Up to NZ$400 mln taxpayer cost of guarantee scheme is 'premium paid to avoid potential catastrophic losses'

Up to NZ$400 mln taxpayer cost of guarantee scheme is 'premium paid to avoid potential catastrophic losses'

Finance Minister Bill English says the up to NZ$400 million haircut taxpayers will take on the Government's retail and wholesale guarantee schemes is the price they have to pay for avoiding potential "catastrophic losses" during the Global Financial Crisis over the past 18 months.

(Update adds comments from David Cunliffe and Russel Norman).

In a statement to Parliament this afternoon English defended the Government's handling of South Canterbury Finance (SCF) which was covered by the Crown Retail Deposit Guarantee scheme and sank into receivership last week at an initial cost to taxpayers of some NZ$1.775 billion.

English noted that the world was in turmoil when the guarantee scheme was introduced in October 2008 by the then Labour-led government. He said SCF's balance sheet had expanded only slightly whilst it was covered by the guarantee and that the "great majority" of its problem lending occurred prior to the Allan Hubbard controlled company entering the guarantee.

Once it became apparent SCF was in difficulty, English said there were proposals to either acquire parts of the group or to recapitalise it.

"I instructed Treasury officials to work co-operatively with the firm on these options," English said. "However, all effectively amounted to a bailout by the Crown, with extra cost and risk to taxpayers. At no stage would the Treasury have recommended accepting any of these proposals."

Ultimately it was insolvency not a lack of liquidity that brought the curtains down on SCF. Once the receivership was completed, English said this would largely complete a cycle that started in October 2008.

"When the fees collected from the wholesale and retail guarantee schemes are included, the net cost is likely to be between NZ$300 million to NZ$400 million," said English.

"While this cost to taxpayers is considerable, this expenditure did help prevent the potential collapse of the financial system. In the light of ongoing bank bailouts around the world, this net cost is the premium our economy has paid to avoid potential catastrophic losses to the taxpayer over the last 18 months."

Opposition critcism

However, English and the Government came under attack from Labour's finance spokesman David Cunliffe and Green Party co-leader Russel Norman. Cunliffe said "serious questions" needed to be answered. These included how much the Government knew and when, whether SCF should have been in the guarantee scheme, whether it had been in breach of its eligibility, what deals were on the table to save it before it coollapsed into receivership and what other options were mulled and dismissed.

And Norman said Parliament's finance and expenditure select committee should hold an inquiry into SCF and the Government's actions.

Read Bill English's statement below:

I wish to make a ministerial statement under Standing Order 347, in relation to the receivership of South Canterbury Finance and its coverage under the Crown Retail Deposit Guarantee Scheme. The Deposit Guarantee Scheme was announced by the previous Government, who set the terms of the guarantee, in late 2008, and was supported by the incoming Government.

At that time the turmoil in world financial markets caused many OECD governments to take unprecedented steps to protect their financial systems, including nationalising banks and providing sweeping sovereign guarantees for most financial system deposits. Administration of the scheme was delegated to the Secretary to the Treasury, in accordance with policy guidance set by the Minister of Finance. South Canterbury Finance was admitted to the scheme on 19 November 2008.

The essential test for admission was whether it appeared necessary or expedient in the public interest. Under the Deed of Guarantee, participants could take on increased deposits and lending, but were required to pay fees in respect of any growth. Allowing participants to continue lending was a major aim of the guarantee scheme. At the time South Canterbury Finance appeared sound. In June 2008 Standard and Poor's had affirmed a stable BBB- credit rating, and commented that "asset quality is sound, underpinned by a modest risk appetite, proactive risk management, and sound underwriting standards".

However, this was not necessarily the case. In the four and a half years to December 2008 South Canterbury Finance's assets had almost doubled from $1.1 billion to $2.16 billion. As 2009 evolved, it became clear that much of this additional lending was not high quality. The balance sheet expanded slightly under the guarantee, peaking at $2.35 billion in June 2009. It is clear however that the great majority of problem lending occurred prior to entering the guarantee. In mid-2009, the Treasury appointed KordaMentha as advisors to report on the company's financial position. The June 2009 Crown accounts included a provision of $831 million for the Deposit Guarantee Scheme.

