Top 10 at 10: Hubbard's Aorangi dealings exposed; Brian Gaynor on Hubbard; China's mega-debts; Dilberts

Here are my Top 10 links from around the Internet at 10 to 11am. I welcome your additions and comments below or please send suggestions for Tuesday's Top 10 at 10 via email to bernard.hickey@interest.co.nz

1. Related parties up the Wazoo - Greg Ninness at the Sunday Star Times has a good look at Allan Hubbard's Aorangi Securities. It makes for uncomfortable reading for anyone who is backing Hubbard. It seems Aorangi co-invested and lent with South Canterbury on several occasions. Aorangi seems to have offered bridging finance for South Canterbury and vice-versa at various stages.

There are also many properties owned by Hubbard where banks are owed significant amounts. This could get very ugly for many people and institutions.

Aorangi operated without a prospectus and would borrow money from private investors and lend it out again to various business projects. Some of those projects related to Hubbard's own investment activities. One of those was Luggate Investments Ltd, a company structured as a joint venture between Aorangi and Forresters, making Hubbard its ultimate owner. The company appears to be a speculative property developer, which undertook a small lifestyle subdivision at Luggate, a rural settlement about 13km inland from Lake Wanaka in Central Otago.

Funding for the project appears to have come from South Canterbury Finance and Aorangi, both of which took out mortgages over the project securing up to $1m each. However, the development appears to have been adversely affected by the recession and no sections have been sold since September 2008. The South Canterbury and Aorangi mortgages remain in place over the unsold sections.

Aorangi also appears to have provided bridging finance on an investment property Hubbard owns in Christchurch.

The property is owned by Eastleig Ltd which is 100% owned by Forresters. Eastleig purchased the property in 1999 from Broadway Industries, a company in which the Hubbards are the largest shareholders.

Up until last November, the property was used as a warehouse and office by HEPerry, an optical supplies company owned by Broadway Industries. The property had been mortgaged to ASB when it was purchased, but at the end of last August, three months before HEPerry moved out, the ASB mortgage was replaced with one to Aorangi.

Just over a week later that was replaced by a mortgage to South Canterbury Finance. That suggests Aorangi had stepped into the breach and provided bridging finance until more permanent arrangements could be put in place with South Canterbury.

South Canterbury still holds a mortgage over the property which appears to still be vacant, with local real estate agents trying to find a tenant.

Aorangi also appears to have played a role in facilitating the sale of several properties owned by Hubbard. Hubbard has extensive property investments and he is listed as an owner or part owner of 128 properties with a combined land area of nearly 8000ha. Many of those holdings are farming properties. On most of them any mortgages are usually held by one or other of the major banks.

2.  'There's not many defences' - Brian Gaynor rightly put a deft boot into the supporters of Allan Hubbard in his NZHerald column on the weekend.

The Securities Commission and Serious Fraud Office seem to be concerned with Hubbard because he took money from Aorangi on an unsecured basis, with inadequate documentation and security, and this is a misrepresentation of risk as far as investors are concerned.

Would the major trading banks allow their directors to take money out of client accounts on the basis they would be able to pay it back? This is a ridiculous suggestion yet there seems to be widespread support for this sort of behaviour at Aorangi.

Timaru lawyer Edgar Bradley, a long time friend of Hubbard, told the media: "If a sometime criticism of Allan is a lack of documentation then it must be remembered he is a product of days when trust was more important than paperwork. Sadly the reverse is now the case."

Bradley's view is misguided because trust and documentation are both vitally important in the modern era and the former has not replaced the latter.

The clear message from the Hubbard's statutory management and Serious Fraud Office investigation is that regulators believe that he has obtained funds from Aorangi on an unsecured basis when investors have been told that their money would be secured.

Regulators cannot condone this behaviour on the basis that Hubbard, or anyone else in the same situation, promises to meet any shortfall.

3. Now it's getting political - Labour MP Ruth Dyson has pledged to challenge Simon Power over Allan Hubbard's predicament, and in particular the supposed conflict of interest between Securities Commissioner Simon Botherway and his brother Jonathan, who had borrowed money from South Canterbury Finance, the Timaru Herald reported. 

Ms Dyson said she would challenge Mr Power in parliament about the connection this week.

