Opinion: Why New Zealand needs to ramp up its Serious Fraud Office massively to rebuild investor confidence

Opinion: Why New Zealand needs to ramp up its Serious Fraud Office massively to rebuild investor confidence

New Zealand spends just 0.2% of its NZ$3.5 billion law and order budget on investigating and prosecuting Serious Fraud.

By Bernard Hickey

Confidence and trust in the financial architecture of a nation is a delicate and ephemeral thing. It's also crucial to the long term sustainability of any modern economy and society. If the public loses faith in they way their investments are handled it can take decades to recover.

In many ways the anemic nature of our stock market now and the lack of investment in productivity-producing infrastructure and equipment through the 1990s and 2000s is a result of the failure of public confidence in the market after the 1987 crash. Many would argue the housing boom of the mid 2000s and the associated surge in investment in finance companies is also a direct result of that loss of faith in our markets. Investors decided property was safer and more lucrative than stocks.

Their perception was after years of failed litigation and inquiries that those rich enough to afford good lawyers could get away with taking money from the public or taxpayer and enriching themselves. Only a few of the high fliers from the mid-1980s saw the inside of jail.

One in particular, Rod Petricevic, was involved in one spectacular failure (Euro-national) and was widely distrusted by many within the more informed echelons of the financial industry. That distrust never percolated out to the wider public, who invested NZ$458 million with his finance company Bridgecorp. They will be lucky to get any of it back.

New Zealand investors have lost confidence in most publicly available investments except for those in the bank. A RaboDirect survey published this week showed public confidence in fund managers, financial advisors, stock brokers and finance companies is at rock bottom. The only institutions we really trust are banks and building societies.

The shock of the financial disaster of the last 3 years is now sinking in to the national investing psyche. As the wreckage is cleared away, it's now clear up to 200,000 'Mum and Dad' investors face losses of up to NZ$4 billion on funds worth NZ$8.5 billion that have been frozen within finance companies, mortgage trusts and investment trusts. Much of this was money simply invested poorly.

But a good chunk of it will have been outright fraud. Estimates of the cost of white collar fraud in New Zealand range from NZ$2 billion to NZ$5 billion a year. The costs are borne by everyone through higher prices and taxes, but it is especially damaging for investor sentiment. Yet our policy makers seem to treat this white collar fraud as business as usual if the budget for the Serious Fraud Office is the measure.

The Serious Fraud Office is budgeted to spend NZ$7.47 million in the 2010/11 year, according to its annual report. This is flat on the just completed 2009/10 year and up 35% from the previous year, but it is vastly lower per capita than the resources spent in other Western economies. The SFO has just 32 staff who were handling 47 active cases and 13 prosecutions at June 30 this year. That works out at 0.68 staff per case, compared with 3.57 staff per case in the UK. In the just completed financial year the SFO investigated cases with losses of NZ$629 million for 25,000 people.

In New Zealand, we have more people working in the Ministry of Youth Development or the Ministry of Women's Affairs. The government spends NZ$3.5 billion on law and order, locking up violent criminals and policing the streests, but spends just 0.2% of it investigating serious fraud.

Why do we spend so much investigating blue collar, brown collar and black collar fraud and so little on white collar fraud that has the potential to cripple our future economic growth?

Let's get serious about fraud.

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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Careful Bernard...demanding justice for your criminal types is one thing but seeking an equal dose for members of the old boys club of shites is another...especially from the pollys!

Bernard : Any chance of a double-shot interview with Jane Diplock , Securities Commission , soon to take the gold Rolex & retire ?

I've asked many times. No luck yet.

cheers

Bernard

What's stopping you from copying John Campbell's " style " , and camping outside her house . Create a ruckus , some publicity ............$  Billions of Kiwis' savings were lost in the finance companies' collapses ........... And many folk  wanna know what Janie was doing all those years , to warrant her generous salary and expenses account .

What have you got to  lose , Bernard , by embarassing her , and building a nationwide outcry .

Camping outside someone's house I would regard as un-acceptable....

regards

Great article Bernard.