The majority of this related to South Canterbury Finance. Assessing the potential risk was complicated by related-party lending, generally poor credit and accounting processes, and more recently the departure of most of the senior management. Despite this deteriorating position, South Canterbury Finance remained in compliance with the Deed of Guarantee, and as such there was no ability or cause for the Crown to withdraw their guarantee.

If, for whatever reason, South Canterbury Finance's guarantee had been withdrawn, existing depositors would have still been covered for the full term, and the Crown's exposure would have remained. In September 2009, the Government moved, with unanimous support in the House, to extend the Retail Deposit Guarantee until the end of 2011, though on significantly more restrictive terms than previously.

On 1 April 2010, South Canterbury Finance was approved for entry to the extended scheme when it started in October 2010. Their admission into the extended guarantee did not materially change the Government's risk in the event of default. In the event, because South Canterbury Finance entered receivership before October, the extended guarantee never applied. Payments to depositors will be made under the terms of the original scheme.

During the period of the guarantee, the Treasury and their advisors were in close contact with the firm. Once it became apparent the firm was in difficulty, there were proposals either to acquire parts of the firm or to recapitalise. I instructed Treasury officials to work co-operatively with the firm on these options. However, all effectively amounted to a bailout by the Crown, with extra cost and risk to taxpayers. At no stage would the Treasury have recommended accepting any of these proposals.

At the request of its directors, South Canterbury Finance was placed in receivership on 31 August. The ultimate cause was insolvency, not lack of liquidity. The Government then moved promptly to ensure that depositors could be repaid swiftly. As well as repaying $1.6 billion of remaining depositors, the Government extended a loan facility of $175 million to the receivers to ensure prompt repayment of prior charge holders, and extended the guarantee to a small number of previously ineligible depositors.

These decisions were taken for commercial reasons. They avoided the need to pay ongoing interest that otherwise would have accrued over many months or years as investors submitted claims, and also the risk that receivership might be controlled by prior charge holders, to the potential disadvantage of the Crown. Treasury estimates that the net saving to the Crown is about $100 million as a result.

The Government's recent moves ensure that the receivership will be conducted in an orderly fashion that minimises disruption to businesses either financed or owned by South Canterbury Finance. The Receivers this week called for expressions of interest from possible buyers of South Canterbury Finance's assets. While the Crown has had to make good its guarantees to depositors, it will recover some of the proceeds out of receivership.

Once the receivership is finished, this will largely complete the cycle that began in October 2008.

When the fees collected from the wholesale and retail guarantee schemes are included, the net cost is likely to be between $300-$400 million. While this cost to taxpayers is considerable, this expenditure did help prevent the potential collapse of the financial system. In the light of ongoing bank bailouts around the world, this net cost is the premium our economy has paid to avoid potential catastrophic losses to the taxpayer over the last 18 months.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Ta for the link David top draw as usual.

When you go too the casino and lose you don't then go to government and ask for your money back Bill! People have NO choice but too use banks for their mortgages & their wage payments via DD. A finance company's sole purpose is to make people money via 'gambling and risk'. What other OECD government around the world includes finance companies in their GGS Bill?  NO ONE! because it would be stupid! So i can only  guess that it was done of purpose to steal taxpayer money, hence i will be askingfor all investors names via the FIA.

Your a thief Bill and i intend to prove it.

Since the CHCH earthquakes Tower insurance has lost money for investors, the worst kind of investor, those that profit from peoples 'perceptual fear'. If Tower go under Bill do those scum ass investors get bail out Bill?  Where does a tax payer's thief like you draw the line?

Good luck to you on that...dig in and don't let go.

Not entirely  sure who you were targeting there Ivan...but please do read the thread before the de-horsing process gets into full swing......

