Taking Stock 13 August 2020

IT is now a decade since South Canterbury Finance collapsed, leading to public sector and political blunders that cost investors and taxpayers more than a billion dollars.

The cost was unnecessary and highlighted the worst aspects of public, corporate and political behaviour.

Yet one might ask a decade later - what behaviour has changed?

Recently an experienced journalist, Matt Nippert, was interviewed on National Radio to recall his investigation into one of several dozen examples of the disrespectful and illegal devices used by the late Allan Hubbard and his directors to circumnavigate the law.

Nippert exposed a deal involving related party lending, hidden by the cynical decision to use a non-related member of a director’s family to avoid the appearance of related party lending.

Nippert's work was useful, an uncommon example of a journalist being granted the time to untangle corporate chicanery. Probably it helped the regulators to focus on one of the strange smells under SCF's deck.

However, the example was just one of a large number of deceptions and in the context of the SCF saga, little more than a page in a book, evidence of one of the mildest viruses that infested SCF.

Ten years after it lapsed into the hands of the most incompetent and over-priced receivership I have observed, SCF's demise has led to at least some useful change.

Yet the most remarkable outcome is that not one of the culpable protagonists in this debacle still retains the position from which they created the mess.

Eighteen of the people whose decisions and errors led to the internationally humiliating outcome have handed in their rifles.

To be fair, the returned artillery varied from howitzers, in the case of Key and his governments, to muskets, to pop guns and to cap pistols in the case of, for example, Samford Maier Junior, whose firepower was barely discernible.

The cynical Key resigned from politics, as did Bill English and Simon Power, the three politicians whose decision making and behaviour was most culpable.

In the public sector, John Park, John McPherson and Jane Diplock have exited their positions in Treasury, the Company Office and the Securities Commission, McPherson after what was hitherto an eminent career. The report on Aorangi compiled by McPherson and his team, including the Grant Thornton partner Graeme McGlinn, was either pre-ordained, or involved the lowest-imaginable level of intellectual analysis.

Andrew Harmos and Neil Paviour-Smith, who were both advisers (either to SCF or to Hubbard during the crisis), resigned from their NZX directorships. NZX was a regulator of SCF.

The lamentable receivers of SCF and Aorangi Securities, Kerryn Downey and McGlinn, retired immediately after their receivership roles ended. McGlinn believes that some of the evidence used to criticise his performance was ''invented''. One imagines the peer review of his work would not have been a career high point.

Ed Sullivan and Allan Hubbard have died.  Stu Nattrass and Bob White retired when the tanks were rolling into town.

The SCF lending supremos of Lachie McLeod and Peter Bosworth were terminated, and now are not visible in financial markets. They drove the lending that made SCF so vulnerable. They appeared clueless about the risks they were creating.

Eion Edgar has retired as chairman of Forsyth Barr and those of his network who governed SCF in its last year have handed back their water pistols, ending a most unimpressive period of governance.

All the evidence of the appalling behaviour of the politicians has been buried, leaving it unavailable to Official Information Act discovery.

SCF asset manager Ian Thompson today sells real estate, and most of the dreadful SCF branch lenders no longer are invited to practise money-lending, nor should they be.

No doubt many have deleted their errors from their memory.

One hopes those who still participate in the financial market sector have written off their errors to ''learning on the hoof'' and are now less likely to repeat those errors.

That might be one good outcome of the now 10-year-old disaster.

It is now too late to make accountable any or all of the miscreants.

Key, of course, was principally responsible for the destruction of tax-payer money as he had the authority to prevent it, and had neither the wit nor the substance to choose the right strategies. Those who admire American-trained banking mentality may retain their respect for him, despite his unforgivable decisions.

Hubbard, of course had the view that, given time and the freedom to make decisions, his assets had the inherent value to avoid losses. He would have justified his view, had he not lost his mojo by taking every shortcut available.

He blew his chance and his credibility when he opted for a Forsyth Barr plan that was predicated on Forsyth Barr's ability to sell its improbable solution to its clients and the market generally.

Hubbard had an alternative that was much more credible but chose the Forsyth Barr plan because it left him with more ability to be a part of the decision-making. The Dunedin sharebroking firm was clearly underpowered and out of its comfort zone in tackling the recovery challenge.

Even after Hubbard's poor decision, a possible recovery was possible, with minimal loss to tax-payers and to SCF preference shareholders. However, the politicians and the public service facilitated a dreadfully inaccurate Companies Office report and even after it was shown to be demonstrably and childishly wrong, it was still allowed to shroud the truth, enabling the politicians to bury their, and the Companies Office, errors.

As a chapter in New Zealand's corporate history, the shameful SCF debacle will be still smouldering in future decades, the bonfire of a billion dollars (and some), a legacy of some dreadful behaviour and decision-making.

A decade later, I look for signs that the outcome next time would be better.