Like a lot of Kiwi's I have been waiting for a professional journalist to take up this line with white collar criminals. I think a lot of Kiwi's stick up for Alan Hubbard, not only because they doubt his guilt until proven guilty, but also because so many worse crooks are still at large.

The 1980's only resulted in a few crooks stopped in their tracks and jailed. Now is New Zealand's chance to nail every single person in the financial services game who has seriously offended. This may mean charges and jail or it may mean that they are never allowed to work in this area again - never allowed to source retail deposits or funding.

This will then allow NZ to move on and for legitimate parties in the financial services area to rebuild confidence and introduce sound new investment oppportunities under new laws in todays market.

One of the best things that ahve occurred in recen times is the appointment of the new FMA CEO who comes from Australia's ASIC. ASIC don't muck around - if someone breaks the rules, they are held accountable - they also put fear into wannabe crooks, so it's not worth the effort unless you are an idiot.

Hopefully the Govt and the NZ public get right behind your views and we see the Govt agencies such as the SFO and Securities Commission bring the likes of Strategic Finance and Haniover Finance directors to face up to their serious indiscretions - also that the authorities don't just hit slap them a wet bus ticket but charge them and also either seriously fine them to the value that they illegally made their money or confiscate their assets under the crimes act.

Bernard, please continue this crusade for the benefit of all NZ which will enable the financial and capital markets to grow for teh ebenfit of teh wider community. Remain relentless until justice is done.

Long weekends seem to bring the ebst out of you - here's to many more.

jeez, southern dude..now you've gone and done it!

BH,  in his own modest unassuming way will go into manic overdrive on the back of your praise and anything could happen....nobody will be safe in this "touchey adam feeley " world we live in?

time to hit the beach now and leave this site to the bedridden like Wolly and the aging beach bums clinging to a palm tree and a nymphet...how much can a gummy bear is the question?

Rob of the North,

Ha!. Will ask for the overdrive button to be installed in the right hand column tomorrow. Just click on it and I go into overdrive...

cheers

Bernard

Rob of the North and Bernard

 

Like i say I have been waiting for this article for ages- in fact I was a pain in Bernards and Gareth's side for months - they even changed the format on this site so we had to register.

So Bernard and Gareth were not my friends when they sat on the fence

But credit is given where credit is due.

When are you going to drill down on Strategic Finance and Hanover, Bernard??

Whether they were illegal, immoral or unethical the Strategic directors stiffed a lot of investors and took out over $150M and also sold the company to Allco - probably by inflating its value in 2007. The Hanover cas  eis similar.

Survey shows ' Banks are the only institution we trust'.  Well Wolly, Kunst etc obviously weren't surveyed as they point out how incompetent and even untrustworthy the Bank Chief economists all are. And they know better!

Muzza - on a shooting spree – targeting some honest bloggers - you didn’t go the church this morning – Muzza did you - take life easy mate !

"once a market has been poisoned by fraud which goes unpunished, then institutional players will avoid that market as untrustworthy."

 

"When I was in the Wall Street game, our small-cap fund was for a time in the top 5% of performers. I got bored and left, which is a longer story. Anyway, I observed a phenomenon about fraud. First it happened. Then it was widely publicized. Then it was prosecuted, and some big names were jailed. At that point, it was safe to go back into the water.

This happened in a few industries prior to the mid-1990s, at which point basic law enforcement was neutered and there were no more fraud prosecutions that mattered. I have always thought that the lack of fraud prosecutions for Internet/telecom fraud was a significant reason why the NASDAQ has never made a significant recovery to anything close to its peak reached in March 2000."

http://www.oftwominds.com/blogoct10/poisoned-well10-10.html

The market in Noddy has always had a pong about it......but in the USA...oh man you just don't wanna breath in ........."They knew what they were selling".....have this with your coffee!

 http://www.marketoracle.co.uk/Article23741.html

 ’This should have a phenomenal effect legally, both in terms of the ability of investors to force put-backs and to sue for fraud,’ said Joshua Rosner, managing director at independent research consultancy Graham Fisher & Co.