No piety intended. 

Yes it is Stuart.

Never ceases to amaze me  how the taxpayer rolls over when the blinds are drawn and the shut shop delivery rings of finality.

What English is asking us to do is read between the lines and understand just how precarious our position was in terms of financial exposure of wider banking interests.

Well I say you cannot have it both ways Billy Bob either you explain ..as Minister of Finance..just ....how exposed we were to warrant the option exercised....or you explain the unanswered questions... at an inquiry.... as raised by Cunliffe and others...in the interests of transparency and good Governance.

You..Billy Bob and John Boy are back to your best form in terms of treating the Voter like something caught on your boot........there is a ....Need To KNOW...here.

You don't just hand me a bill and tell me I don't need to know what it is for no matter how little of it you ..think I would understand.

The point is you will have discharged you obligations ..to the wider public...in doing so.

 

If  you have nothing to hide you have nothing to fear and if your concern is based on perceptions ...I can tell you it's all bad from where I'm seeing it right now....so no loss there uh...?

P.S. with fond regard and respect Bernard you did the job on SFC..well done..now see it through to a conclusion.

Not arguing that Bemused....so that's it ..? it stops there..? you read about it in ten years after the cleaners have finished sanitising ..?

So Fonterra shareholders are not stupid afterall.  They voted Nuttrass off their board. Even the big voters couldn't save him under the single transferable system.  If it hadn't been for that system, he would have got back on.

It is often the women in farming partnerships that vote in the elections and the resounding message from women that saw him at candidate meetings was that Nuttrass was so arrogant. He said at meetings that he wanted to float Fonterra and if it didn't happen, then he would go.  We saved him the trouble and voted him off instead.

Moral of the story:  if women are a force in the voting, don't p.ss them off with arrogance! :-)

We.......... need......to......KNOW.....if ...that ....was ....a ....fact.

I still want to know the foreign investment guest list that may provide some answers as to .......who ......came and went out the back door. 

 " we the great unwashed get told to “suck it up” don’t you know there is a recession. I smell a few rats here..." gosh Selwyn you should see a doctor old boy..the stench is overpowering...maybe you have the flu!

Ever tried to herd cats Selwyn...even the dogs just go "woof" and leap into the nearest pond. Cunliffe is just blowing steam to improve the profile in the House. SCF is history old boy...buried in the Beehive cellar for all time. There are bigger rorts afoot now. Keep your eye on who gets what in the way of contracts in Canterbury.

Your right about Cunny... Wally..but that's no reason not to start milking him to his word.

He opens his dummy...he has access to the system ...I say we lean on him with the sniff of a swing.

On the sauce again Christov...!

See David Hillary's link at top of roll.........worth the visit and worth pursuing.....Bernard used Headlines like .....A Fish stinks from the Head....

Well it seems to me you missed the stench coming from the guts of it Bernard because the Head's gone....................and the fish is ...STINKING TO HIGH HIGH HEAVEN.. 

Anonymous at 10.53am,

The "unhappy investors" included very senior members of the government.

Do you have any proof of this?

Should I take that as a no then?

Barnesy,

Did you not see the second statutory manager's report on Allan Hubbard? - http://www.interest.co.nz/news/statutory-manager-sees-alarming-gap-betwe...

The issues raised there probably give a good indication of  why the Govt & SFO are interested/concerned.

You can be sure that assorted regulators have/are taking a close look at Hanover. But the question is did they break any laws?

Bemused,

We won't allow anyone to make allegations of criminal behaviour against anyone on this site without some form of proof or official investigation.

You make claims about the directors of Strategic and Hanover which no one has any proof of. You also make claims that senior figures in government or farming somehow orchestrated the Aorangi/Hubbard Statutory Management to protect their interests. Yet you have no proof.

We have repeatedly asked all and sundry for any credible evidence of this and we have seen nothing. It is currently a conspiracy theory that many Hubbard supporters choose to believe without evidence.

