  • Martin Lindberg,

    I'm curious - sssuming for a moment that I have money to invest - are there any finance companies that would be worth investing in? I can't help feeling that the whole industry is a giant pyramid scheme. But then we only hear of the failed companies, so my view is tainted by that.

    Are there any good ones? And how would I be able to tell if they are any good?

    (Note: I will not use any advice to actually invest in these companies ;-))

    Stockholm • Since Jul 2009 • 802 posts Report Reply

  • Tom Semmens,

    I'm curious - sssuming for a moment that I have money to invest - are there any finance companies that would be worth investing in?

    No.

    And we should punish you for buying property to - even though your real estate agent is unlikely to dismantle your house and make off with it in the night, leaving you to wake up in the morning on an empty lot.

    The bottom line is your place in society is to pay for the lifestyle of our largely absentee landlord class, heroes like Eric Watson and Graeme Hart.

    Sevilla, Espana • Since Nov 2006 • 2213 posts Report Reply

  • Andrew C,

    Some late replies to earlier entries

    The Government this morning paid out $1.7 billion to cover investor losses - about $150 million more than it was required to

    Anyone know more about that last bit?

    Recently a firm called Torchlite had arranged the injection of some capital into SCF to keep it going, but as a condition it required first dibs on up to ~175m before any other claims could be made [fairly normal when you are a risky enterprise asking to be propped up].

    The concern was that Torchlite, as the priority creditor, could force the firesale of assets at bargain basement prices simply to recover enough to get its monies owed - as long as it got 175m it wouldnt care how much value it was throwing away.

    Clearing them out of the way tidies things up and improves our chances of extracting maximum value from the assets.


    Mixing some threads:

    This debacle also shows what a dumb idea it was to extend the RDGS to finance companies. It is one thing to protect customers, who are innocent third parties. It is quite another to protect investors. What next? The government will guarantee people against gambling losses?
    ...
    The idea was to prevent a run on the Finance Companies, followed by a tidal wave of collapses and then foreclosures and forced sales across the country as they all went under at once. So it worked pretty well in that respect.
    ...
    With the proviso that we'll never know whether it would in fact have happened, yes.

    Some numbers. When Lehman Brothers was allowed to collapse in the USA it was the trigger for the biggest shitstorm financial disaster seen in the world since the Great Depression. Lehman Bros represented 0.5% of US GDP.

    SCF represents 0.8% of NZ GDP. So we were definitely in the same ballpark of figures that have a recent precedent for financial major epic fail.

    We now have SCF collapsing in a fairly orderly and tidy fashion. While not having any collapses would have been the ideal outcome, avoiding a catestrophic meltdown which reverberated across all sectors was the next best thing. The USA has had wealth destroyed many many times over and above the face value of the collapsed investments themselves, the DGS is (hopefully) acting as baffels in the way of similar shockwaves.

    Auckland • Since May 2008 • 167 posts Report Reply

  • Andrew C,

    Are there any good ones? And how would I be able to tell if they are any good?

    Well, there are many still covered by the govt guarantee, so from a purely financial perspective you can easily find safe havens for your $$

    Auckland • Since May 2008 • 167 posts Report Reply

  • ScottY,

    are there any finance companies that would be worth investing in?

    Forget finance companies. Invest in Allied Farmers shares. If I were you I’d invest every cent into that company. In fact, I’d borrow heavily to invest in Allied Farmers.

    When the share price is that low, things can only go up, right?

    West • Since Feb 2009 • 794 posts Report Reply

  • Danielle,

    anti-intellectualism (expressed in the form of scorn of properly implemented management systems, and the ignoring of business best practices and standards

    I have been forced against my will to take graduate-level management classes. They are, in fact, the purest form of anti-intellectual busywork known to humanity. I can't imagine they would have helped particularly.

    Charo World. Cuchi-cuchi!… • Since Nov 2006 • 3828 posts Report Reply

  • Martin Lindberg,

    Well, there are many still covered by the govt guarantee

    Well, that doesn't count. But is there something inherently wrong with the business model that finance companies adhere to?

    Again, I'm not personally interested, I'm just wondering if this can be done right?

    I believe pyramid schemes are illegal - so there must be some aspect of this industry that separates it from one of those schemes and makes it legal. What's the distinction?

    Stockholm • Since Jul 2009 • 802 posts Report Reply

  • Ian Dalziel,

    When the share price is that low, things can only go up, right?

    oh forget Allied Farmers, I can take that troublesome cash-cow off your hands in
    exchange for these magic beans...

    Christchurch • Since Dec 2006 • 7889 posts Report Reply

  • Ian Dalziel,

    I saw this in today's paper...

    ...Her profile on the C&R website praised her exceptional leadership skills and said she would help pursue greater vibrancy in the community.

    ...that vibrancy would be shuddering, right?