"’Original buyers of these securities could sue for fraud; distressed investors, who buy assets on the cheap, could force issuers to take back the mortgages and swallow the losses.

"’I don’t think people are really thinking about this,’ Rosner said. ‘This is not just errors and omissions – this appears to be fraud, especially if there is evidence to demonstrate that they went back and used the due diligence reports to justify paying lower prices for the loans, and did not inform the investors of that."

 

Now my understanding is that there are tens of thousands of banks and communities round the world that were dumb enough to be buyers of this shit in the first place but they now have grounds to seek all their money back and damages.........the final bill will be paid by the banks and the govt which owns many of the banks.........I smell a heap of QE spewing from the Fed to pay for this.

I can but hope.....

If this isnt fraud, then I dont know what is....no way can someone buy a known tainted asset at a discount and then sell it at "full" price..........no way.

regards

Bernard , you are onto something here

More serious than fraud is the way investors are fleeced in NZ , often voting to be fleeced

A recent example is the meeting of members of the NZX Listed AMP OFFICE.

In the most astonishing thing I have ever seen , Shareholders were asked to ratify a management contract with the property managers that is a contract- in- perpetuity .It can never be reviewed , the managers can never be fired, the fees cannot be re-negotiated , there can never be a competitive tender for the management.

Its a bloody disgrace, and the (unitholders) shareholders  voted for it like Turkeys voting for Christmas .

The outcome of the Feltex debacle is another one . Those directors should have been jailed at the very least .

In NZ we dont have consequences that are enough of a deterrent

If the Feltex directors did what they did in China , they would all have been found guily , taken back to Prison and shot , the same day , no wasteful appeals and lengthy delaying tactics.

I am still waiting for Hotchin to be arrested for something  . I am sure the IRD could dig up something on someone as crooked and dishonest as this man 

You are so right , Boatman . As long as we accept useless patsies 'like Jane Diplock ( Securities Commission ) and Mark Weldon ( NZX ) in key roles , we will continue sliding in productive investments . Their pathetic perfomance , whilst receiving massive salaries and generous expenses accounts , is a national disgrace . Both Labour ( Michael Cullen ) and National ( Wild Bill ) have twiddled their thumbs , whilst Kiwi savers have been fleeced .

Diplock / Weldon / Cullen / English : Shame upon you ! Lazy , patheticly incompetent  , personally greedy , and unaccountable : each and every one of you .

Interesting comment, but maybe New Zealand has something to learn from China here. People are not taken to prison and shot in China, they are first asked to explain themselves, then asked make good what they have done wrong, using all their personal available resources, irrespectively on what and where. They must show regret in action. There is no hiding behind trusts or companies or proxies here. The justice system will see right through anything, to the guys who call the shots. In the melamine disaster New Zealand did just that, fully correct and legally. The Kiwis were seen as not having sent in the right competencies, and subsequently that contributed to, not caused, the disaster, and that meant a certain responsibility, just as a doctor performing a failed operation on a patient without proper qualifications. A sort of “plea bargaining” outside the court room. Consequently $8 million was channeled through a China trust, and the Kiwis did not have to appear at the trial. In the same way errant Kiwi so called “investment bankers” could be forced to use their overseas funds to make good to Kiwi investors. Why not. Instead of trying to punish only, try to get correction and rehabilitation.

It's the Kiwi way SL....steal as much as you can...steal millions and be fined thousands...laugh at the judges who give you homestay holiday..but don't forget to make the political party donations..then make a comeback...start up again in business and fleece another mob...it's so friggin easy.

It's not even making the headlines anymore in the poodle press...they are distracted and busy with the latest round of economic spin and BS aimed at the sheep....the finance company thieving is history already...onto the next bubble SL...into the dosh and fat bonuses...into piles of other people's money....

Think it's a problem only in the private sector?........ 

"In a bid to reduce risk of internal corruption, Immigration New Zealand will stop accepting cash as a method of payment from late next month. More than 30 staff at the agency have been investigated for misconduct, including fraud and corruption this year and at least seven officials have been sacked." herald

So why don't we cut to the chase, and start discussing the underlying corruption that encourages fraudulent and other behaviours?

