A.Hubb Over The Hotch

Picking Winners - an astonishing day

Nice Mad Grandad

Evil Uncles Eric and Mark

The prudent measure of most business reporters has been that they have waited until this week to comment on South Canterbury Finance ("SCF") and Allan Hubbard's broader affairs. Despite murmurings of some that they thought this was coming, it is (like house prices) easy to sit and predict eventual failure. It is a grand amount harder to analyse in advance precisely how this will happen, when and with what effect. If you really knew, then chances are you are under confidentiality order and cannot write about it in any instance. SCF was a case of reporting on a corpse rather than those in Hanover in real time. Because there was no corpse in Hanover’s case, Bernies' in the form of Hotchin and Watson, were moving freely and weekend tabloid targets for speculation and innuendo.

Some of the best reporting on SCF and other finance companies is hidden away in the “still bloody difficult” to navigate website of interest.co.nz including this very interesting "deep freeze" list. Plenty of Bernies on that.

Some will write Hubbard off and say they have been for years. Of course they would be lying. No one saw this coming for more than a couple of years ago because if they did they would have smashed Hubbard the moment he and his wife were placed in Statutory Management. The SCF cult cannot be separated from the Hubbard's so imminent doom was reasonably predictable. Most sat on the fence and hoped like hell it was not true, because unlike Hotchy and Watson, this wasn’t a very sexy target. And we still do not know the extent of the issues because of commercial confidentiality concerns and the like.

According to the new Great Helmsman "Smile and Wave" John Key:

South Canterbury Finance got itself into trouble by lending money to people who couldn't pay it back and on assets that have no value, with many of the loans now bonfire material.

Really? A tad simplistic I would have thought. Ignoring of course why this money was lent and on what valuation of assets. Smile and Wave also announced:

However, New Zealand banks and finance companies would not have been able to raise capital without the government guarantee, Mr Key said. "There are some people who've invested in other finance companies, like Hanover, and have lost their money and yet they'll see others that are covered by South Canterbury Finance." They may see a degree of unfairness but it was necessary to help the New Zealand finance sector, he said.

But the most telling was from South Islander Bill "Karori" English:

Whatever your points of view about how South Canterbury has been run or the personalities, taxpayers are ending up with a bill of $600 miliion and there are a lot of other things we could have used that $600m for.” “Without that support, Timaru and South Canterbury could have ended up $600m out of pocket.”

Make no mistake, the decision to bailout SCF immediately with funds entering to the receivership, to place it in the Government Guarantee Scheme, then to honour the guarantee when it is questionable that the government even had to, is an entirely political decision of National Party rural stock. Even though SCF invested in property other than farmland, it was the farms wheeled out as to the reason why SCF could not be left to fail. The Green Party twerp railed against letting it fail as the farms could fall into foreign hands. Yet SCF invested itself in ventures in Fiji and others with remarkably similar risk profiles as Hanover.

South Island vs Auckland. It represents a wealth shift from North to South. From those at present least able to afford it to those who can afford it. Yes, the city folk are struggling in New Zealand, the rural folk sitting on ever-increasing land values and leveraging the cow crap out of themselves on the basis of those valuations creating this debt situation. Leveraging that seems to have hit a road-bump as their saviour when the Australian banks turned them away, turned out to be a crock. Yet another example of the New Zealand economy favouring those chasing tax-free capital gains over taxable income streams in terms of investing. Would SCF tanking have actually ruined the South Island and with it New Zealand? The S&P rating agency doesn't seem to think so.

Sandy Maier even stated upfront today that:

“Maier said the guarantee, which many commentators claim distorts the market, gave him confidence to accept money from "widows and children" as he sought to save the company from collapse”.

