Tuesday's Top 10 with NZ Mint: Westpac Viaduct's generosity; May Wang's nervous nelly auditors; Captain Bernanke's iceberg; NZ's Zombie economy; Dilbert

Here are my Top 10 links from around the Internet at 10 am, brought to you in association with New Zealand Mint for your reading pleasure.

I welcome your additions and comments below, or please send suggestions for Wednesday's Top 10 at 10 via email to bernard.hickey@interest.co.nz.

I'll pop any surplus suggestions I get into the comment stream.

1. 'Sign me up for that account' - The NZHerald reports that a Westpac processing error at its Viaduct branch put about NZ$15,000 of 'free money' into an Auckland man's account, reminiscent of the Rotorua couple who received a windfall from Westpac and then did a runner to China.

Westpac got lucky this time.

The man told the bank.

Time for me to open an account at Westpac in the Viaduct...

"I was stunned, like, 'I'm sure this isn't mine'. My initial thought was to board a flight to Beijing, but better judgment prevailed and made me realise this money wouldn't last me longer than a week in a big city," he said.

He went to the Westpac branch, where the manager confirmed that the deposit had been entered twice. "He appreciated how honest we were, and thanked us for it," the man said.

2. The gathering clouds around May Wang - Now the auditors for Natural Dairy are getting nervous about the accuracy of the accounts of Natural Dairy and the affairs of May Wang and her gang of merry men, the NZHerald's Karyn Scherer reports.

Hong Kong firm Morison Heng has refused to fully sign off Natural Dairy's latest accounts, saying it is unable to give a "true and fair view" of Natural Dairy's affairs because of a lack of "reliable financial information".

The accounts have been announced a month late and reveal that the company, which is listed on the Hong Kong Stock Exchange, made a loss of HK$203 million ($34.12 million) for the 14 months ending in May. Its auditor says it was unable to ascertain the fair value of Natural Dairy's New Zealand investments, so was unable to say if the accounts were "free from material misstatement".  

3. Zombie economy - Even the rental property investors are starting to lose faith. David Whitburn, the President of the Auckland Property Investors Federation, pointed out to Greg Ninness at the Sunday Star Times that banks are dripfeeding mortgagee properties onto the market not to cause a crash and avoid having to revalue their loan books.

This is typical 'extend and pretend' zombie banking, if true.

The size of the property overhang could be significant and means pressure on prices will remain for some time.

Here's what he says.

"There is actually a whole lot of properties where the banks are holding back on mortgagee sales, because, if they processed them all at once, it would have a downward impact on the market," Whitburn said.

While the policy may give property owners who are in arrears some extra breathing space, the banks were not holding back for altruistic reasons. A rush of mortgagee sales and a subsequent fall in prices would affect the security value of other mortgages the banks would be holding, he said.

That would shrink the amount of equity owners have in their properties and increase the risk that the banks will not be able to recover all of the money they are owed when more loans fall into arrears.

There are also serious implications for banks' balance sheets.  

4. Tax break for finance company investors? - Our Deep Freeze list shows that finance company investors are sitting on losses of upwards of NZ$3.5 billion. What if they could be offset against income to reduce tax bills?

Deloitte is wondering if they can start claiming these losses back via the IRD, the ODT reports. Your view?

Deloitte Dunedin tax partner Peter Truman has been working on ways for his clients to recoup some of the losses suffered when finance companies collapsed.

"The failure of finance companies over the last couple of years has resulted in thousands of investors suffering investment losses or finding themselves in a position where it is unlikely they will recover their investment in these companies. "This raises the issue of whether the investor is entitled to claim a deduction for their loss."  

5. 'Flogging a dead horse' - Bloomberg's Mark Gilbert makes the point that central banks are essentially flogging a big dead horse by printing more money. He's right.

Central banks are now one-trick ponies, stuck in a financial groundhog day with no fresh ideas. Their willingness to sacrifice their principles not only undermines their hard-won independence, it also allows their political masters to avoid the hard work of structural reform that might generate a genuine recovery. Instead, we are relying on transfusions of artificial central-bank liquidity.