I think you are right, it is not only the private sector. The underlying problem is a culture of rip-off. We just need to change the playing rules to fit the situation, but how do we do that when the crooks hold the “big gun”?

Not just SFO though, that's closing the gate after the horse has bolted in terms of investor confidence......

What is needed in the first place is legislation and regulation to make all aspects of financial dealings transparent and level/equal so mom and pop investors have a chance of being able to invest wisely. This for me is why ppl buy property its relatively honest .....

"is a result of the failure of public confidence in the market after the 1987 crash."

Exactly........

So things like the NZX selling relevent market information to ppl who pay say 20mins before it tells anyone else is a no no, micro pre-trading should be illegal, when a customer comes to you and wants to buy USD or shares, you dont go out by that USD or shares first forcing up the price and sell it to him for the commision and the profit on the USD itself....thats lack of morals, if the ppl who suggest actions like that cant see not only that its wrong but that its killng their industry then they need to be removed from it.

and thats just the start....

 

regards

Oh Steven you are a laugh...fair go mate...to expect the rules to be fair for mum and pops..hahaha...the NZ system is and will always be stacked against investors.....the simple answer is do not invest in NZ companies where the directors are stealing fat and then fatter fees for failing to produce returns....you must expect the lying and corruption as a fact of NZ economic life...only then will you see there are better ways to protect your wealth from the steady destruction of the Kiwi by the RBNZ. ....yes they are in on the rorts.

In the first days of decimal currency, if you had accumulated $100,000 and placed it in a toolbox under the shed...what would it be worth today?....see, this deliberate theft is a govt policy...now how is that different from the thieving by corporates!

The RBNZ could crush the inflation to near zero and protect the value of the money...they don't. So how do you protect your wealth against this organised theft....that is the task the investor must achieve before thinking about earning a return on their capital. And don't forget..the mums and pops will have the govt fingers in their wallet stealing the taxes all the time, while the corporates are away to the races paying stuff all.

"fair go" indeed mom and pops vote with their feet, but its not just NZ Wolly, we have just about any share market in the world.

At least at present they are not forced to invest in the share market, unless of course kiwisave becomes compulsory....then instead of paying down debt first we will be forced to save at a lower net rate in ponzi schemes as dictated by the Govn...so a useless load of rip off bums get handouts for life.....just great.....

Corps paying stuff all, indeed google paying 7k tax on 50million is obscene....not just them of course any Corp witha NZ subsidary will be doing the same...that needs to be fixed.

regards

What do people expect having such an unbalanced economy ? As a country with low, one sided production sectors, but a huge property industry - no wonder why illegal and doggy business practices are booming, trying to squeeze the money out of everyone’s pocket.

Economically and financially a nation increasingly in desperation mood ! What’s next ?

The public need to become more political educated and push for valuable changes. Financial and economic matters not Coro Street and Crime programs !

Considering the worldwide situation and beyond our economy need a complete new strategy.  This cannot be achieved by the private sector only, but needs dedicated politicians/ policymakers in government with an understanding of economics and a vision. It is now a matter of leaving behind traditional ideological thoughts (eg. NZMEA ?!) working together in order to achieve results for the best outcome of our nation. Real productivity garanties almost  full employment. The reduction of quality imports (infrastructure) improves skill and knowlege, lifts wages and reduces our massive account deficit.  Real productivity is a major contributors for positive changes and balances uncertainty on the export front.

 With the worldwide current economic scenario and beyond, we do need urgently a "Mixed Economiy Model" - a rather structured economy -

The watch Walter...did I miss your reply?...where to get it fixed...I don't want it to die!

I told you send me an email:  Product/ Producer/ year of manufacturing/ Ref: No/ etc.

..and I do an investigation.

It's a Roamer Walter...circa 1970...Stingray S.... Lever-Movement MST 471.

Both knobs are missing...they fell off!...can you get me the knobs Walter..?