In other words – time would have been called well before now. Maier however was happy to let the taxpayer carry the can knowing full well SCF could not meet obligations and the situation was going to get worse. But Maier did not create the mess, he was handed a hospital pass only the worst ever All Black, Simon Mannix could have thrown. Hubbard seems to have been the architect of that, doling out money for example to young sharemilkers like a Smack Daddy Father Christmas for no interest. Sub-prime lending, Fanny Mae, Freddie Mac and now we have the A.Hubb.

It seems in New Zealand that you can be rural, borrow money to buy land to farm and have preferential treatment over say a young city entrepreneur who starts their own business, employs a few people then gets into trouble. All this does is distort risk away from buying land and property and towards young entrepreneurs with an idea, but no capital or tangible asset to mortgage against. Smile and Wave may think that Hanover “investors” may feel hard done by, but what this really is about is another rural v city divide in New Zealand whereby own land and you will be backed. Own exciting new intellectual property, technology or try to grow an SME and employ more people than you would if you had used the money to go farming to push around cows, and you are on your own.

Where does New Zealand’s GDP actually come from? Agriculture apparently only makes up 4.5%. Industry makes up 25.8% and services the remaining 69%.. In terms of employment Agriculture makes up just 7%, industry makes 19% and services the remaining 74%. So while important as an export earner, in terms of total GDP, agriculture stands in the shadow of service industries in New Zealand, led by entrepreneurs and market risk taking decision makers.

Of more concern with respect to creating incentives in an economy, according to Bernard Hickey:

More than a third were 'rate chasing' government guarantee investors who jumped in after October 2008 to get hold of the 'free money' returns of over 8 per cent that were guaranteed by the government.

This lot should not be bailed out as it wasn't the intention of the guarantee scheme. They should be made to wait and sweat. But this distortion was created by the silly guarantee scheme in the first place. Where else can one get 8%+ in the market on a “risk free” investment? I didn’t realize the risk free rate or return was 8%+, yet the guarantee created this. The second the guarantee was extended and applied to SCF the "fix" was in.

Anyone with half a brain knows that return is based primarily on risk. The higher the promised return the higher the risk on the investment, beneficiaries even understand this when they drive off to Skycity Casino. But when you have a government intervening to create zero risk, what does this do to the market? It stuffs the market that’s what it does. Many commentators will explain this in terms of statistical modeling better than I, because Finance modelling tends to put me into a chemically induced coma, but the general conclusions will be the same. Mess with risk at your own peril. Bailing out A.Hubb is not a market decision, it is interventionalism.

Government guarantees are just nonsense. David Chaplin dug up this gem.

The Labour Party created these silly guarantees for finance companies as their last expensive act before being turfed out of office, however unlike the worthless train set, they can’t be entirely to blame. National have not tried very hard to get out of the guarantee fine print and exacerbated the damage rather than minimizing it:

The company welcomed Treasury and Trustees Executor's arrangement for debenture, deposit and bond holders to be repaid in full regardless of their eligibility under the Crown Retail Deposit Guarantee Scheme. The government has done quite a remarkable thing," Maier said.

So here is proof from SCF itself that payment has been made by the taxpayer for events it is not even liable for. In the meantime Hanover “investors” get nothing? SME business owners in cities in New Zealand hit by the recession as well get nothing? Hardly seems fair does it? Unless you are from the South Island and your aunty is also your step-mother.

The Deed of Guarantee ("aka DOG")

There are four DOG's (amended) on the Treasury website:

Original Deed

For example at 6.3 of the original deed signed

“During the guarantee period (12th October 2008 for two years) the principal debtor shall ensure its business and operations (and the business and operation of its subsidiaries) are conducted in a proper, businesslike, efficient and prudent manner”

Then there is 6.4 inthe DOG which looks even more ominous given SCF’s reporting

“During the guarantee period, the Principal Debtor shall prepare and provide to the Crown, as soon as practicable after reasonably requested, any reports concerning the business, its operations or financial position of the Principal Debtor and/or its subsidiaries, and shall ensure that all such reports are accurate, complete and not misleading”

Next Deed

Then in December 2009 an amended DOG was signed with a far extended clause 6.3

Note that Allan Hubbard signed that DOG as director on 11 December 2009.