"This is a very serious investigation, and the integrity needs to be maintained. I want some reassurances as to when the potential conflict of interest was declared," Ms Dyson told the Herald. Ms Dyson said she was disappointed with the tenor of Mr Power's comments regarding the Hubbards.

"It is a really distressing situation that Mr and Mrs Hubbard have been put in. Everyone deserves to be considered innocent until proven otherwise, but the response from Simon Power was far from moderate. It sounded like he was already convinced."

4. Baby boomers on trial - BBC Radio4's Michael Blastland examines the claims of David Willetts and others about Baby Boomers being responsible for our current economic predicament and a massive intergenerational transfer of wealth. A nice balanced look. It's 30 minutes long and the first minute is a promo, but persist.

Blastland points out the counter-arguments, including that many of the beneficiaries of the 2002-2007 housing boom being 30-40 year olds and that the expectations of Generations X and Y are unreasonably high. HT Pixelace via Twitter. 

5.  Now for the backdown - New Australian Prime Minister Julia Gillard is getting ready to announce a partial softening of the mining super tax, although at least initially they look similar to the softenings that Rudd was planning, the Sydney Morning Herald reported. The changes don't look enough to keep the miners happy though.

The Herald understands the changes to the mining tax largely resemble those Mr Rudd was to announce last Friday, the day after he was deposed as prime minister. These were designed to address the concerns of the coal-seam gas industry by reshaping the tax to more closely resemble the petroleum rent and resource tax, which applies to offshore oil and gas.

The rate at which a super profit is defined would increase from 6 per cent to 11 per cent. The government would drop $1 billion in exploration rebates and taxpayer-funded writeoffs for failed ventures, and change the point in the production process at which the tax is levied. The day before he was deposed, Mr Rudd called the changes sensible and balanced but conceded they would not appease the minerals giants which oppose the 40 per cent rate and its application to existing projects.

But it is understood that extra work was done at the weekend on transitional proposals it is hoped will quieten the mining companies.

6. Prepare for monster printing - Ambrose Evans Pritchard at the Telegraph reports on Royal Bank of Scotland credit chief Andrew Roberts' forecast that Federal Reserve Chairman Ben Bernanke is about to unleash a 'monster' amount of money printing for an equally monstrous helicopter to tip out the door over the US economy. Bernanke's now infamous 'helicopter' speech of 2002 is referenced. HT Andrew Wilson via email.

 The ECRI leading indicator produced by the Economic Cycle Research Institute plummeted yet again last week to -6.9, pointing to contraction in the US by the end of the year. It is dropping faster that at any time in the post-War era.

The latest data from the CPB Netherlands Bureau shows that world trade slid 1.7pc in May, with the biggest fall in Asia. The Baltic Dry Index measuring freight rates on bulk goods has dropped 40pc in a month. This is a volatile index that can be distorted by the supply of new ships, but those who watch it as an early warning signal for China and commodities are nervous.

Andrew Roberts, credit chief at RBS, is advising clients to read the Bernanke text very closely because the Fed is soon going to have to the pull the lever on "monster" quantitative easing (QE)". We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable," he said in a note to investors. 

Evans Pritchard then goes on to make this sweeping summary of the situation and put his 10 cents in for more printing. He thinks everything should be done to avoid deflation and he reckons central banks can get their timing right to avoid printing turning into deflation. Your view? I'm more sceptical.

Clearly we are nearing the end of the "Phoney War", that phase of the global crisis when it seemed as if governments could conjure away the Great Debt. The trauma has merely been displaced from banks, auto makers, and homeowners onto the taxpayer, lifting public debt in the OECD bloc from 70pc of GDP to 100pc by next year.

As the Bank for International Settlements warns, sovereign debt crises are nearing "boiling point" in half the world economy. Fiscal largesse had its place last year. It arrested the downward spiral at a crucial moment, but that moment has passed. There is a time to love and a time to hate, a time for war and a time for peace. The Krugman doctrine of perma-deficits is ruinous - and has in fact ruined Japan.