Is that you at   art.design@xtra.co.nz   Nice Gallery Walter!

It would be preferrable if youse two exhanged emails and carried on these private conversations elsewhere

I printed out Wolly's email so can delete that "stuff" - thanks.

Storm

Hi Iain

No need to convince me, as you know, however it surprises me that people still think that money isn't created out of thin air and the amount of money is fixed, or even can be fixed (as the monetary reform people in the UK seem to think) or even that it should be fixed.

But then when one takes this idea and applies it to Government spending and come up with this;

"When you understand the power of creating credit out of nothing, your mind will probably take the next logical step: why don’t we create money out of nothing to pay for public goods and services directly rather than surrender this awesome power to the banks? You’ll begin to realize: isn’t it insane for a government that has the Constitutional authority to create money to not do so when we have unemployed workers, work that needs to be done, and the resources to do the work???"

It becomes wrong wrong wrong.  (this is the MMT thinking right?)

Sure it can work, and it can work for a while, but it's Keynsian stimulus http://www.zerohedge.com/article/niall-ferguson-explains-why-keynesian-p... every cent spent this way debases every other cent in circulation, by the percentage of the new money spent this way to the total.  It's wrong because the Government has spent money into circulation with no intention of taxing it back.  It's infationary and taxes every saver.  If it did it this way (instead of raising bonds), but intending to balance the budget then yes OK.  Governments need to bakance their budgets just like anyone else.

But this idea of money printing for the Govt is nothing new.  It's happening today, it's part of the problem, so it can't be used as a solution.

Check that link out where it shows the number of $US dollars in circulation outside the US in non US taxpayers hands.  The pallets of US $ that were spread around Iraq.  All of this is exactly what is described above.  And guess what it is?  It's theft.  And when the biggest, toughest, gang on the block is doing it who's going to call them to account.  This is why money and power go together.

The solutions from what I can see are either free banking;  http://www.thedailybell.com/1470/Lawrence-White-on-Austrian-Economics-Fr... or free banking plus freegold http://fofoa.blogspot.com.  If there is to be a central bank, then restrict what they can buy to "real bills" (ie bills backed by productive output that terminate), maybe some securitised residential mortages (new homes only) but no "lender of last resort", no acceptance of fake reserves by giving what is actually bank credit money the undeserved status of Government backed fiat money. 

 

No need to convince the Gummy Bear neither ........... That Andrew in Finland is a cool dude , who can readily explain the banking system .

Simple and  polite ........ excellent blogger ........ Heck , if the Gummy one can follow it , anyone can .

Except that you and Andrew are both wrong, and fail to acknowledge what is wrong with the system.  The loan comes first, it creates the credit money.  A fraction of this credit money needs to be kept in reserve (in some places) and this credit money is "acceptable" as a reserve.

And why is this important? because I'm sick of the subject myself.  Well if you correctly understand what the problem is then you are some of the way down the path to identifying the solution.  Andrew is wavering, though, I think.

Fred

I thought you were coming to grips with the requirements for a creditor?   Banks operate like a man with a set of books in a temple.  He cant do anymore than you or I can do.

Anybody can create a valueable money that can be used by his customers as the customers means of exchange where this money is a claim to the money creators wealth.

The created loan money requires creditors for it to be used as created money otherwise it is the same thing as a promise of a hard money loan when created where hard money gets issued or borrowed later.

Andrew,

What part of "credit bubble" don't you understand and you fail to explain how that it could happen and therefore come up something that could be applied as a solution.

Fred

The credit bubble required creditors who believed they would be paid.  Without these creditors there would have been no credit bubble.   You probably realise that when the bubble burst the governments guaranteed many of the creditors?   People investing in subprime mortgages were creditors, these investors appeared to have an insatiable appetite, plenty of money and were happy to take that yield while the music was playing. 

There's a positive feedback loop.  Credit comes out of the bubble and is fed back into the bubble that's why the appetite appears "insatiable".  The bubble hasn't burst yet, that was just a burp.

"The credit bubble required creditors" Sorry Andrew, I can't agree.