There is now some reason to hope that the fit and proper person enquiries might shut the door on weak and unskilled executives and governors in the future, and to have a higher bar for those seeking a role in the rescue team.

Surely in future there would be more supervision of receivers, denying amateurish practitioners to discount state assets.

No investor is ever again likely to believe that trust companies are effective guard dogs.

The Financial Markets Authority is clearly now a much better regulator than the ineffective group who led the Securities Commission.

The Reserve Bank is now building regulatory competence, and is less likely to be bullied by Treasury.

Auditors are now far less likely to sign off accounts without challenging odd-looking transactions.

And one has to hope that the public sector will make much more use of competent, experienced private sector people before taking on responsibility for funding private sector assets.

I also hold some hope that credit rating processes that are flimsy, lead to accountability for the raters.

It is important to record what happened and what needs addressing, because there will be repeats, probably in large numbers, given the chaotic state of the world.

Failures may be in banks, in funds management, in trust companies or with insolvency practitioners or property syndicators.

As the stresses of Covid-19 lead to hardship or losses, weak, unfit, improper people will cover up their errors or misdeeds, rather than accept the responsibility of fixing the problems.

Selfish, greedy people always try to avoid accountability, and will take risks with other people's money to evade detection. Their backbone is amoeboid.

The SCF disaster ultimately was proof that the public sector needs to have effective laws and be supervised by skilled people to deter the selfish and greedy.

It would be a disgraceful outcome if all the blunders that created the SCF disaster were not being addressed, one by one.

Those whose job it is to frame these repairs should fall back on a simple solution – make detection of poor behaviour a certainty, take from the offenders their personal and family trust assets to reimburse the cheated, incarcerate them, and deny offenders the licence to practise in capital markets. Is that too hard to understand?

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SUPERVISION of receivers and liquidators might also be a simple matter.

Imagine if a receiver had to account to all shareholders and creditors for every item sold; the name of the buyer, the price achieved, the name and credentials of any valuer or intermediary, and the itemised details of each transaction.

Shareholders and creditors would know when the processes and prices were unreasonable.

When McGrathNicol were (wrongly) awarded the SCF receivership, the Treasury was advised quite specifically that the receivers must be supervised and must refer significant sales to Treasury. After all, the money was owed to tax-payers represented by Treasury.

The source of the advice was a major accountancy company with a large receivership division.

The Minister in charge of Treasury (Bill English) was told of the advice and supported it.

Inexplicably Key and his government decided no supervision was required, despite being told that not to supervise would lead to hundreds of millions being unnecessarily lost.

Unsupervised, McGrathNicol engaged nearly 100 SCF staff and contracted them for one year, with a promise of a bonus and guaranteed salaries.

McGrathNicol must have had these SCF people sign as though they were employees of McGrathNicol, as the ultimate receivership charge for those staff was at hourly rates several times the actual rates paid to the staff.

Of course if the SCF people were by then McGrathNicol contractors, there was no transparency of the hourly rates paid to the staff. There was just a charge to the receivership by McGrathNicol of the hourly rate it nominated. The total cost of a two-year receivership exceeded $50 million.

In effect the staff cost was arbitraged.

Asset sales then went ahead at prices that were later seen to be absurd.

It was in anticipation of that absurd fire sale approach that Treasury and the Key government were told to dictate that sales should be deferred until distressed markets had recovered.

Because Key and his government over-ruled that advice, McGrathNicol was free not just to charge hideously high staff rates, but was also permitted to sell assets at fire sale prices.

Ultimately the buyers of the cheap assets have benefitted by a billion dollars or more. The tax-payers have borne the cost.

There can be no debate about this.

It happened.

The SCF receivership, and indeed the receivership of its related company Aorangi Securities, provided irrefutable proof that all receiverships should be overseen by an independent panel.

In my opinion that panel should include representatives of the unsecured creditors and the shareholders.

If that sounds simple then why has the troubled Ministry of Business, Innovation and Employment not drafted new law?

Covid-19 will cause hundreds, probably thousands, of businesses to fail.

The lack of supervision of receivers will again lead to nausea at our Old Boys Networks, and raise doubts about the processes followed when the assets of the failed companies are sold.

In recent months a High Court has twice ruled that receivers have charged excessively, and forced the errant receiver to reduce his bill.

But excessive charges are the lesser of the two problems.

The more significant matter is the maximising of sale prices.

Unsecured creditors and shareholders would endure losses because of both these loose practices.

Why is the MBIE and the Ministry of Commerce indifferent to this matter? Is no one paying attention?

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OUR seminar schedule is deferred, for obvious reasons. We will be in touch with enrolled people as the current situation changes.

As of today I have NOT deferred the Auckland meetings, but that seems likely.

Anyone intending to attend a seminar who has not notified us should do so now, enabling us to update anyone enrolled to confirm arrangements.

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Travel

Kevin will be in Ashburton on 19 August.

Chris Lee

Managing Director

Chris Lee & Partners Limited