Former Finance Minister Michael Cullen says ex-Aussie PM Kevin Rudd to blame for NZ's broad Crown retail deposit guarantee scheme that left taxpayers' with NZ$1b bill

By Gareth Vaughan

Former Finance Minister Michael Cullen says ex-Australian Prime Minister Kevin Rudd is to blame for New Zealand's wide ranging Crown retail deposit guarantee scheme, which looks set to cost taxpayers around NZ$1 billion.

Cullen says the New Zealand government of the day was "forced into" a much more comprehensive, open ended scheme than it had been considering by Rudd's "panicky" actions.

Introduced in October 2008 by Cullen's Labour Party led government at the height of the global financial crisis during the 2008 election campaign, the scheme at its zenith saw taxpayers' guaranteeing about NZ$133 billion. Ultimately nine finance companies failed with debts guaranteed by the taxpayer before the much smaller extended Crown retail deposit guarantee scheme, introduced by the National Party-led government upon the initial scheme's expiry in October 2010, ended on December 31 last year.

All up, the taxpayer paid out NZ$1.97 billion to investors in failed finance companies with the bulk stemming from South Canterbury Finance's August 2010 demise. Finance Minister Bill English has put the amount reimbursed through receiverships so far at NZ$523 million, and up to June 30, 2011 a further NZ$355 million was collected in fees from companies participating in the scheme, leaving the taxpayer more than NZ$1 billion out of pocket.

Following Deputy Controller and Auditor General Phillippa Smith's recent appearance before Parliament's Finance and Expenditure Select Committee, Labour's new finance spokesman David Parker has been striving to have Treasury officials hauled before the Committee for questioning over their stewardship of the scheme, serious aspects of which the Auditor General has criticised. Parker told interest.co.nz that based on Smith's comments, the loss to the taxpayer could have been at least NZ$100 million less if Treasury had taken a more proactive management role and said it was a fair question to ask whether Treasury heads should roll.

'Govt had been working on a more limited scheme'

For his part Cullen says he's "keeping out" of recent arguments. However, he says the Crown retail deposit guarantee scheme as it ultimately emerged was more comprehensive than the Government of the day had been planning because of Australia's move.

"The day the Labour Party launched its election campaign Helen (Clark) was going to include a reference in her speech to the fact that work was proceeding on such a scheme," Cullen recalls. "However, word emerged out of Canberra that it was believed that the Australian Government was about to announce a comprehensive 100% guarantee scheme."

At the time an International Monetary Fund-World Bank conference was underway in Washington DC. Australian Treasurer Wayne Swan was attending, along with the Australian Treasury Secretary and New Zealand's Treasury Secretary John Whitehead.

"So we were actually huddled at the back of the (Auckland Town) Hall in the green room getting messages through to John Whitehead to find out what was going on," says Cullen.

"The Australian delegation in Washington professed to have no knowledge of any such announcement being made. Eventually we got on to Rudd's office and got confirmation that Rudd was about to announce, essentially on his own initiative, a 100% guarantee scheme," says Cullen. "Therefore we had to announce that, which we promptly did in Helen's speech."

Clark's Sunday October 11, 2008 speech, kicking off Labour's campaign for the November 8 general election which it subsequently lost, noted "the Government has agreed to implement a deposit guarantee scheme which will provide New Zealand depositors with additional confidence."

"What emerged over the next couple of days was there were absolutely no details, virtually at all, to the Australian scheme," Cullen continues. "We actually filled in the details of ours very much faster than they did  even though we were in the middle of an election campaign."

Fears over 'rush of money to Australia' after Rudd 'panicked'

And, Cullen says, the New Zealand scheme that emerged was forced by the Australian announcement.

"Because clearly if the Australians were doing that we had no choice but to follow given the probability that if we were something less than that then there'd be a great rush of money out of New Zealand into Australia."

Cullen says the New Zealand Government didn't want to get itself into such a comprehensive scheme, but had to "because of Rudd's action."