The creditors and credit are the inevitable consequence of the debt creation. A liability and an asset are created similtaneously on the banks ledger and this comes to rest with those individuals or companies or pension funds or countries running a surplus of income over spending.

There really is no such thing as  "money" or reserves in our  system, it's all just debt and credit.

Kiwidave

A liability and an asset are created similtaneously on the banks ledger.

Yes that is correct.   But you cannot spend this credit and keep it as credit without creditors who are happy to be owed central bank money.  Without a creditor the 'out of thin air money' is destroyed and it becomes like a hard money loan.  

The loan account entry is just a promise of money.  It is not magic.  It requires no special legal powers.   If you get a loan you are happy to be owed the money until you spend it.   The recipient is happy to be owed the money until they spend it.    Otherwise cash has to be provided

The bank is like a man with a set of books in a temple.  The bank is no different to you or I.  

 

It seems some government organisations are more interested in chasing down telecom instead.

David ( Cunny ) Cunliffe built his political profile by tearing down Telecom , prior to 2009 . He was assisted on the inside , by Theresa Gattung's extraordinary myopic view of her industry , and the " need " to maintain monoplistic positions .

Let's face it , they ought to emulate Rob Fyffe over at AirNZ , but Telecom won't .

The difference is that Air NZ is largely government owned, just like kiwibank. Telecoms best option in the long run, maybe to setup it's own competing fibre network, if they don't get to build most of the new network. They are caught between a rock and a hard place. They don't really have too many options.

Be fair to poor old Telecom ! They have endured the CEO's Roderick Deane , Theresa Gattung , and Paul Reynolds ............ The telecommunications equivalent of Curly , Moe and Larry .......... Without so many yucks !

They have had many people working in it who have been enjoying the gravy train. Looking at their annual report, they have a big percentage of their staff earning over $100k. I am a telecom shareholder, and seen the wealth of my shares pummet from governnment regulation, and poor decisions, and bad luck(XT network) so I want them to succed

You're stoic to ride out the Gattung years . Ye gads she was arrogant , and appalling !

I followed the insiders' transactions . Way back when the Americans bailed out of Telecom ( for a hefty profit , cheers Roger Douglas ) , I followed their lead and got out too .

Insiders' buying or selling can make you a fortune , or prevent you from losing one . Who knows a company better than them !

Good luck .

Right direction, but not enough, by very far. There need to be a change. Tragically, and unbeknown to Kiwis,  New Zealand is becoming known as "Retarded" and "The Nigeria of the South pacific" around the world, a country where what elsewhere is called corruption, fraud, embezzlement, cheating and rip offs, is often normal business or government practice. We have the failed so called investments, Lion, Richina, AFFCO, etc. and latest Fonterra. It looks very different from the other side of the fence, where the truth was covered up in New Zealand. Especially the Fonterra melamine disaster. It appears Fonterra censored articles uncovering the truth and their role about the disaster, but it is known overseas. New Zealand is one of the most censored countries in the world, any white color criminal or companies can claim to have been “defamed”, and the constant threat is enough to stop any exposure. Legal intimidations are frequent. Skilled and educated immigrants come and work for a lifetime in New Zealand, then go back home, just to find that their Kiwi retirement entitlement they paid for all their life is almost cut in half with smart Kiwi regulations, and their eventual top up pension from elsewhere is confiscated by New Zealand. If anything, it is seen with utter disgust and they are left to live below the poverty line. So called investors taking the money off ordinary people, then go broke in New Zealand and live luxury life overseas, presumably on the same money. An ancient judicial system and “closed shop” seen as highly corrupt, protecting itself and serving itself. An American was “done in” by the establishment for criticizing them, charged a million in damages and made bankrupt. A police force with in reality no control from outside, where police plant evidence (Bain, Crew, etc), and get away with it for free, no punishment measured out. Ordinary people get fined and imprisoned, police get “spoken to”, “cautioned” or “counseled”. A country seen as having state racism, as with access by Asians, and purchase of farms. When a Kiwi citizen but ethnic Chinese wanted to buy farm land, the interpretation of the law was quickly changed. Now it is the financiers that need to be New Zealand, presumably “look and sound” like a Kiwi. Then the OIO take an unprecedented long time to handle the case, while the SFO is used to “dig dirt” on the buyer in an obvious effort of racism. At the same time people who “look and sound right” had bought twice the amount of farm land. The KEA was a good initiative, but has in China deteriorated to a party organization in Shanghai on taxpayer’s expense. Don’t believe for a second that it is not noticed and understood around the world what the real story is. I am told that 40% of all skilled Kiwis has left, and do not plan to come back. They just can’t stand this sort of “culture”. I am a bad boy and example myself. I left, and I don’t plan to go back, until I see a change, but it is probably not going to happen. Harriss.rick@gmail.com from Hong Kong.

