Thursday, September 02, 2010

SCF’s Deposit Guarantee: Not just a moral hazard problem [updated]

Turns out that Michael Cullen's Deposit Guarantee Scheme--the one agreed to by John Key before the election, and rolled over by Bill English in April--is implicated in at least two ways over in the collapse of South Canterbury Finance (SCF): causing both risky investments and, at the same time, encouraging major investors to withdraw their money.

We talked yesterday about reason number one: the moral hazard created by the scheme— —that it simply encouraged the finance company to take more risks to make the high interest payouts needed to encourage more “investors”—something confirmed by South Canterbury Finance CEO Sandy Maier, who said Tuesday that “South Canterbury Finance ramped up its risky real estate loans after it signed up to the Government's scheme that protected its investors' money.

_Quote It might have been cynical, it might have been merely incompetent ... it probably violated a lot of prudent lending criteria…

Reason number two to implicate Bill & Michael’s scheme was reported this morning on Radio NZ: that just as South Canterbury Finance was looking for more investment, many major investors were taking money out  to ensure that the only money they were “risking” was the $250,000 guaranteed by the scheme—which is to say that for the last few fragile months the only money many invested in SCF was money for which you and I were taking the risk.

Drinking at the Hitler Bar - NOT PC, 2006So it seems it’s time, once again, for the Law of Unintended Consequences to take a bow.

UPDATE: I’m sure you, like me, will enjoy the irony that some of the money frittered away in loans by South Canterbury Finance after the taxpayers’ involuntary guarantee was rolled over went to a bar in the Auckland Viaduct revelling in the name of ‘Lenin.’

[A place we’ve mentioned here before.]

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4 Comments:

Anonymous Anonymous said...

We are now able to see why Hubbard's personal finances were placed under statutory management.
Statutory maanagment is a tool rarely used and seemed in this case, to be a heavy handed approach
The government liked to link the SFO and Stat Management together when in fact each operates independently of each other. If there was fraud then the SFO can investigate adequately without Stat Management in place. After all who is going to do something dodgy with SFO people looking over your shoulder.
Statutory Management was put in place in MHO to prevent A Hubbard transferring his personal investments, loans, cash etc that were looking shaky into SFC which had a government guarantee.

David

9/02/2010 01:23:00 pm  
Anonymous Anonymous said...

or is it that the govt wanted to claw as many assets as possible off hubbard when SCF went under, so installed the Stat managers, thus leading to the position where SCF was unable to find a new cornerstone investor/ repair its broken financing covenant positions.
How much of the bad debt was lent after Hubbard had been replaced from his previous position?

9/02/2010 02:10:00 pm  
Anonymous Cassanova said...

I always score hot looking chicks every time I go to Lenin bar. While I try to concentrate on chatting or dancing with young chicks, cougars usually approach me for a chat or buying me drinks. One night I took both a mother (mid 40s) and her daughter (22) back to their place for a 3some. It was the mum who made a move on me first.

There is nothing wrong with Lenin, except perhaps of its name (& also the business wasn’t making enough money). As far as I can see, there is nothing wrong at all with SCF lending money to developers & business owners. There would have been no difference if the lender was a bank.

9/02/2010 02:45:00 pm  
OpenID hefevice said...

I really just don't understand why you would be 82 years old, a multi-millionaire, still working crazy hours and living like a poor pensioner - it's not like you can spend your riches when you're dead.

O'Carroll's Bar linked in the Herald story now serves Epic beer, so at least some good has come of all this.

9/02/2010 08:15:00 pm  

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