Labour Finance Spokesman David Cunliffe has called on the government to launch a full and independent judicial inquiry into the circumstances around the collapse of South Canterbury Finance.
Cunliffe also cited overseas investor concerns about New Zealand's financial regulations creating the "Coldest Banana Republic" in the world and criticised trustees and auditors for not being aggressive enough.
Cunliffe said an inquiry was needed into whether the government should either have put South Canterbury into statutory management last year or whether it accepted one of the recapitalisation proposals made in August this year.
"There's an overwhelming case for a full and independent independent judicial inquiry at arms length from government because government servants are involved in the chain here and there are questions about the chain," Cunliffe told interest.co.nz in a Double Shot Interview.
Cunliffe said there were questions about the transparency of the government's decision making and the circumstances around the decision to let South Canterbury trade on.
"That just needs to have some sunlight shone on it," he said.
There were also questions about the fairness of some bond holders and foreign investors being paid out through the deposit guarantee scheme when many other investors in finance companies had not receieved their money back.
"This is a billion dollar-plus question," he said.
Cunliffe also repeated his call for Simon Botherway, the chairman of the establishment board of the Financial Markets Authority (FMA) to step aside while the Ombudsman's office conducted an inquiry into the circumstances surrounding the Securities Commission recommendation to put Allan Hubbard's interests into statutory management.
"We've called for Mr Botherway to respectfully stand aside from his role as the chair of the establishment board of the FMA and from his current duties in the Securities Commission until that investigation is completed," he said.
'Can't have it both ways'
Cunliffe said the government could either have shut down South Canterbury earlier or allowed it to be bought in August of this year, but allowing it to trade on and then then putting it into receivership meant the NZ$200 million 'option cost' of allowing it to trade on was wasted.
"Action could have been taken much, much earlier to place SCF into a statutory management regime where the losses could have been bounded, and where the good bank part of it could have traded on," he said.
"Having paid a lot of taxpayers money to buy an option to recapitalise, why did the government not go through with it?"
"At least one of the deals on the table could have allowed the government to have walked away with a total liability in August of this year of NZ$400 million. Treasury estimates that their loss from allowing a receivership to occur is NZ$800 million. There is a huge question: Why did the government walk away from a deal that would have or could have halved the taxpayer's liability? There are huge questions about that that can only be answered by an independent judicial inquiry."
"Were there prudent actions that could or should have been taken earlier to inform the government, or if it was fully informed, why did it not act more quickly?," Cunliffe asked.
"Something must have been wrong in the information chain for the government not to have know by at least mid 2009 that there were serious issues. What was the role of the trustees? What was the role of the auditors? Were the officials briefing the government properly? Did ministers know but make another decision?"
"There's a theory that the government knew jolly well it was in trouble and wanted the public to get used to the idea that it could fail and kept it going. That would be a very expensive public relations exercise if that were true."
There were also questions about whether SCF was operating in breach of trust deeds, he said.
Line ball call
Cunliffe said his informants suggested a deal could have been done in August of this year that saved taxpayers money.
"I've had a lot of informants come to me, and I understand that even the advice streams within the Treasury were quite split, and some of the experienced hands in the Treaury felt that on a risk weighted basis at least one of these deals was worth pursuing," he said.
"The government can't have it both ways. If there was no reasonable basis for a recapitalisation deal in August 2010 then it should or could have been sorted in June/July/August of 2009," he said, adding it would have been possible to write in covenants or protections for the taxpayers interests at that stage.
'Time for a cold shower'
Meanwhile, Cunliffe said he was generally concerned about the quality of financial market regulation in New Zealand and had been disturbed by what he had discovered in recent weeks when investigating the situation around South Canterbury Finance and other finance companies. He was referring to comments he made in a Red Alert blog post last week titled: "Systemic Market Failure."
"Essentially I felt like having a cold shower after I'd spent 2 weeks working through company structures, effectiveness of trustee arrangements, accuracy and probity of audits and conflicts of interest in the market," he said.
"I'm really worried that our trustee system is broken. I'm told repeatedly that issuers have an incentive to find a trustee that is not over-exuberant -- the more passive the better," he said.
"Who's policing the front line regulator and is that oversight strong enough? This is a really important issue for the FMA bill."
'Coldest Banana Republic'
"The public needs guarantees that those who are responsible for frront line market regulation have got the smarts, the ability, the guts and the backbone to carry that role off. Some of what I've seen raises realy questions about it. One broker I spoke to says he won't allow his offshore clients to invest in New Zealand domiciled and regulated investment vehicles. He insists they go through ASIC regulated vehicles because he calls us the 'Coldest Banana Republic in the world."
"There is no point in building a pool of capital if there's no pipeline from the capital pool to the business that is robust. If it's being siphoned off through weak regulation and through self interested and shady deals. That is not ok because we will all suffer if our market does not have a reputation for integrity."