Some interesting points you raise , Rick . Are you domiciled in HK ?

Alotta positive news coming out of Australia and the Asian region . The stockmarkets are roaring today ........ Nary a peep out of NZ ( they don't work on Labour Day , nor any other day  where the government provides a welfare package , or any other bail-out of individual responsibility ) .

Labour and National are taking turns at rooting a great little country . Sad , very very sad .

I have my base in Hong Kong, where I been for much of my life. I am retired, at least officially on paper, and spend a lot of time in mainland China. New Zealand has huge opportunities here, just now, but don’t seem to be interested or can be bothered. It is a culture clash. In China, just about everything is done on trust and a handshake, and constant perpetual negotiations and rapid change. Banks and financial institutions are “money administrators”, making few decisions and doing as they are told by the business community, who are nearly 100% made up by engineer and officials, who also are engineers. That's why China avoided the economic downturn. There hardly was any “middle man” financial sector.

kiwisfirst.co.nz  - compulsory reading - ouch !

The way I see it the system has a fatal flaw in it that once you understand what that flaw is you would be able to come up with a fix.

Kimble said it the other day on this site.  Why is a diamond worth more than water, when a diamond is not essential to life but water is?  Substitute diamonds for gold etc etc.

What would the world be like if everyone was debt free and owned the houses, factories and capital in the system outright.  Let's say there was "money" in such a system and even let there be banks.  But the banks have no assets (loans), only liabilities (money on deposit).

Under these conditions the banks would have to charge you to deposit your money for safekeeping (whether money was gold or notes or diamonds) in order to stay in business.  Interest rates for deposits would be negative.  You would be charged to keep your valuables at the bank.  This makes sense because there is a risk in keeping it under your mattress.

Imagine a system where there was only physical money, say gold coins.  Under these circumstances banks could operate in a different way than they do now.  Instead of an "account" you might take the option of hiring a safe deposit box,  The banker doesn't know how much is in the safe deposit box only you do, and the money in the safe deposit box can't be touched by the banker, they only own the box, not the contents.

If the banker wanted to lend money out under the "safe deposit box rule" they would have to ring around their customers and ask them if there was any money in their deposit box available.  To make a loan they would take an amount of money out of your safe deposit box, drop an IOU in it and hand that physical money over to the borrower.  Question, would the borrower's IOU be the one in your box, or another one that the banker writes out, given that the banker may have assembled a bunch of IOU's in a number of safe deposit boxes to create one overall IOU to the borrower.  (The question of whether this loan "prints money out of thin air" depends on whether the IOU you find in your safe deposit box can be traded or discounted, right Andrew?).

What's different about the above and what happens today.  Well the first one is that you get an "account" what money you have on deposit at the bank isn't yours, the minute you take it to the bank and deposit it becomes an electronic liability to the customer, and the minute it's deposited it can be leveraged into new loans, printed out of thin air.

Getting to the point you make about "issuing money for the adminsitrative cost".  I think  that something like it could work.  But I think it would need to be combined with a "safe deposit box" type of system.

Anyway I'm repeating myself now.