The only plausible escape route for the West is a decade of fiscal austerity offset by helicopter drops of printed money, for as long as it takes. Some say that the Fed's QE policies have failed. I profoundly disagree. The US property market - and therefore the banks - would have imploded if the Fed had not pulled down mortgage rates so aggressively, but you can never prove a counter-factual. The case for fresh QE is not to inflate away the debt or default on Chinese creditors by stealth devaluation. It is to prevent deflation.

7. Chinese debt - China's chief auditor has warned that high levels of local government debt could derail China's country's economy. Some suggest that a number of Chinese provinces are even more fiscally-troubled than Greece, the Telegraph's Malcolm Moore reports.

Liu Jiayi, the head of China's National Audit Office said the financial crisis had left some Chinese provinces with serious debt problems. "The scale is large, and the burden is quite heavy," he said, in an annual report to the Chinese government. Chinese provinces are, in some cases, equivalent in size to major European countries and run with a degree of fiscal autonomy.

The southern province of Guangdong, for example, has the same population size as Germany. However, provincial budgets have been classified as state secrets until now and this is the first time that China has disclosed the level of local government debt.

Mr Liu said the ratio of debt to disposable revenues at some local governments was over 100pc and in the highest case it was 365pc. He said the audited debts of 18 of China's 22 provinces, together with 16 cities and 36 counties amounted to 2.79 trillion yuan (£279bn) in 2009. Several observers believe the situation is far worse. The China Daily newspaper, which is run by the government, suggested that the total sum could add up to between 6 trillion and 11 trillion yuan (£590bn-£1.08 trillion).

8. The fight in Congress is over - The US congress finalised its banking reforms over the weekend. Reuters' Felix Salmon welcomes them. 

It’s a great day: financial regulatory reform is done, and not a day too soon. The Consumer Financial Protection Bureau is coming — Ron Lieber has a great overview of how that will change the regulatory landscape — and while banks won’t have to sell their swaps desks entirely, they will need to spin them off into separately-capitalized, small-enough-to-fail subsidiaries which deal mainly on public exchanges.

That’s a big and a welcome change. No one really knows how the bill is going to shake out in reality: the Volcker rule, in particular, remains very vague indeed, and a lot of regulatory heavy lifting is being put onto the untested shoulders of the SEC and of other institutions which have failed many times in the past. But in general the bill makes as robust an attempt as could reasonably be expected to both monitor and ring-fence the kind of things which can cause systemic meltdowns.

Former IMF economist and close Congressional reform watcher Simon Johnson takes the other view. He says the reforms fail to solve the 'Too Big To Fail' problem and he points out that one of the big banks, JP Morgan Chase (CEO Jamie Dimon , seems intent on subverting rules, just a few hours after they were agreed. Johnson says the resolution authority created in the reforms simply aren't good enough and Dimon's actions confirms the big banks are already treating its prospects with contempt.

The reason global megabanks will get bailouts in the future is simple – policymakers will fear the chaos that would ensue when competing bankruptcy claims swarm over a defaulted institution, much as happened for Lehman (e.g., in London) in September 2008. Mr. Dimon and his colleagues – who include some top former global regulators – are also well aware that the G20 (and everyone else) will not make any serious push towards creating a cross-border resolution mechanism.

The best way to signal to creditors that they will be protected in all potential future crises is to make JP Morgan bigger and more global. This will lower the funding costs for the organization and in turn make this global expansion more profitable when times are good – and when times are bad, there will be government support.

In effect, Mr. Dimon is constructing a “poison pill” against takeover by the government. This is so simple, so brilliant, and so dangerous that it should take your breath away.

9. Where to now for Goldstein? - TBWA, the advertising agency behind ASB's advertising mainstay Ira Goldstein has been dropped by ASB, William Mace at BusinessDay reports. This is interesting given ASB's marketing head used to be at TBWA.

The bank's marketing mascot Ira Goldstein was created by the agency in 2000 and has enjoyed critical acclaim and public popularity throughout the last decade. But while Goldstein's long run had been predicted to end the bank's decision to axe TBWA will come as a shock to the agency.

TBWA chief executive David Walden says there has been a considerable amount of change at ASB in the last few months and this decision was a reflection of that.

10. Totally irrelevant video - Now BP is burning sea turtles alive, says one of the Shrimping boat captains working on the cleanup. HT Henry Blodget at BusinessInsider. As Jon Stewart would say...'These f*#%!ing guys'