The guardians of the world economy still seem to think the answer to too much debt is yet more debt. Imagine the response, though, if you had asked any of the current crop of central bankers five years ago about the inflationary consequences of pumping trillions of dollars into the financial system. Nomura’s Goodwin says there is no reason why the U.S. inflation rate couldn’t surge to 6 percent by 2015 from its current 1.1 percent pace.

Lending to the U.S. government by buying its 1.25 percent note repayable in September 2015 at its current yield of about 1.3 percent might not be the smartest trade a bond manager could make. When the law of unintended consequences kicks in, the nasty surprise is, almost by definition, unforeseen and unpredictable. I struggle to see how this movie won’t end badly.

6. 'Naked greed and fraud' - Yves Smith writes at the New York Times about the seriousness of the fraudclosure crisis in the United States and the lax and fraudulent practices now being exposed as the housing market tide goes out in America.

Well worth a read to get a sense of the scale of the crisis there.

Consider a company called Lender Processing Services, which acts as a middleman for mortgage servicers and says it oversees more than half the foreclosures in the United States. To assist foreclosure law firms in its network, a subsidiary of the company offered a menu of services it provided for a fee.

The list showed prices for “creating” — that is, conjuring from thin air — various documents that the trust owning the loan should already have on hand. The firm even offered to create a “collateral file,” which contained all the documents needed to establish ownership of a particular real estate loan. Equipped with a collateral file, you could likely persuade a court that you were entitled to foreclose on a house even if you had never owned the loan.

That there was even a market for such fabricated documents among the law firms involved in foreclosures shows just how hard it is going to be to fix the problems caused by the lapses of the mortgage boom.  

7. End fractional reserve banking? - The Bank of England's Governor Mervyn King is on the warpath against the Too Big To Fail international banks, now that he is about to take over the regulatory duties from the discredited Financial Services Authority in the UK. He is talking heresy. Some of the banks don't like it.

Good on him. Here's the Economist's take on it.

“Of all the many ways of organising banking, the worst is the one we have today.”

Possible remedies included not just breaking up banks, but also “eliminating fractional reserve banking”—the centuries-old practice of banks taking in deposits and lending most of them out in riskier and longer-term loans.

Having ignored finance for a decade the Bank of England now seems to want to reinvent it.

8. Why China matters - The Economist has created a great chart showing the importance of China to many economies. We don't figure, but Australia certainly does.

CHINA is now the biggest export market for countries as far afield as Brazil (accounting for 12.5% of Brazilian exports in 2009), South Africa (10.3%), Japan (18.9%) and Australia (21.8%). Each surge or wobble in China's economy has a material impact in these places.

9. Captain Bernanke on course for icebergs - Edward Chancellor from GMO writes at the FT that the financial gains from quantitative easing are fool's gold.

It is generally agreed that a bout of quantitative easing in 2008 succeeded in calming the markets. But conditions are different today. The credit system is not dislocated and banks are willing to lend, according to the Fed’s survey of senior loan officers. The problem is not with the supply of credit but with lacklustre demand from the private sector. Any new money created by the central bank expanding its balance sheet may well end up adding to the existing pile of more than $1,000bn of excess reserves in the banking system. Quantitative easing is also intended to reduce unemployment, which remains at very elevated levels.

But much of the current unemployment may be structural in nature. People who can’t find a job because they are in the wrong place with the wrong skills won’t find their prospects improved by the central bank acquiring Treasury bonds. Nor will lower rates help many consumers. After the recent decline in house prices, about half of US homeowners find themselves owing more than their homes are worth and are thus unable to refinance. And since long-term rates in the US are already so low, quantitative easing is unlikely to promote much new business investment. Mr Bernanke is tilting at windmills. Not only is deflation absent in the US, it is arguable whether mild deflation is economically damaging.

And even if it were, no one knows whether asset purchases by the central bank could succeed in reversing a deflationary tide. After the great credit binge, deflation reflects the desire of households and companies to pay down their excessive debts. It is a symptom, not a cause, of a problem. The experience of Japan over recent decades shows that deleveraging does not end because long-term rates decline. This explains why the Bank of Japan believes quantitative easing is futile.

10. Totally relevant video - Jon Stewart previews the mid-term elections tonight.