Roger.  I think that what has happened is that we have a banking system that has electronic money and credits available plus all of the derivative stuff that they get up to.  Kunst asked a question a while back.  Why do corporates issue debt.  Simple answer.  If they didn't they would be taken over and the new owners would load it up with debt.  More derivatives feeding into the banking system.  I think that we have a banking system designed for physical money, and designed for one layer of derivative away from a real person/shareholder, but we have allowed it to be rorted by the banking system and no one has been able to come up with a set of rules that provides stability and fairness.

No doubt those institutions that promote a more robust business model and environment for NZ will be much in favour of this initiative, and put all their influential weight behind it. 

I speak of course of the Business Roundtable and ACT.  I am sure that they will be at the forefront of pushing for more anti-fraud resources for the country. 

I await their enthusiastic response.  It will of course be backed in the case by the BRT by a sponsored research study by a high-ranking US academic, which will show the importance of a well regulated business environment.  They will then provide press releases and speeches, and take pressure to the highest level of government.  They will be great allies for your cause, Bernard.     

Anything else is inconceivable.   

What type of fraud is it when you are a politician who sets up a system of high tax rates which only apply to a small percentage of high earners and then enacts inflationary fiscal policies and encourages inflationary monetary policies such that a larger and larger percentage of people fall in the high tax bracket as the years go by? This was clearly intentional, not due to stupidity. Was it fraudulent?

What type of fraud is it that artificially holds interest rates down to encourage inflation and thus the destruction of the purchasing power of savings? Again, it was clearly intentional so was it fraudulent?

What type of fraud is it when the artificially low interest rates encourage people to lend money to lying thieves who have adopted the appearance of respectability by calling themselves Finance Companies?

What type of fraud is it when public "servants" (doublespeak truly worthy of George Orwell) earn 20% more than equivalent jobs in the private sector in NZ?

What type of fraud is it when company execs are paid way in excess of their demonstrated achievements?

What type of fraud is it when you are a politician who messes up the country so badly you are booted out of office and then you get a sinecure as a director of a publicly owned company?

 

Are these all examples of control fraud? We need a NZ version of Bill Black to shine a light in these dark places.

My point is not that we should try to get the bastards but we should try to identify that which is essentially fraudulent. I think all the examples I gave have an element of fraud hidden in them. This is exceedingly destructive to society, and therein lies the real cost.

Well I had a bit of an "aha" moment when I thought that a house built 30 years ago for $6,500 is now potentially backing $350,000 in first derivative money (and goodness how much second derivative money) into circulation.  That's at least $350,000 of savings that have been misdirected because it's not productive investment.

Why do individuals strive to be debt free, yet it's an imperitive for a corporation/Govt/municipality (legal persons) to carry debt, for survival.

BTW reading;

http://globaleconomicanalysis.blogspot.com/2007/06/misconceptions-about-...

http://globaleconomicanalysis.blogspot.com/2007/06/why-does-fiat-money-s...

http://mises.org/daily/3480

26 Trillion in securities what sort of number is that?  How do they even know?  It's a house of cards.  List them all into one big spreadsheet what would you see, an endless list of numbers representing fictional things owned by fictional entities.  Could anyone even list all of the securities that make up that number.

What's not happening is the clearing and settling of all of that debt.  Every SPV or SIV or whatever it's called, the off balance sheet investment "vehicle" is a fiction on a fiction.

The savers, pension fund managers etc etc are all being conned.  You are right the banking system right now is one huge wealth transfer scheme.  Take a look at this http://www.zerohedge.com/article/bill-gross-calls-fed-mother-all-ponzi-s....

"Back to balance, I would like to discuss your opinion that all money that is issued needs to be oneday extinguished to avoid disparity and inflation?"  Happy to discuss back to the hampster wheel.

Yes absolutely agree the SFO should be better resourced and effective - but then why are they continuing to restructure out or otherwise 'leak' talented staffers with significant forensic accounting and comercial investigatory experience? Clearly there's a fit in or go mindset with the new leadership at a time when building the team and adding to its capacity would be a better plan than staff cleansing.

We all want results - unfortunately it'll be more of the Hanover sort of outcome if the SFO doesn't get this right.