"Whether he was under pressure from the Aussie banks, who have always had enormous amount of entree into the Prime Minister's office in Australia, I don't know.  He just seemed to me to panic and clearly hadn't consulted properly with the Australian Treasury about it," Cullen adds.

'Politically untenable to have left finance companies out'

Asked about the inclusion of finance companies in the scheme Cullen says there was no real consideration given to leaving them out.

"Because that would have folded them up like a pack of cards straight away. It would have been politically untenable apart from anything else, because we would have been seen to precipitate those collapses as opposed to the process of what you might call orderly collapse which have been occurring over a period of time," says Cullen.

He says the only area where he recollects not following the advice of Treasury and Reserve Bank officials was resisting pressure from Treasury for a "very clearly" risk weighted scheme.

"It would mean a very high fee for, for example, the credit unions. My view was that was likely to lead to very high risk of their immediate collapse because the costs would've been so great to them, given the very low margins with which credit unions operate, that it was unsustainable."

Some of the features of a proposed New Zealand Crown guarantee scheme prior to Australia's move included caps on exposure. Cullen says it wasn't going to be a blanket scheme, "100% everything across the board no matter what." In a perfect world he says the government would've worked out the details of the scheme "a little bit more carefully" and hopefully had more limited total exposure.

Nonetheless, Cullen argues through its initial stage the scheme - following an international trend started by Ireland - was successful.

"It stabilised, to a significant degree, confidence in the financial sector in New Zealand and that in the end was the purpose of the exercise. From there on the problem was always going to be, for whoever was the Government, how did you extricate yourself from the guarantee?"

'Govt wouldn't let the big banks fall over'

And in terms of the big banks, he says there has always been "a degree of pretence" around the idea the government didn't stand behind them.

"If they were systemically important in reality the government couldn't afford to let them fall over. But no Minister of Finance is ever going to say that as Minister of Finance. It's only when they're old and clapped out and out of a job that they can actually say that."

An October 10, 2008 report from Treasury and the Reserve Bank entitled Responding to the prospect of a worsening financial crisis in New Zealand said if quick action was needed, the preferred option would be to offer a guarantee of some or all liabilities of banks and other deposit takers. They noted that, given Parliament had been dissolved for the election, the only way the Government could charge fees for a guarantee was if the scheme was operated on a voluntary opt-in basis, which the scheme ultimately was.

The officials went on to say they didn't believe it would be appropriate to offer a full guarantee of all liabilities at present, and noted that any offer should include New Zealand registered banks, and non-bank deposit taking entities including building societies, credit unions and deposit taking finance companies.

'Sum equivalent to three quarters of GDP guaranteed'

The report further said that banks held retail deposits of about NZ$130 billion with about another NZ$10 billion held by other institutions.

"Hence the contingent guarantee might well involve a sum equal to three quarters of GDP. This is an order of magnitude larger than all existing Crown Contingent Liabilities," the report added.

Although acknowledging this was the total potential exposure, the report said actual fiscal cost would only be what the Crown ended up paying out in the event of a company failure.

"A back of the envelope calculation based on US Savings and Loan crisis experience is that this cost could be of the order of 0.1% of GDP, or about NZ$1.6 billion," the officials wrote.

Meanwhile, in the first reading of the Crown Retail Deposit Guarantee Scheme Bill in Parliament on September 8, 2009 English noted the Australian Government had decided at very short notice to guarantee retail deposits.

"There was a considerable risk that New Zealand’s financial institutions could lose some of their domestic deposit base to Australia," said English.

"At the time, the New Zealand Parliament had been dissolved for the 2008 general election, and the Government of the day established the existing guarantees scheme using the powers available to the Minister of Finance under the Public Finance Act 1989. This scheme provided assurance to depositors in New Zealand financial institutions during a period of great uncertainty and at a time when New Zealanders had seen pictures on TV of bank runs in the UK."

