Thursday, August 19, 2010

Welfare for bankers. There’s a lot of it about. [Updated]

‘Tis the season to give welfare to bankers. Unfortunately, New Zealand is not immune.

What is Kiwisaver, after all, but a giant welfare scheme for local paper shufflers; the nett result of which is that NZ’s overall level of saving hasn’t changed a whit—just the places where saving is done, and the levels of the taxpayer subsidy for it.

And what is the call for compulsory saving but even more welfare for those same suits with nothing in them—suits who’ve already failed to grow the money they’ve been give voluntarily, so that giving them your money by force just looks like rewarding failure.

kiwibank_180 Which is pretty much the case with Kiwibank.  A bank set up simply to assuage those New Zealanders who are frightened of foreigners—one that gives no returns at all to its shareholders (i.e., you, whether you like it or not), that makes virtually no return on the enormous capital you and I have sunk into it, and on the back of its lower profits has been rapidly expanding its loan book ((by $2.2 billion last year) by propping up the rapidly deflating housing bubble.

And its reward for its dismal return on your involuntary investment of more than $300 million?  That’s right: another hit of the same.  A promise from Bill English to pour $150 million more of your money down its black hole, just so it doesn’t lose its credit rating.

There is no rational argument for Kiwibank to exist as a state-owned bank, nor for it to keep sucking in more taxpayers’  money just because (with its unprofitable business model) it can’t generate enough itself.  There are four other big banks and fifteen smaller ones doing the job banks actually need to be doing without having otherwise productive capital tied up in a bank whose advertising and very existence is based on little more than NZers’ xenophobia.

New Zealand has a small labour force, and it enjoys among the developed world’s worst figures for labour productivity. A primary reason for that is because entrepreneurs have so little capital with which to put labour to work.  Yet this government and the last one seem insistent on making the little capital we do have is put to the least productive uses they can find for them.

It makes no sense.  But then, xenophobia never does.

UPDATE: Eric Crampton spotted superb commentary on this at NBR’s Plays of the Week:

_Quote National’s decision to use taxpayer funds to prop up Kiwibank’s credit rating ensures not only will this dog remain on the government’s books but also the liability will continue to grow.
    Only a few months after considering at least a partial sell-down of Xenophobiabank, the government has decided to give it a credit facility, allowing it to borrow about half a billion dollars more to try to keep the housing bubble inflated.
Massey University banking studies lecturer David Tripe told media the facility was basically a government guarantee that gave Kiwibank an unfair competitive advantage over the other main banks.
    But there should be no surprise the spineless National Party has continued to pander to unthinking nationalism and economic illiteracy.
    Just as with Kiwirail, that other capital-destroying “investment” made by the previous Labour government, National opposed Kiwibank when it was created.
    However, when handed the levers of power it decided to send more funds down this giant black hole for taxpayer money, just as it did with Kiwirail.
    Throwing good money after bad is a strategy only governments can get away with for any length of time, because they can continue to thieve from taxpayers to fund the stupidity.
    If a private company destroyed this much wealth it would go bust faster than you can say “malinvestment.”

Magnificent! I’d be proud to have said it myself.  :-)

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10 Comments:

Anonymous matt said...

Two things here. First, compulsory savings is an outrage - it is the nationalisation of workers. If the government wants to increase savings, it can do it one of two ways. One, it can increase interest rates and cut taxes on savings, so as to make saving in New Zealand a rewarding activity, which it currently is not. Or two, it can leave interest rates right where they are and force you to save at, ultimately, the point of a gun. Somehow in our political system, option two is more advantageous than option one.

Second, Kiwibank's struggles is evidence of one of two things. Either a) actually its mainly Australian owned competition isn't ripping off New Zealanders - the fees they set are apparently about what's required to run a sustainable business. Or b) governments make bad owners of private goods. Either way, Kiwibank doesn't have a reason for existing. But exist it will because the good ole median voter will quickly dispose of anyone trying to get rid of it.

The country is going to hell.

8/19/2010 11:21:00 am  
Anonymous Kimble said...

"suits who’ve already failed to grow the money they’ve been give voluntarily, so that giving them your money by force just looks like rewarding failure."

You keep saying this.

(Lets ignore that KiwiSaver investment is long-term, and three years is short-term.)

Do you really think that all investment managers should be making positive returns all the time? Even when all investment markets fall, do you expect managers to post positive returns?

Compulsion issue aside, if you do believe this then, by extension, you demand that every manager should go 100% cash to protect investors money when the markets turn. In which case you want the "failing managers" to have more discretion over the investments they manage.

You would, in effect, be ordering those "failures" to try and time the market. Something which few expert investors are able to do successfully.

I mean, that train of thought is logical right?

Now, if you mean that the managers have lost money over and above what the markets have lost(i.e. they dont earn back their management fee), thats another thing. And it wouldnt be at all surprising if it was true in aggregate. But I dont recall seeing that info anywhere.

8/19/2010 03:52:00 pm  
Blogger Ruth said...

Fund managers have long been known as the car salesmen of the finance profession. Fund management has been a culture of mediocrity for the last 30 years.

I am sure no one expects them to make positive returns all the time. However, even the most elementary index trader and trend follower made a substantial profit in 2009. Everyone except fund managers, it seems.

8/19/2010 06:51:00 pm  
Anonymous Kimble said...

"However, even the most elementary index trader and trend follower made a substantial profit in 2009. Everyone except fund managers, it seems."

What?