We know the Serious Fraud Office has said it is conducting a major investigation into Allan Hubbard's affairs. It extended and widened its investigation last week. http://www.interest.co.nz/news/sfo-boss-feeley-says-hubbard-probe-major-investigation-very-complex-range-issues

A quick reminder to all not to make any abusive, defamatory or racist comments on the site. I have removed a few from this thread.

Please register so you can comment after we turn off unregistered comments from this Sunday September 12. A reminder to all that we are moving to registered comments from this Sunday. We welcome any registered commenters.

We don't welcome commenters making abusive, defamatory or racist comments. They'll be deleted. We want to have good clean fun that makes us smile and think rather than swear, huff and puff, and feel slightly unclean.

Registered commenters can edit their comments and more easily include links out. We won't be spamming people. The box to register is in the right hand column. Here's more detail.

http://www.interest.co.nz/opinion/heres-why-wed-you-register-be-commente...

We welcome any suggestions for other changes too to improve the quality (and quantity) of the debate here.

cheers Bernard

Anonymous

You think we haven't tried to find out? You think we have stopped?

We welcome any help we can get from anyone on this. Please email us at bernard.hickey@interest.co.nz or gareth.vaughan@interest.co.nz.

If anyone has proof please present it. Companies office records. Quotes from individuals. We'll keep trying.

Meanwhile we'll be routinely deleting any such accusations that are made in the conspiracy theory/broad assertion camp.

cheers

Bernard

Make some friends as you need to Big B..........start with a Whispering Jack as the walls have ears.....there's the odd good man in there...failing that pick the egotists.

Should get some progress.....

You don't drink... do you.... Bernard...? 

Anonymous (perhaps you could register with real name or even a pseudonym...)

Sigh.

We have not deleted comments urging us to investigate things.

We have deleted defamatory comments made without evidence. That's because we don't just allow any old thing to be said on this site.

I have no fear of getting 'cut off'.

Sad to hear you have lost respect.

We'd welcome you back in registered form ;)

cheers

Bernard

Bemused,

So what laws did Mark Hotchin, Eric Watson, Jock Hobbs and Brian Fitzgerald break by taking big dividends and paying themselves weighty salaries?

Gareth......it is appreciated that you are simply pointing out legal facts of the matter....and at the same time being seen to hold no bias.....and that is just fine and quite correct.

Perhaps what Bemused is sensing here is a preciousness about the victory you.. savor followed by a relaxed attitude to other matters provided they discharged their legal obligations.

I intend no disrespect to your journalistic talents....just possible motive on bemused's part for angst.

Cheers Christov.

And I understand and share the anger that people feel with the amount of investors' money many finance companies lost. There was immoral and unethical behaviour from the leadership of some of these firms. My point is that it wasn't all illegal.

I would point to what Adam Feeley said in this interview - http://www.interest.co.nz/news/sfos-live-finance-company-investigations-...

People ought to bear in mind there was a range of factors that caused the finance company collapses, he said. Some companies were caught out by the market and others were “fairly sharp” in their practices. There was a “big and important" distinction between commercially sharp and acting in a criminal manner.

“I think there’s a real issue for New Zealand to grapple with regarding the level of business and financial literacy of a lot of the investing public. And unfortunately I think we’ve got ourselves into a situation with the finance company collapse that there are large parts of the New Zealand public that won’t invest because they believe every time there’s a failure something criminal must have happened.”

There were some companies, which he declined to name, where the prospectuses were fairly clear, if complicated, about what people were investing in.

“And if people had read those prospectuses very carefully, and perhaps also taken good independent advice, they might have thought twice about whether they were good investments,” Feeley added.

So noted....cheers.

Bemused,

Strategic fell over before the government guarantee scheme was in place.

We have aggressively reported on the problems with Strategic for nearly 3 years.