The introduction of this bill recognises that non-bank deposit taking institutions are a significant feature of New Zealand’s financial system," he added. "However, the Government recognises that guarantees can encourage unwarranted risk-taking among financial institutions and that guaranteeing deposits carries an ongoing economic cost."

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38 Comments

He sounds like a little schoolboy - "It wasn't my fault Miss it was Kevin's" - What a wally.  

Hey  ...that's really not very nice Andy.

What annoyed financial advisors about the guarantee was that while the finance companies were pulling the wool over the eyes of Treasury, those Treasury boffins spent their time nazel gazing over who was and who wasn't covered by the "blanket" guarantee announced by Helen Clark. So as time progressed Treasury posted a stream of "interpretations" of the guarantee on their web site. No one knew what was coming next. So some investors who put money into finance companies in good faith after the guarantee was announced suddenly found themselves not covered. For example, if the investment was made by a trust and one of the beneficiaries was a non-resident, then the whole investment made by the trust was not covered. This situation applied in many circumstances i.e. a grandchild who was born in Australia. When SCF went under and the government found out how timethe Treasury had been spending their time (fiddling around with the eligability criteria) they realised what a fiasco it would be if every SCF investor had to apply to the Treasury for a ruling on whether they were covered. Wisely the government over-ruled the boffins and instructed them to pay out all investors in SCF.

Not defending Rudd at all, but this mess all started with the Irish government - they were the ones who panicked first and started the whole "govt guarantee" domino... UK was next and by the time it got down here we (or Rudd) had no choice really .

Well here's a clear example of where he should have followed that great philosopher of modern thought, Nancy Reagan, when, upon learning of the Australian proposal, he should have just said no.
 
Ultimately the whole fiasco of govts. guaranteeing bank deposits was started by the stupid Irish government trying to stop a run on their banks, forcing everyone to follow suit. And look at what happened to them (the Irish). There’s a lesson in there, and that’s be very careful who you vote for. 

I suppose Kevin also gets the blame for overpaying for a trainset as well?

...and spurned an great offer from Singapore Airlines to buy Air NZ then throwing away a billion bucks to subsequently Air nationalise Air NZ once it had become effectively worthless.
...and bought the LAVs
A Billion here and a Billion there...Pretty soon it adds up to a tidy sum.... :-/
 
 
 

Yep, you've hit the nail on the head - John Key is responsible for Irelands economic crash, and for Australia and New Zealand's stunted growth.
 
Probably Greece, Iceland and Italy also at the same time.
 
 
Or it could be you are a bell-end conspiracy theorist......

We've all endured some hogwash from Parksy , over the years ........
 
........ but credit where it's due , he's excelled himself this evening ....
 
Pure , un-adulterated mad loony raving bollocks !

Next JK will be responsible for the extinction of the dinosaurs.

....... all of them , or just the sauropods ?

A clear case of political bias on the part of the gummy one I think. Why are these comments worthy of censure, at least they make the effort to quote reasonable sources, but the comments of a Mr Justice below (which are clearly in a league of their own), are not worthy of censure?
I've got a conspiracy theory for you. Gummy is actually Stephen Franks.
 

Who said anything about censure ? ....... not me .
 
... Gotta admire talent , Parksy's the funniest conspiracy theorist whom I've ever encountered !

I don't defend John Key , Iain ........ I ignore him ....... but Wild Bill & he are the lesser of two evils , given that a NZ Labour & the Greens coalition  is the current alternative .......
 
....... but bless you , Parksy , for having such a wonderful sense of humour ..... you're a rare gem ..

Nobody is stopping you from speaking your mind, and can reasonably agree that the overfinancialisation of an economy and the incentives that fuel it are not a good things.
But I put it to you that stark raving mad conspiracies about JK being responsible for Irelands woes, which very clearly have been set in motion by events over 20-30yrs, involving many many people with absolutely nothing to do with JK, make it less likely people will take any of the substance you do have seriously, and makes it far easier to dismiss you as a loon.