    Christchurch • Since Dec 2006 • 7889 posts Report Reply

  • Andrew C,

    Well, that doesn't count. But is there something inherently wrong with the business model that finance companies adhere to?

    Again, I'm not personally interested, I'm just wondering if this can be done right?

    I would be interested to hear ideas around what to look for also.

    Brian Gaynor said this morn that he doesn't believe the industry is dead, just that it will stop looking for its finances from Mum and Dad investors.

    Auckland • Since May 2008 • 167 posts Report Reply

  • ScottY,

    You have to be careful about the "first ranking" claims often made by finance companies. If you read the fine print you often find first ranking secured deposits are in fact unsecured.

    Another thing to look at is the board. If the board is stacked with representatives of the biggest shareholders and lacks independent directors, it may be safer to avoid it.

    Most importantly, avoid any business venture promoted by a past or present All Black.

    EDIT: Thus comment made sense before Andrew C amended his last comment to delete the list of factors to look for in a company.

    West • Since Feb 2009 • 794 posts Report Reply

  • Sofie Bribiesca,

    My Mother always told me to never put all my eggs in one basket.Sound advice without a financial advisor in sight.Unless of course you want scrambled eggs, then by all means pull out the frying pan as well. I'd prefer an omelet with 3 cheese.That's the reason for the farmers. My omelet :)

    here and there. • Since Nov 2007 • 6796 posts Report Reply

  • James Green,

    Well, that doesn't count. But is there something inherently wrong with the business model that finance companies adhere to?
    Again, I'm not personally interested, I'm just wondering if this can be done right?

    Curiously (especially with someone suggesting back a few pages that the returns were so high), there is a strong school of thought that the returns were low relative to actual risk. That a ~2% premium to bank deposits did not really reflect what people were buying into. Now I'm not saying that an additional 2% is not something to be sneezed at at all. But that they imply a far lower level of risk than really existed.

    Dunedin • Since Nov 2006 • 703 posts Report Reply

  • Joe Wylie,

    My Mother always told me to never put all my eggs in one basket.

    "It's the eggs -- they're releasing chemicals to tranquillize you. It's a mechanism used by parasitic insects."

    flat earth • Since Jan 2007 • 4591 posts Report Reply

  • Rich of Observationz,

    Like I said way back, if a finance company had a reasonable proposition, they wouldn't take retail deposits. It's cheaper and easier to borrow on global markets than to chase thousands of small deposits.

    http://observationz.blogspot.com/2005/03/accidents-waiting-to-happen.html


    If they're after the dumb money, it's because the smart money won't touch them.

    Back in Wellington • Since Nov 2006 • 5550 posts Report Reply

  • Ian Dalziel,

    mathy madness...

    it doesn't reassure when the so-called informed media financial commentators can't agree on the figures either...

    The Herald has it that: "...or $405 for every man woman and child in New Zealand" on a $1.775 billion bailout...

    (I guess they are adding in the $175 million loan to quit current debt)

    The Press today has it that: "The collapse of South Canterbury Finance will cost New Zealanders $372 a head after the Government made good on the Crown guarantee." on a $1.6 billion bailout...

    Stuff's Business Day has it that: " Taxpayers face a wait of up to four years to find out how much they will get back from their $1.8 billion bailout of South Canterbury Finance's depositors.
    The collapse of the company will cost $372 for every New Zealander. "
    same per capita figure as in The Press but based on a $200 million larger total amount - I guess division is not their strong suit!!

    still what's a few million, eh...

    Chicken census...

    My Mother always told me to never put all my eggs in one basket. Sound advice without a financial advisor in sight.

    Shares in a wickerwork enterprise then? If extra baskets are to be a growth industry...

    Keeping up with the Joneses...

    Most importantly, avoid any business venture promoted by a past or present All Black.

    Hmmm I notice billboards round town for Instant Finance with Stacey Jones pic and signature - very reassuring, maybe they'll change their name to Little General Finance!
    - or the League of Extraordinary Expenses...

    Apparently the ads are to get borrowers as they don't let the public invest (see Hickey's July 7 comment in the comments under linked article)

    Christchurch • Since Dec 2006 • 7889 posts Report Reply

  • Rich of Observationz,

    Also, I notice the government is going to try and dump the whole deposit guarantee scheme.

    This is dumb, because basically the real banks have an implied state guarantee. If a major bank failed and people couldn't access their funds, then things would be so stuffed that the government would *have* to bail them out.

    So they have a guarantee, and it's better to make it explicit and charge for it.

    Back in Wellington • Since Nov 2006 • 5550 posts Report Reply

  • Kumara Republic,

    The whole point of the deposit guarantee system was to discourage bank runs, which were a major factor in the Great Depression, and more recently the likes of Northern Rock.

    Problem was, analysts warned of runs on higher-risk finance companies if they weren't covered as well. Vested interests, methinks?

    The southernmost capital … • Since Nov 2006 • 5418 posts Report Reply

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