Here is the latest on the problems at Strategic.

http://www.interest.co.nz/news/strategic-returns-likely-mirror-those-other-failed-property-financiers

http://www.interest.co.nz/news/interim-payout-no-more-25c-dollar-massive...

http://www.interest.co.nz/category/institutions/strategic-finance

Hard to describe us of  being selective and/or lazy when looking at that list.

cheers

Bernard

Bemused,

Sigh. For the record. Here's what the first three paragraphs of that report said.

Strategic Finance debenture holders look like getting back no more money than investors in other failed property financiers, probably something between 10 and 25%, after its receiver revealed an initial distribution of no more 2.5 cents in the dollar. This would mean the confirmation of losses for 13,000 investors of more than NZ$300 million. 

Other failed property financiers such as Bridgecorp, Capital + Merchant, Lombard Finance, Belgrave Finance, Dominion Finance and St Laurence, have returned, or are expected to return, between zero and 34% of investors’ money. Capital + Merchant’s expected returns are the least, at 0-2%, with St Laurence the highest at 34%.

See our Deep Freeze list here, which details how over 199,000 investors have NZ$6.8 billion frozen or lost in 59 finance companies, investment trusts and mortgage trusts.

cheers.

Bernard

There is only one pillock here and it sure as hell ain't Bernard.

Folks, the Securities Commission looks into all finance companies that collapse. Is the SFO investigating Strategic? Not that I'm aware.

Double Shot interview with Adam Feeley right here - http://www.interest.co.nz/news/sfos-live-finance-company-investigations-...

The answer dear readers is to join the National Party and worm your way up the ladder high enough to be in the room when the VIPs let lose with the hints and winks...and get the other half to join the Labour party where once again being in the room at the right time will reward the diligent brown noser. Just take care the pair of you are not seen together...ever!

All true Wally but not helpful...........come on matey you must have some forgotten maggot still belly walking the corridors...

pick up that phone Wally....for the sake of Humanity..!

p..s. Wally did you just call us .....Dear readers...?

now ..now.. nonny it was worth a smile not a shot. :)    I think he'll have a quiet wince.

Oooooooooooooooooooh at last some traction on a non property topic......I'm gonna cry ..I just know it.

You know the sad thing here is that although our population has grown some ...we have come no further really politically speaking......

When Bureaucrats don't want to discuss something of public interest it's a closed shop...shutters go up...just like the old councils.....

You want answers..? well you'll be shitting red tape before sun up.

One thing I will give the yanks....they would shake this tree until something fell out even if was just the nuts that got loose up there.

Proof Bollard is full of shit. Anyone else watch sundays Q&A interview?

 

http://tvnz.co.nz/q-and-a-news/q-interview-alan-bollard-3760907/video

Yes of course...Justice...a must to view...and a must to miss after watching.

I did an encapsulation on Monday...I'll go find it see if you think my summation was thereabouts.

Here you go Justice.....lazy posting ..but I got a busy day ahead..cheers!

Well I just watched and read the transcript......... and overall it could have gone something like this......

Guyon...... Dr Bollard you were in no doubt as to which Finance Companies were in a death roll were you not..?.

Bolly Bib.....er ah...I can't tell you that because the Banks were exposed....er no wait...they were not exposed..... but the potential for panic and the domino effect was certain....er that is that the er..well we covered it because we didn't understand it and needed time to think...in any case the worst case scenario was the tax payer bailing it out......ah look I can't say any more on that for er..um legal reasons....yeah legal reasons....

Guyon....Dr Bollard does it concern you that  when shown the potential for some of these financial instruments..that you just plain did not understand it much less could prepare to defend against it.....?

Bolly Bib....Well.... er ..nobody else did either..! bloody smart arsed whizz kids and their fandangled quantum thingamebobs.......................................................aw............I wanna talk about me book...!

Guyon ...OK...why did you leave the job summit feel good camp to go to a cricket match.

Bolly Bib.... cause they had no hotdogs at the summit and I couldn't understand what the hell we were talking about.

Guyon....Dr Bollard thank you for coming in today and sharing bugger all with our viewers.

Bolly Bib....Up yours Espina.