No, it doesnt SEEM like that at all. Do you actually KNOW what fund manager returns were for 2009?

You too seem to be saying that fund managers should be employed with a very wide mandate to invest wherever they can get the best return. Sure there are hedge funds that can do that, and some wide mandate ordinary funds, but most managers are paid to invest in a particular area, with restrictions on shorting and market exposure.

Not all fund managers have a hedge fund mandate. You cant blame them for the preferences of investment style revealed by the market. Index trading trend followers get killed in changeable markets (i.e. when trends shift direction often and severely). Just because that style worked one year doesnt mean it is going to work every time.

Fund managers in aggregate dont know in advance what the market was going to do, and therefore which style it would pay to invest in. Nobody does.

8/20/2010 12:19:00 pm  
Anonymous Anonymous said...

i don't know where you are getting your figures from but kiwibank reported a profit of $45.8 million in the 12 months ended June 30 2010.

Kiwibank opened for business in February 2002 with NZ$80 million of taxpayer funding via the government. About another NZ$230 million had been pumped in since, via parent NZ Post. So all up Kiwibank had investment of NZ$310 million.

retained profits to date total $175million.


“The value of the bank today is somewhere between NZ$800 million and NZ$1 billion,” Knowles said

“So there’s at least NZ$500 million, if you like, of value that has been created in the eight years I’ve been involved in the bank and that’s a very good return.”

ceo Knowles says "taking the broader banking market into consideration, Kiwibank’s existence had prevented somewhere in the vicinity of NZ$1 billion to NZ$2 billion in profits being sent to Australia"

i don't know where you are getting your numbers from but everyone knows that kiwibank makes money for our government. because it leveraged a 300+ network of existing nzpost branches nationwide and has secure access to needed capital ensuring a good credit rating.

8/20/2010 04:32:00 pm  
Anonymous Pro-Capitalist said...

Kimble, I think that the point Ruth is making is that fund managers try to make out that what they do as somehow special, which in fact, what they do is nothing special at all. Investors can DIY and their returns wouldn't be much that difference from what the so called fund managers are doing and the evidence in the industry have shown that this is the case.

Fund managers are nothing more than oracles who take fees for simply playing Russian roulette with people's money and of course they charge substantial fees for that. The main perception in the industry is that somehow they've got special skills (my arse!). They don't have special skills because if that's the case, then they themselves would have been self-made millionaires with those skills without the need to entice the general public & investors to put in their money with them to be managed.

Fund managers are all the same. They're more like Madoff. Madoff deliberately defrauded people which is a crime while fund managers defrauded investors by misleading (in that they misleadingly sell themselves or portrayed themselves as oracles which they can read the market) which is in a way perfectly legal. This is the main difference otherwise, one is misrepresentation and the other is illegal so Madoff is no difference to fund managers.

8/20/2010 08:06:00 pm  
Anonymous Kimble said...

Pro-Capitalist, ask yourself this, if fund managers are holding themselves up as investing gods that can always pick the right stocks, why do some have portfolios of dozens of stocks? Why do others have portfolios of hundreds?

Obviously, if they WERE holding themselves up as such they wouldnt diversify. But they do diversify, which means they recognise the difficulty in picking stocks, picking markets, and timing investment. (Which many people dont.)

Investors CAN DIY, sure. And they might very well perform better than managers. But consumers CAN do their own plumbing, fix their own car, cut their own hair, etc. They dont though. They pay someone else to do it. Does that make plumbers, mechanics and hair dressers frauds or that they are ripping people off?

I would REALLY like to see any evidence you have on how DIYers perform vs fund managers. I suspect you have misunderstood a number of other studies or put too much stock in small sample anecdotal evidence.

I know of studies that show the overall market beats the average manager, and that a monkey once beat a bunch of stock brokers, but there is no real data on fund managers performance against a decent sampling of other private individuals.

The average fund manager might under perform the market, but the only way that would mean that they dont beat most other market participants would be if the majority of those participants invested in the whole market. Which they probably dont.

It is true that there are many times that the average fund manager under performs the market. But the key word is AVERAGE, it is simply not true that none out-perform it.

All anyone has done is rant and whine about stuff they imagine to be true, but on closer inspection is either illogical, ill-considered, a gross stereotype or flat-out wrong.

8/21/2010 03:06:00 pm  
Blogger Ruth said...

There are 2 types of fund managers - those who manage to the index (passive) and those who actively manage. No active manager has ever out-performed a passive manager after tax according to Bankers Assoc of NZ.

Fund management is a total disgrace. Don't fall for those talking their book!!

8/22/2010 03:16:00 pm  
Anonymous Kimble said...

"No active manager has ever out-performed a passive manager after tax according to Bankers Assoc of NZ."

Really, where did they say this?

Make no mistke, this is a HUGE statement and needs to be referenced if anyone is to take it seriously.

The first example that comes to mind is Warren Buffet, a guy who has out-performed passive managers over a very long time.

Even locally there are managers who have outperformed a global index over a decent amount of time. Of course, passive management DID have an NZ tax advantage over active management for a long time. But that changed around 3 years ago with FDR and the abolition of the grey-list.

In any case, your statement looks flat out wrong and you need to back it up with a link to support it. The fanastical nature of your statement makes it look more likely that you have misunderstood what you have read.

8/23/2010 11:57:00 am  
Anonymous Kimble said...

Oops, meant to add PIE as a reason for the advantage disappearing too.

8/23/2010 11:59:00 am  

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