Parker: Key may well have done and said all those things. But, what's the point of going on about it. GBH sums it up fairly accurately in saying the populace, in a democratic election, chose the lesser of two evils. Remember, Roosevelt appointed Joseph Kennedy, the greatest financial evil-doer of his time, head of the Securities Exchange Commission on the basis it takes a shark to know what the other sharks are doing. You would be better saving your ammo for the future. Meanwhile, you're wasting your time.

Interesting some bloggers here are picking on Helen, Cullen and other members of the Labour party members past – regularly and often rather ridiculously, without any responses.
But when Iain Parker publishes his profound and well researched articles about the current PM –  it seems wrong.
Iconoclast, I’m not sure if you aware that the majority of Kiwis don’t know the past of John Key – our PM. Why are these educational articles not valuable for you ?
What about the simple issues for our politicians and ask for accountability and trust ?
  

Kunst: Unless Key gets his act together and does the "vision thing" eventually his star will wane and the electorate will lose faith. At that time Parkers articles will resonate more and have more impact.  Some time in the future. Just not now.

Iconoclast – I'm of the view Key already failed. He and some of his ministers don't understand the mechanism between economics and society. New Zealand's education system is working and well respected overseas, but without the creation of decent jobs/ wages not attractive enough for the wider population.

Yes, its rather funning the level of partisanship here actually. I mean it goes both ways and both sides usually have a pretty ridiculus statement to support their favourites. I think most of the partisans I have observed, would probably support any statement at all, as long as its critical of their least favourites in some way.
One of the most ridiculus arguments I have observed is when people accuse, typically Labour, of handing our sweeties to 'bribe the voters'. Do these people really think that political parties should attempt to get elected by delivering bondage to their support base? What did you expect, in fact what should they be doing in a representative democracy? Certainly not implementing policies which their core supporters wouldn't want, over policies they would. 

..... " funning " ?
 
Dude , do you actually read other bloggers' postings , or just assume you know what they're going to say ?
 
......... 'cos if you did some reading , you'd see that many of us are mightily hacked off with Wild Bill & Jolly Kid too ...... and have been since they won office in late 2008 , and promptly fell asleep  ........

Who created Kiwisaver?
Now, who specified certain 'finance companies' as  default options?
Now.........who created the GGS that included 'finance companies'?
 
Ok..............connect the dots yet people?

Thanks for confirming the stupidity of your decision to go against the good advice you were given only 2 days before and the lack of any reasonable basis for the decision you made. What was there to lose by a wait and see approach?

Basically it was a decision to spend a billion dollars to pre-emptively pervert the New Zealand financial system and the overturn the established and wise policy for a problem that did not and probably would never exist.
Just like I said on the day it was announced, regulating because other countries do is a stupid thing to do:
http://www.lostsoulblog.com/2008/10/regulating-because-other-countries-d...

Agree, this was "follow the herd into the bog" thinking. Rather than being cowardly imitative,Cullen and co could have framed their response to events in a much more creative manner:
Kiwibank. The Crown as shareholder could have announced that they were prepared to inject more capital as necessary to ensure the bank's ongoing viablilty.
Oz- owned NZ banks.Silence. This would have forced Rudd into either extending his guarantee to cover his (Oz) banks NZ subsidiaries, or risking them fail, with the consequent impact on their parent banks. Now what do you think Rudd would have done?
Deep down I do not think governments should bail out private businesses, but especially not ones owned by foreigners. Even those across the ditch. They do us no favours and we should have returned the compliment. An F for Mr Cullen.

Yes, Cullen missed a golden opportunity to grab the crown jewels back in one fell swoop. He could have limited the guarantee to just kiwibank, and the the populace would have done his bidding for him, and flooded out of the AU banks into Kiwibank PDQ. Fool.

I think the reality is most Kiwis would have sat on their arse.