Death Rattle

And then again Hubbard signed as director, ironically on April Fool’s Day 1 April 2010, a similar extension document. When he was not running the company according to anyone out of the South Island in a “proper, businesslike, efficient or prudent manner”. Not to mention various other questionable exclusions the Crown could exercise if I had more time to rip that DOG apart.

Last Rites

Hubbard was removed as a director on 28 May 2010.

All and all there seems to be enough information in the journalistic domain already to blow these DOG's up with something a lot less demanding than a New Zealand Police issued handgun. So why the corporate welfare for South Islanders?

Deborah Hill Cone called it the “We Love You South Canterbury Finance Scheme”. She was not wrong:

I have been examining the Government's Retail Deposit Guarantee Scheme and it does look a bit like it could be called the "We Love You South Canterbury Finance Scheme". The Government last year announced it was extending the scheme, which was due to end in October this year. Why? There is a suspicion it was specifically because South Canterbury Finance could not be allowed to fail.

Allan Hubbard, described by Tumeke's Tim Selwyn as Mr Magoo, may not cost the taxpayer a $1.7 billion ($1 billion in apparently recoverable "good" debt and $700m being toxic) headache once the government and receivers have got value for the “good” assets remaining from the $1.7 billion Smile and Wave chucked in today, but he deserves a few sleepless nights that he will be having for being such a benevolent fool using other people's money less than prudently.

Rubbing our heads as well A.Hubb

The SFO are investigating all of Hubbard’s affairs, however proving “fraud” will be very difficult as he hasn't really stolen the money he's just led a company that invested it badly - which was the whole point of signing the DOG wasn't it? To cover for finance companies tipping money into property that is currently either illiquid or worth far less than the valuation in the accounts. The irony may be that Hubbard is charged with absolutely nothing significant in relation to any of his affairs.

In which case the Regulators of the finance company industry should be (cough), as well as the auditors who were signing off on valuations and the accountants.

If tax structuring cases were now decided as “frauds on the taxpayer” despite following the technical letter of the law, then it will be interesting to see how Hubbard is slung in the aftermath of what has happened. I am picking he will expire naturally before that occurs.

John Key is expecting the damage to be around $600 million, but he’s a politician so let us double that and add the cost of cranking out the market for risk, we ask who has taken that hit?

Aucklanders have had to, low income families have had to, ask the Hanover “investors” who made the mistake of having men in charge of their companies not as favourable to the politicians eyes as the A.Hubb with a Finance Minister based in the South Island.

Today Bill English loses the Karori Bill tag forever. It is clear that this is a deal struck for South Islanders.

Or was it a deal struck for politicians?

Can we ask now how many of them have money (or their companies and trusts) directly or indirectly tied up in South Canterbury Finance and have benefited in this guarantee rort?

That's the only logical explanation I can think of to get a politician to do something that reading the legal documents, they probably did not have to do.

Update - In this interview with Meier, John Campbell seems to have nailed Maier on television to the cross with his interview. Maier stating quite clearly the DOG was breached:

Asked whether it had been cynically exploiting the government guarantee, Mr Maier replied: "It might have been cynical, it might have been merely incompetent... it probably violated a lot of prudent lending criteria."

Go back to 6.3 of the DOG's and tell me that SCF in the guarantee period was run in a "proper, business like, efficient and prudent manner". It's own CEO, in the final foreign accented "fuck you" to New Zealand taxpayer has now publicly admitted it was not.

There is preference for South Islanders. Bill English is incorrect (well let us face facts - teling porkies) in this interview. The taxpayer did not have to pay SCF anymore than they would have had to for Hanover or Blue Chip. SCF took deposits for and moved $700m (or 41% of total) of their lending to more risky criteria even into the the hyper-risk of mezzanine lending. They breached the guarantee and their own CEO said so.