They would have had to, no money for petrol, or food...if they want to waer blinkers more fool them.
regards

I will give Cullen and Bollard, A++
regards

No, it was necessary, it prevented the NZ banking system from going into meltdown....no one being able to spend at pak'n'save etc would have caused severe problems.
regards
 

It MAY have been necessary but I think the impending election influenced the timing of decisionmaking which, with the benefit of hindsight looked rushed and not well thought through. What I am saying is that the same thing (an effective guarantee of the major banks) could have been achieved another way, without exposing the NZ taxpayers to any liability with respect to bank deposits.
As for extending the guarantee to cover non-banking institutions, this was both morally indefensible and plain stupid to boot. That was not about enabling people to keep buying their groceries, the motives were 100% political and cynical. Why do people foolish (or risk-comfortable) enough to "invest" significant parts of their savings in these "bubble" ventures DESERVE to be bailed out by taxpayers, most of whom have more sense? I got singed by a finco failure, and learnt a valuable lesson, which I doubt I would have taken to heart if my losses had been covered by others.
 
\

"And in terms of the big banks, he says there has always been "a degree of pretence" around the idea the government didn't stand behind them.
"If they were systemically important in reality the government couldn't afford to let them fall over. But no Minister of Finance is ever going to say that as Minister of Finance. It's only when they're old and clapped out and out of a job that they can actually say that."
So let's recap shall we......during Cullen's era under Clark the banks were in charge but this fact was never to be spoken of to the public.......Today it's English under Key and the banks continue to own and control the financial system.....and no way will English speak of this to the public.
There you have it folks. This is not New Zealand...independent country...this is a farm owned by the aussie banks from which they harvest billions and all they have to do is sell credit to idiots and tell fools in the Beehive and the RBNZ what to do.
 

They taught me this in school:
 
The Magpies

When Tom and Elizabeth took the farm
The bracken made their bed
and Quardle oodle ardle wardle doodle
The magpies said
Tom's hand was strong to the plough
and Elizabeth's lips were red
and Quardle oodle ardle wardle doodle
The magpies said
Year in year out they worked
while the pines grew overhead
and Quardle oodle ardle wardle doodle
The magpies said
But all the beautiful crops soon went
to the mortgage man instead
and Quardle oodle ardle wardle doodle
The magpies said
Elizabeth is dead now (it's long ago)
Old Tom's gone light in the head
and Quardle oodle ardle wardle doodle
The magpies said
The farms still there. Mortgage corporations
couldn't give it away
and Quardle oodle ardle wardle doodle
The magpies say.

Dennis Glover

plucking bell - the GG cost NZD$1b - get a a grip - we spend that every week on social spending! The GG achieved an objective and cost roughly the same amount as a cup of coffee at Starbucks for every NZer. Why drag JK into it? The scheme fell under HC watch and frankly was one of the only decent things Labour did!

Well said , Sore Loser ..... as ever , you've nailed it more succinctly than a convention of finance ministers & central bwankers could hope to achieve in a thousand life-times  ......
 
..... but where's your CAPS-LOCK  finger gotten to , retired ?
 
HICKEY'S NOT HERE : SHOUT , MY FRIEND , SHOUT THE MESSAGE LOUD & LONG !

If only they had asked a young Forex dealer back in 1987  -  he could have set NZ aright: ...
http://www.nzonscreen.com/title/close-up-big-dealers-john-key-1987
 

Yeah, all that ticket clipping, and at the end of the day you haven't really achieved anything more than a computer algorithm could do.

I have to note the pressure built by Gareth's first two articles (here and here) to seek clarity from Treasury officials before the select committee has been deflated considerably by introducing the convenient memories of an "old and clapped out and out of a job" ex Minister of Finance. 
 
Meandering off at tangents by default misses the target, unless short term self serving popularity is really the proprietor's editorial aim.  And of course I might have been confused and deluded hoping  for continuously focussed journalism.

Rudd and Cullen.  Both muppets.  Both panic stricken and making decisions on the fly.  In the hallway and without information.  Spare us.